Around the World with Stonky: Southeast Asia
Demographics are destiny.
Without fail, the above phrase finds its way into most all conversations about capital allocation within emerging and frontier markets.
Unfortunately—like most quips and aphorisms—it sounds great but says little.
Is it hype, hullabaloo, or hallmark of a changing world order?
Well, per the International Monetary Fund, widescale demographic shifts are not only real, but also accelerating:
Changes in the size and structure of a nation’s population affect how we work, age, and live. In many advanced and emerging market economies, a shrinking pool of working-age people will have to support a growing number of retirees. Other countries — in Africa and elsewhere — will need to generate a staggering number of new jobs just to keep pace with the youth joining the job market…
Changing age dynamics have profound implications for growth, social stability, and geopolitics. They influence how people save, spend, and invest, with consequences for everything from marriage to retirement to migration.
Take a deep breath and stay with me here. After all, change begets tremendous opportunity.
Just as American investors ought not fight the Fed, so too should prudent VCs and Angels pay close attention to this forthcoming wave of TAMs, SAMs, and SOMs.
Alongside Africa and Latin America, Southeast Asia (SEA) has been a hotbed of startup growth and VC investment. The numbers are simply staggering:
- Per Jungle Ventures, SEA’s technology startups had a combined valuation of $340 billion in 2020, and they anticipate this will triple by 2025.
- SEA countries have a huge population — nearly 600 million—representing about 8.5% of the world’s population.
- According to McKinsey, 163 million solvent households are expected to emerge by 2030 in SEA countries.
- The GDP for the five biggest members of the Association of Southeast Asian Nations — Indonesia, Malaysia, the Philippines, Singapore and Thailand — will grow by a tremendous 5.1% in 2022.
- VCs made 393 investments in SEA startups in the first half of 2021, 18 more deals than the previous record in the region.
- According to Golden Gate Ventures, startup funding in SEA will exceed $14 billion by 2023.
Put simply, SEA’s increasing relevance on the global stage is not an if, but a when.
To help us make sense of this fast-changing, forthcoming demographic wave, Stonks turned to veteran operator and investor Viktor Kyosev.
A peripatetic globetrotter, newsletter author, and true Renaissance man, Viktor has started companies, partnered with many exceptional early-stage founders, scouted for early-stage investment firms, and mentored upcoming entrepreneurs across Southeast Asia (SEA).
His impressive career spans Indonesia, Taiwan, Malaysia, and Singapore (that’s in Southeast Asia alone!) and dozens of startups. The man knows the SEA startup ecosystem like few others do.
Over to Viktor!
Southeast Asia — A Story of Relentless Growth and Immense Wealth Creation
When I first moved from Denmark to Indonesia in 2016, many of my European friends were shocked. The questions piled on:
- What was I thinking?
- Why would I ever move to an emerging market?
- Why would I give up on the high standard of living, excellent infrastructure, world-class education, stable governance, and generous healthcare that Denmark offered?
Yet, over time, this narrative has changed. People started praising my then-contrarian bet and began asking for tips on how they could make a similar move.
This change in perspective was fueled by the incredible growth Southeast Asia experienced in such a short period of time. Growth that has translated into publicity, startup successes, and case studies that reached every corner of the globe.
Southeast Asia’s digital economy is projected to reach $1T GMV by 2030. This is incredible given how underdeveloped nearly all Southeast Asian countries were merely a decade ago.
Every time I visit my family in Bulgaria, it blows my mind how digitally-nascent most European countries are. For an example, just one year ago my brother boasted to me about the rise of food delivery startups in the region; a service Southeast Asia has been enjoying since ~2015!! More, e-commerce, food delivery, and digital financial services alone are expected to reach ~$360B in SEA by 2025.
The region’s gargantuan success cases of both Go-Jek and Grab have married the dynamic duo of an affordable workforce and widespread mobile technology; creating convenience at a price that’s rarely seen in other parts of the world. All that while generating a significant economic opportunity for the local workforce. Go-Jek and Grab drivers now work jobs that pay better, have very low barriers to entry, and are more flexible/enjoyable than what these men and women used to do.
