Newsletter 96: Introduction to Southeast Asia’s startup ecosystem and the fundraising landscape
Throughout the past decade, I started companies, joined great founders, scouted for investment opportunities, and mentored upcoming entrepreneurs across Southeast Asia (SEA).
This month alone, I am helping a cohort of Korean startups with a series of workshops. All those events will cover fundraising and doing business in Southeast Asia (SEA):
Nailing down the right narrative through storytelling.
Simplifying complex business models through design.
Understanding opportunities across SEA.
Building an effective fundraising process.
Understanding how the SEA fundraising landscape differs from other parts of the world.
The reality is that nobody loves fundraising. Most founders have plenty of priorities apart from their next raise. But for most startups, external investment is an important step in their journey. After all, it takes time, great talent, and all kinds of other resources to build a sustainable business.
As with most things in life, you can study the fundraising process as much as you want, but building fundraising decks and pitching investors are skills that people develop predominantly by getting their hands dirty. Yet, that does not mean you should jump straight into the fundraising process without doing your homework.
In my experience, founders raising capital in Southeast Asia face one of the following challenges:
First-time founders do not understand what VCs are looking out for. This stems from the lack of warm relationships with regional investors.
Seasoned founders who built businesses in other parts of the world face challenges when adapting their story to the expectations of VCs in SEA.
While I am not an expert, I have had a front-row experience in observing how Southeast Asia transformed. From a little-known region into one of the most exciting startup ecosystems worldwide.
So, this week I wanted to take a moment and share my learnings. Years of experience of observing and participating in the greatest wealth creation the region has ever seen. Condensed into one essay.
Starting with the potential of Southeast Asia’s digital economy. Then, transitioning into fundraising lessons for early-stage ventures (pre-seed to Series A).
Southeast Asia — a story of relentless growth and wealth creation
When I moved from Denmark to Indonesia in 2016, many of my European friends looked at me incredulously. Why would I move to an emergent market? Why would I give up on the high standard of living, excellent infrastructure, world-class education, stable governance, and healthcare support Denmark offers?
Yet, over time, the narrative has changed. People started praising my (at the time) contrarian bet. Asking for tips on how they could make similar moves. The change in perspective was fueled by the incredible growth Southeast Asia experienced in such a short period. A growth that translated into publicity, success cases, and studies that reached every corner of the planet.
Southeast Asia’s digital economy is projected to reach $1T GMV by 2030. Not too shabby, given how underdeveloped Southeast Asian countries were just a decade ago.
Every time I visit my family in Bulgaria, it blows my mind how digitally nascent most European countries are. Just one year ago, my brother was boasting about the rise of food delivery startups in Bulgaria. A service Southeast Asia has been enjoying since ~2015. In fact, E-commerce, food delivery, and digital financial services alone are expected to reach ~$360B by 2025. The region’s success cases Go-Jek and Grab have married affordable workforce and 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. Going back to the examples of Go-Jek and Grab. Their drivers have received access to jobs that a) pay better, b) have low barriers to entry, and c) are most likely better than what they used to do.
But unless you live in any Southeast Asian country, it’s hard to understand how compelling the opportunity is. So let me offer a few insights:
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 read on the topic, the more obvious it seems that Southeast Asia has built a great foundation for a thriving startup ecosystem:
Market size — pretty large given that ~9% of the world population resides across Indonesia, Malaysia, Thailand, Philippines, Vietnam, and Singapore ✅
Consistent growth — the digital economy is expected to grow as high as 10x during the 2020s ✅
Access to capital — There is a record high capital, poised to spur even more investments into the startup ecosystem ✅
Talent is perhaps the only area where most Southeast Asian countries have struggled to get great results.
That’s especially prominent with engineering jobs, but where isn’t it? Fortunately, markets like Indonesia and Vietnam are becoming emerging hubs for tech talent.
Singapore is the only country within the region that has consistently done great work attracting talent.
Founder talent has been improving given the return of overseas educated Southeast Asians (known as “sea turtles”).
Growth in the digital realm has a snowball effect across other sectors as well. That has been the case in all countries where I have resided, i.e., Indonesia, Malaysia, and Singapore. Roads are getting bigger and better. New highways are popping up frequently. The ever-improving infrastructure goes hand in hand with a thriving construction sector. In fact, I like to joke about how fast-paced construction in Asia is. How every time I visit my family in Europe, a new skyscraper gets completed in Jakarta or Singapore by the time I am back.
The frantic construction leads to frequent changes in cities’ skylines, which is incredible to witness. So naturally, that dynamic makes you feel optimistic about what’s ahead.
Yet, to participate in this growth, you need to understand the subtle differences in doing business in the region. I have written at length about what it takes to expand your business to APAC, culture differences when doing business in Asia, the venture capital landscape in SEA, and the overall opportunities the region offers. But the one area where I have not written much is fundraising in Southeast Asia.
The subtle differences in raising capital in Southeast Asia
About a year ago, I participated in a program called A+ Accelerator. While attending the program, we were raising capital. As an outcome, we were simultaneously exposed to the feedback of both American and Asian VCs.
Whenever we pitched an American VC, they urged us to focus on product development. Stressing the importance of reaching product-market fit. But on the other hand, Asian investors kept on asking questions about our traction, unit economies, and revenue growth.
Most Asian-based investors did not want to dive into our product. All that mattered to them was proof of business, speed of execution, and solid business fundamentals.
Admittedly, being exposed to the different requirements from each side was confusing. So we created two decks. One deck was focused on market size, product, and why now, geared towards the American crowd. While the other deck emphasized traction (aka growth of service providers and clients on our marketplace).
While the experience was frustrating at times, it was also fascinating to witness. It taught me a valuable lesson. A lesson about adapting your narrative to the needs of the ecosystem where you operate.
