November 7, 2016    5 minute read

Why Southeast Asia Is The New Tech Startups Hub

Risks And Returns    November 7, 2016    5 minute read

Why Southeast Asia Is The New Tech Startups Hub

Gone are the days when only traditional companies such as Microsoft and HP dominated the technology sector. Today, as digital penetration continues its winning streak, tech startups around the world are basking in its glory.

Many of these startups have blossomed into unicorns, especially those in Silicon Valley and China. Unicorns are private companies that are valued at $1bn or more – Uber currently leads the valuation table, being valued at around $66bn.

The Rise Of SEA

A similar – albeit newer – trend of a tech startup industry, is on the rise in Southeast Asia (SEA). The region, well known for its diversity regarding religions, political views and economic activities is home to many tech startups, a few of whom qualify as unicorns. SEA’s ‘King Unicorn’ is Grab (previously known as GrabTaxi), a taxi-booking app founded in 2012. Grab is Uber’s chief rival in this region, and as of July 2016, it has been downloaded into over 19 million mobile phones in SEA

The success stories of Grab and many other tech startups in SEA are not publicised as much as those in the Silicon Valley. However, the rise of SEA as a tech startup hub is highly commendable. The region is home to an increasing number of tech startups buoyed by various factors as laid out below.

Digitalisation – The Smartphone Trend

The chart below is an apt representation of how successful digital penetration in SEA is – SEA countries such as Thailand, Malaysia and Indonesia have more smartphone users than PCs, compared to most developed countries. Smartphones are currently the most important channel for tech startups to reach customers. Apps available on iPhones and Androids enable customers to shop, look for transport and connect with employers in just a few steps. Higher smartphone utilisation is thus an essential ingredient for the rise of tech startups in SEA.

startups

(Source: Google Report)

Buoyant Consumer Demand

Consumer demand for technological services offered by startups in SEA has been growing at a record pace. This is mainly due to high GDP growth in the region, which the OECD has forecasted to be around 6% in 2016. Higher economic output leads to greater purchasing power which, in turn, fuels demand across various products and services. SEA consumers are cautious about their spending compared to consumers in the West. But according to the Nielsen Global Consumer Confidence Survey in 2013, SEA consumers are increasingly appreciating premium offers and are happy to spend on travel, fashion and entertainment. Given that this trend coincides with a high digital penetration and the preference for fast and easy transactions, it is no surprise that demand for technological services and apps is growing. Such an environment is very conducive for tech start-ups to regarding up, as it provides them with a large pool of potential customers.

Moreover, the start-ups of SEA are in a better position to cater to the needs of clients in the region. This is evident given how most SEA consumers prefer using Grab over Uber, and Lazada or Zalora over Amazon. The preference for regional services is likely to stem from safety, culture, and convenience. For instance, consumers in SEA probably prefer Grab or Go-Jek over Uber as they can get a particular price quote and pay quickly in cash, which they deem safer compared to using credit cards.

Active Investment Appetite

The decision to invest in tech start-ups involves many considerations – during the Wild Digital Conference 2016, Mr Roderick Purwana an Indonesian venture capitalist listed market potential and execution as the key factors. SEA scores well in the market potential area, with a healthy GDP growth and consumer demand, as discussed above. However, since many of the region’s tech start-ups are new compared to those in Silicon Valley, time is what SEA needs to prove itself in terms of execution. Nevertheless, investor confidence in SEA startups has grown rapidly in recent years. In fact, startups in SEA received a record total funding of $1.61bn last year. Based on Tech in Asia’s report, this was a 43% increase from the funding received in 2014.

To further support investment in tech startups, governments and private organisations across SEA have carried out important initiatives. For example, the Malaysian government runs Malaysian Global Innovation & Creativity Centre (MaGic), a startup and entrepreneurship program aimed at making Malaysia a startup hub for SEA by empowering entrepreneurs. 500 Startups, a US-based venture capital firm, is also heavily involved in helping SEA startups work on specific growth goals. Just last year, it added another $5m into ‘500 Durians’, a micro-fund focused on investing in startups in SEA.

What Does The Future Hold?

With continued government support, healthy GDP growth and a positive investment outlook, SEA has the potential to transform itself into Asia’s very own Silicon Valley. Based on recent conferences held on this topic, there seems to be a high level of enthusiasm among tech startups to make a mark in SEA and beyond. Startups in SEA should also look at options for partnering with startup hubs in India and China to create synergies and penetrate other markets in Asia.

It is important to keep in mind that tech startups face high volatility regarding valuation. Many have warned that the unicorn path is a dangerous one, as there is a risk of developing unsustainable business models. Hence, tech startups in SEA should ensure that their objectives do not focus solely on growth, but also on creating liquidity and being profitable in the long run.

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