That said, the region remains an enigma to many. Unless you live in a Southeast Asian country, it’s hard to understand how compelling the opportunity is. Below are a few insights that help showcase how staggering this market’s size currently is and will soon be:
A population of 589M
Internet penetration of 75%, ~440M internet users
350M digital consumers
Digital financial services are flourishing and expected to continue growing:
- Remittance flow — currently at $17B, 📈 +18% by 2025
- Lending loan book — currently at $39B, 📈 +31% by 2025
- Digital payments — currently at $707B GTV, 📈 +13% by 2025
- Insurance (APE/GWP) — currently at $3.2B, 📈 +30% by 2025
- Investments (AUM) — currently at $33B, 📈 +29% by 2025
The more I study the topic, meet with local founders, and converse with global VCs, the more obvious it seems that Southeast Asia has prepared a great foundation upon which to build a thriving startup ecosystem for many years to come.
It has a few critical things going for it:
- Market Size — Roughly 9% of the world’s population resides across Indonesia, Malaysia, Thailand, Philippines, Vietnam, and Singapore ✅
- Consistent growth — The digital economy is expected to grow as much as 10x during the 2020s ✅
- Access to Capital — Record high investment—particularly within the earliest stages of venture capital—which is poised to spur even more follow-on capital allocation into this fast-growing ecosystem ✅
It’s not all sunshine and rainbows, however. Talent development and retention is a major area where most Southeast Asian countries have struggled to obtain exceptional results. That said, there are signs that this tide is turning:
- Markets like Indonesia and Vietnam are becoming emerging hubs for tech, product, and engineering talent.
- Singapore has consistently done tremendous work attracting talent.
- Founder talent has improved due to the return of Western-educated Southeast Asians (known as “sea turtles”).
Additionally, growth in the digital realm often leads to real-world impact across both sectors and cities. Anecdotally, this has been the case in all of the countries in which I have resided:
- Roads are continuously getting bigger and better and new highways are popping up at an ever-increasing pace.
- The region’s improving infrastructure grows hand-in-hand with its thriving construction sector. It seems that every time I visit my family in Europe, a new skyscraper is completed in either Jakarta or Singapore by the time I return.
- This frantic pace construction leads to frequent changes in SEA cities’ skylines. This awe-inspiring dynamic makes individuals feel ever more optimistic about what’s ahead.
Yet, to participate in this growth, it’s vital to understand the subtle differences key to doing business in the region.
In past pieces, I have written at length about expanding within APAC, bridging culture differences when doing business in Asia, the burgeoning venture capital landscape in SEA, and the ever-increasing opportunities the region has to offer.
The one area I have yet to cover extensively is fundraising in Southeast Asia. Hence this piece.
Raising Capital in Southeast Asia
About a year ago, I participated in a program called the A+ Accelerator. While attending the program, my startup was fundraising and, at the program’s conclusion, we were simultaneously exposed to the feedback of both American and Asian VCs.
The difference was profound.
American VCs urged us to focus on product development, stressing the importance of reaching product-market fit.
Alternatively, Asian investors asked pointed question about our traction, unit economics, and revenue growth. They did not want to dive into our product in any detail. All that mattered to these VCs was proof of revenue/profitability, speed of execution, and solid business fundamentals.
Admittedly, exposure to these vastly different requirements was confusing. Because of this we created two decks.
- One deck was focused on market size, product, and why now, geared towards the American VC crowd.
- The other emphasized traction (i.e. the growth of service providers and clients on our marketplace), to appease the Asian VCs.
While the experience was frustrating at times, it was fascinating to witness and taught me a valuable lesson: You must adapt your narrative to fit the needs of the ecosystem in which you operate.
Below are some learnings that I have documented and shared with numerous founders in my network.