In turn, I started documenting my learnings and sharing them with founders in my network. So far, the feedback has been great, which triggered the idea of writing this essay.
Developed markets VS Emerging Growth markets
I guess it goes without saying that building a business in the western hemisphere is quite different than building one in Asia. In fact, the topic has been fascinating for me for a long time. I even wrote my Master's thesis on how innovation takes place in Hong Kong VS Denmark.
Raising capital
The US has been the canonical example of a great startup ecosystem. Investment deals happen fast. Valuations are high. Acquisitions are frequent. Ticket sizes are getting higher and higher. There are ~3000 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 that has resulted in an incredible talent magnet. Attracting the world’s brightest minds to participate in the world’s greatest 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 emerging markets, and you can imagine how different the two ecosystems are. While I am not an expert on the topic, I have observed the following differences when raising capital in SEA. Valuations are lower and driven by solid unit economics and revenue growth. Ticket sizes are smaller but definitely growing. Exits happen mainly via M&As (80% of deals), followed by secondary sales (15%) and IPOs (only 5%). Fourth, it’s rare to see deep-tech activity. Most startups address challenges across travel, e-commerce, transport and food, online media, and financial services. Awareness around ESOP is still lacking. And overall, investors have an appetite for proven business models.
The fewer exit opportunities are definitely top of mind for investors looking for winners in Southeast Asia. Series A and above startups would aim directly for an IPO. Whereas earlier-stage ventures would typically accept acquisitions coming their way.
I am obviously handpicking criteria to emphasize the differences. Many things are similar as well. But I think it’s more valuable to focus on the differences. In that way, you can manage your expectations better. Then, adapt your business style when doing business across the region.
Trends
Next, I would like to highlight a few underlying trends that drive the growth of the 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 more common, showing the ecosystem's maturity.
Rebound in larger acquisitions (+$30M) with companies like Tradegecko’s acquisition by Intuit, Fave’s acquisition by Pine Labs, and Moka by Go-Jek.
Given how it takes up to a decade for a tech startup to go through an exit, it is expected to see more success cases soon. 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 that builds the foundation for a great ecosystem as we have seen in the west. In fact, there are already some examples of Grab, GoJek, and SEA mafias.
Growing appetite from global late-stage funds and LPs. For example, American and China-based family offices, Tiger Global, Insight Partners, Hedosophia, Harvard Endowment, Sequoia, Accel, Lightspeed, Hustle Fund, SOSV, and many others.
E-commerce is the largest growth driver. Today, it accounts for $120B GMV, followed 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 seeing a 4X increase.
A few tips for raising capital in SEA
Outreach thoughtfully
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 happen to be collectivistic and top-down/hierarchically oriented. In some cases, Western cultures are the opposite. Scoring high on individualism and adhering to egalitarian leadership principles. In turn, it’s easy to be perceived as too direct, pushy, or even incompetent at times 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 and drinks.
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. That will result in warm introductions to the VCs that backed them.
On another note, in most countries (other than Singapore), the legal system is not terribly reliable. 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, be mindful of how you manage those relationships.
Last but not least, be 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. Outreach to investors who would be excited about the problems/markets you are building.
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 overhire. In turn, experienced VCs would expect to see a cautious plan for hiring people. Some VCs are increasingly calculating the revenue per headcount. After all, human resources in a tech startup tend to be the largest cost item. So founders should devote significant time to identifying, attracting, and retaining great talent.
Couple that with the current investment climate. Many VCs would expect you to have at least 18 months of runway these days. If your model relies on lavish spending to acquire users, you will have a hard time fundraising capital.
All that leads to a reassessment of what metrics founders have to track. In a good investment climate or more developed ecosystems, GMT/GTV are acceptable metrics. In Southeast Asia, investors care about your actual revenue. In the case of my last business, every time I pitched our gross revenue, I got interrupted instantly. Then the investor would ask, “that’s all good, but what’s your net revenue?” So think deeply about how you would grow your gross. About your margins. Also, how would you launch adjacent verticals to flesh out the path to considerable profitability?
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, on the other hand, is far from being a homogeneous block. Instead, you can consider it a unique collection of 10 diverse cultures and languages. Most of those countries share quite a low standard of living. You will have to conquer each market one by one, requiring a proven model and an incredible execution. 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 turn, they send sales teams to fly to each country frequently. Others, like TikTok, would invest considerably in core markets like Indonesia 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 that myself, twice. Expanding too fast comes at a price. You sacrifice on a) deep understanding of the nuances of each market and b) focus.
Conclusion
Rumour has it that Southeast Asia has entered a golden era for startups. The region has transformed from a little-known corner of the world to one of the most exciting innovation ecosystems.
A few days ago, I asked a founder who had just closed a seed round in Singapore about his observations on the topic. In his view, building a new venture in Southeast Asia attracts an incredible amount of attention from top-tier VC firms. It has never been easier to raise a round. The appetite for risk amongst local family offices, angels, and VCs is much higher today than ever before. That’s not a surprise, given the market's strong fundamentals.
But there is still work that needs to be done, though. Operating across all those fragmented markets is hard. A strong focus on traction and revenue builds sustainable businesses. Yet, that comes at a cost, making it much harder to start and grow new companies. The relatively low number of exits results in fewer seasoned operators. Thus lower talent density.
Having said that, I am super excited to continue building in Southeast Asia. Let's assume we take the perspective that history repeats itself. Then, study the world's best ecosystems like the US and China. It quickly becomes obvious how SEA is just getting started.
Thank you to everyone who reviewed this essay and offered invaluable feedback: Adriel Yong, James Matin-Lewis, and Kang Lin Ong 🙏