Developed Markets versus Emerging Markets
Building a business in the Western Hemisphere is quite different than building one in Asia. This topic has fascinated me for a long, long time. In fact, I wrote my Master’s thesis on how innovation differs in Hong Kong and in Denmark.
The US has been the canonical example of what a great startup ecosystem should look like:
- Investment deals happen fast, valuations are high, and acquisitions are frequent.
- Ticket sizes are only getting higher and higher.
- There are ~3,000 venture capital firms and more than 70,000 startups.
- The market has produced incredible successes, ranging from $600+ billion to several trillion-dollar companies.
- All this has resulted in an incredible magnet for talent—attracting the world’s brightest minds to participate in the world’s greatest opportunity for wealth creation.
On the other hand, Southeast Asia is still a relatively young ecosystem. It started gaining traction only in ~2010, with the first major success cases coming to life in ~2016. Couple that with the unique circumstances of running a business in an emerging market and you can imagine how different the two ecosystems are:
- Valuations are lower and driven by solid unit economics and revenue growth.
- Ticket sizes are smaller but growing.
- Exits happen mainly via M&As (80% of deals), secondary sales (15%), and IPOs (only 5%).
- Deep-tech activity is rare. Most startups address challenges across travel, e-commerce, transport and food, online media, and financial services.
- Awareness around ESOPs (Equity Stock Ownership Plans) is still lacking.
- Overall, investors have an appetite for proven business models versus risky, product-driven bets.
- The fewer exit opportunities are top of mind for investors looking for winners in Southeast Asia. While Series A and above startups often aim directly for an IPO, earlier-stage ventures typically accept acquisition offers that come their way.
Current and Future Fundraising Trends
Next, a few underlying trends that have propelled and will continue to augment the growth of the SEA ecosystem:
- Governments have recognized their important role in the ecosystem. Throughout the past decade, we have seen the launch of initiatives like Thailand 4.0, Indonesia’s 1000 startups, Malaysia’s Penjana Kapital, and Singapore’s Startup SG Founders (in the past, I have written on the great initiatives Singapore offers).
- Later-stage deals are becoming much more common, showing the ecosystem’s increasing maturity.
- There has been a rebound in larger acquisitions (+$30M). Examples include Tradegecko’s acquisition by Intuit, Fave’s acquisition by Pine Labs, and Moka’s by Go-Jek.
- Given how it takes up to a decade for a tech startup to go through an exit or liquidity event, more success cases are certainly forthcoming. The exit cycle matters because tech talent that has been through an exit tends to either launch a new business or invest in the ecosystem. On a long horizon this only builds the foundation for a great ecosystem as we have seen in the West. In fact, there are already some examples of this with the Grab, GoJek, and SEA mafias.
- Ever-growing appetite from global late-stage funds and LPs. For example, American and China-based family offices, Tiger Global, Insight Partners, Hedosophia, Harvard’s Endowment, Sequoia, Accel, Lightspeed, Hustle Fund, SOSV, and many others are competing for quality deal flow and sizeable allocations.
- E-commerce remains the largest growth driver. Today, it accounts for $120B GMV, followed closely by online travel and media.
- The average ticket size for Seed and Series A deals increased 6X in 2021 compared to 2017, while the Series B deals are still seeing a 4X increase.
SEA-Specific Fundraising Tips
1. Conduct Thoughtful Outreach
To succeed when doing business in the region, you need to have an intimate knowledge of the local culture. After all, most Southeast Asian countries are collectivistic and top-down/hierarchically oriented. In some cases, Western cultures are the opposite—scoring high on individualism and adherence to egalitarian leadership principles. In turn, it’s easy to be perceived as too direct, pushy, or even incompetent if you do not adapt your relationship-building style.
While many key players in the startup ecosystem are Western-educated, my experience repeatedly taught me the importance of building long-lasting relationships. You must build an emotional connection from the beginning, which involves frequently going out for meals, drinks, and other such rapport-building encounters.
Get to know later-stage founders and try to deliver value. Involve them as advisers, angels, or mentors. As the relationship strengthens, those founders will start opening their networks, resulting in warm introductions to the VCs that backed them.
Most countries (other than Singapore), lack a robust, reliable legal system. Therefore, relationships carry more weight than written contracts. Only when there is a strong trust between two parties will you be able to secure deals. Most VCs know each other quite well, so be mindful of how you manage those relationships.
Last but not least, be agile and well-prepared at all times. SEA-based VCs tend to position themselves as industry-agnostic. Studying their portfolios will show how they might be more bullish/bearish on certain sectors. Reach out to those investors whose portfolios may make them excited about the problems you are solving/markets in which you are building.
2. Manage Costs Cautiously While Focusing on What’s Important
Given the affordable talent in Indonesia, Vietnam, Thailand, and the Philippines, many first-time founders tend to over-hire. In turn, experienced VCs expect to see a cautious plan for hiring people. Some VCs are increasingly calculating revenue per headcount. After all, HR in a tech startup tends to be the largest cost item. As such, founders should devote significant time to identifying, attracting, and retaining great talent.
In light of the current investment climate, many VCs expect teams to have at least eighteen months of runway these days. If your model relies on lavish spending to acquire users, you will have a hard time raising capital.
All this leads to the current reassessment of what metrics founders should track.
In a good investment climate or more developed ecosystems, GMT/GTV are acceptable metrics.
In Southeast Asia, investors care about your actual revenue. At my last startup, every time I mentioned our gross revenue, I was instantly interrupted by an investor asking: that’s all good, but what’s your net revenue? Think deeply about how you can grow your gross, improve your margins, and launch adjacent verticals to lay out the path to profitability.
3. Recognize that SEA is not a Homogenous Market
The US has a large total addressable market where people speak the same language and have high purchasing power. Southeast Asia is far from a homogeneous block.
Instead, it’s helpful to consider it a unique collection of ten diverse cultures and languages. Most of those countries share quite a low standard of living. Startups will have to expand to each market one by one, by means of a proven model and an incredible ability to execute . A clear go-to-market plan highlighting your deep understanding of the market’s complexity is a must. In my experience, the best way to prove the viability of your plans is through:
- A history of success.
- Running experiments that prove your assumptions in each market where you plan to operate.
Even established organizations find it hard to capture the market successfully. I have seen a variety of strategies, some more successful than others. For example, LinkedIn has parked its regional headquarters in Singapore in order to frequently fly sales teams to each country. Others, such as TikTok, have invested considerably in core markets like Indonesia in order to build solid traction.
Obviously, most startups are less-resourced and thus need to have proven go-to-market plans localized for each country.
A word of caution here. Many founders tend to over-expand too fast in a bid to plant flags and position themselves as a regional success case.
I have been guilty of this twice. Expanding too fast comes at a price. You sacrifice on a) deep understanding of the nuances of each market and b) focus.
Southeast Asia may well have entered its golden era for startups. The region has transformed from a little-known corner of the world to one of the most exciting global ecosystems of innovation.
A few days ago, I asked Singaporean founder who had just closed his seed round about what lessons he learned in the process. Interestingly, he stated that building a new venture in Southeast Asia often results an incredible amount of attention from top-tier VC firms. In his mind, it has never been easier to raise a round as the appetite for risk amongst local family offices, angels, and VCs is much higher today than ever before—no longer a surprise given the market’s strong demographic fundamentals.
That said, there is still work that needs to be done. Operating across all of these diverse, fragmented markets is a tall order—success often derives from a dual focus on traction and revenue that leads to a sustainable business model. Yet, this comes at a cost, making it ever more difficult to start and grow new companies. Because of this, the relatively low number of exits results in fewer seasoned operators. Thus, a lower density of talent.
As for me, I will continue building in Southeast Asia.
History doesn’t repeat, but it often rhymes.
With that in mind, we’re clearly in the initial stanzas of the SEA startup saga.
Nota Bene: The above was originally published here. It has been lightly edited for clarity, Stonkyness, and vibes.
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