Recently, Vertex Ventures Southeast Asia & India announced our latest fundraising of US$541 million to invest in more early-stage founders across this region. This is not just the largest venture capital fund raised within our Vertex Ventures network; this is a testimony that Southeast Asia and India will take centre stage in the startup and VC arena in the next ten years.
But I guess, with the grim headlines all around us now, it is not easy to believe this future. The Business Times recently published this “Looming startup failures are giving VCs a reality check”. Well, the hard truth is that in this part of the world, Southeast Asia, the startup ecosystem is still very nascent. Most only got started in the last decade, and as all things go, it takes cycles of booms and busts to build a solid foundation for success.
Sectors that we are bullish about for the next decade
As the region’s large and young population enters their prime earning years and experiences rising incomes, the demand for consumer tech products will naturally rise in tandem, mirroring patterns observed in other developed markets.
Notably, the Generation Z cohort, which comprises digital natives, plays a significant role in driving this demand. Bain & Co reveals that digital natives aged 18-29 in urban areas spend 75 per cent more than the median population and boast one of the highest adoption rates of consumer tech, second only to affluent consumers in Southeast Asia.
Moreover, consumption patterns are expected to shift towards online platforms, providing convenient access to consumer tech products for consumers living in suburban areas outside of Tier one and Tier two cities.
Currently, 43 per cent of the digital population in Southeast Asia resides in suburban areas. Interestingly, despite their significant online presence, there remains a notable disparity in the penetration rate of consumer tech, such as e-commerce and travel tech, compared to their urban counterparts. This indicates a vast untapped market potential in suburban areas, presenting opportunities for growth and expansion.
Also Read: SEA companies making waves with funding, innovation, expansion
While attention has fairly been focused on retail digital banking services for Southeast Asian consumers, there still exists a gap in the infrastructure supporting small to medium enterprises (SMEs). This was what Fairbanc, our portfolio company, recognised — an opportunity to level the playing field for SMEs in Indonesia.
They enable these enterprises to obtain short-term credit for purchasing fast-moving consumer goods from large consumer brands, a process that typically requires extensive documentation — an obstacle that many SMEs face. Fairbanc’s innovative approach addresses this gap, providing fair access to banking services for SMEs and empowering them to thrive in the dynamic business landscape of Southeast Asia.
Beyond Singapore, Southeast Asia harbours immense untapped potential, specifically within the region’s small and medium enterprises (SMEs) that form the backbone of its economy. The market size and potential are huge, with over 70 million SMEs in Southeast Asia accounting for nearly 40 per cent of the region’s GDP and employing almost two-thirds of the working population.
Companies that effectively cater to this market have witnessed remarkable profits. In Indonesia, for example, our portfolio company, Manuva, operates as a tech-based packaging platform that helps SMEs optimise their packaging development and procurement processes. By providing tailored solutions, Manuva enables SMEs to enhance their competitiveness and efficiency in the market.
Lastly, healthcare presents a significant opportunity for startups to address people’s basic needs through technological advancements. It is noteworthy that, excluding Singapore and Malaysia, Southeast Asia exhibits an average of only 8 doctors per 10,000 residents, as per the World Health Organisation (WHO). This ratio falls significantly below the global average of 15 doctors per 10,000 residents, indicating a lack of access to healthcare services for many individuals in Southeast Asia.
In this context, healthcare companies and startups have the potential to not only thrive in the market but also bridge the gap and connect the underserved population with essential healthcare services through innovations like telemedicine.
What are some roadblocks that Southeast Asia may face?
Southeast Asia is characterised by its vast diversity and fragmentation. Different countries within the region have distinct languages and regulatory policies, posing a challenge for startups seeking to expand across the region. This is especially true for startups with limited manpower and legal resources to navigate and understand each market’s unique background and conditions.
Regional startups encounter a talent crunch despite tech layoffs in larger companies. While tech giants like SEA have been reducing their workforce, emerging startups still face a shortage of talent in tech-related fields.
Skilled employees are often recruited by legacy companies that are undergoing digital transformation initiatives. Consequently, startups must strive to exceed their targets and achieve more with limited manpower.
The full realisation of potential growth in sectors such as logistics and e-commerce depends on the development of key infrastructure. Governments in the region are actively taking steps to address this challenge, with projects like the Trans Java and Trans Sumatra Toll Roads in Indonesia. The establishment of robust infrastructure is essential for startups to leverage and expand their operations effectively.
Southeast Asian customers tend to be price-sensitive, which can impact the adoption of emerging technologies. Affordability becomes a significant factor, and it varies across different regions within Southeast Asia.
According to Trading Economics, Indonesia’s GDP per capita stands at US$11,858, Thailand’s at US$17,077, and Vietnam’s at US$10,628.
In comparison, the global average for GDP per capita (PPP) is US$21,283. These statistics reveal that consumers in Southeast Asia have lower disposable incomes even after accounting for the differences in the prices of goods and services.
The disparity means that consumers with lower disposable incomes in the region may face challenges in affording new technologies that come with higher price points. Thus, startups must learn to juggle the costs associated with developing new products and align them with the price points consumers are willing and able to pay.
Also Read: How these SEA tech companies are using AI to improve their offerings
Several markets in Southeast Asia experience political uncertainty, which can impact business operations and investment climate. Fluctuations in government policies, regulatory changes, and geopolitical factors may introduce uncertainties and challenges for startups operating in the region. Staying informed and adaptable becomes crucial to navigate through such uncertain environments.
A golden age for Southeast Asia startups
We believe the next decade will be a Golden age for Southeast Asia startups and Venture hubs. The future of Southeast Asia’s tech ecosystem is filled with exciting prospects and opportunities. Several key areas are likely to shape its trajectory.
One of these areas is Artificial Intelligence (AI). The integration of AI into existing startup products or new product ideas presents a promising avenue for growth. However, it’s important to acknowledge that the adoption of AI technology may currently be costly and not cost-effective for companies in Southeast Asia.
While the AI sector holds immense potential, startups in the region need to carefully consider the feasibility and financial implications of implementing AI solutions at this stage.
Another area of significance is the growth in Venture Capital (VC) investments. Private investments, particularly in Singapore, have been robust, but emerging markets in Southeast Asia are also experiencing an increase in investment.
As countries like Indonesia and Thailand become more competitive in terms of funding opportunities, we can expect to see a surge in the growth of startups across different parts of the region. This rise in VC investments may pave the way for the emergence of new unicorns and bolster the overall startup ecosystem.
Climate tech will be another area that many investors will be watching closely. Southeast Asia, with a strong commitment from 9 out of 10 ASEAN members to achieve net-zero emissions by 2050, holds significant potential for growth in the ClimateTech sector. Communities in Southeast Asia are expected to be at the forefront of the climate revolution, creating opportunities for innovative startups to develop solutions addressing climate challenges.
Our portfolio company, Fairatmos, based in Indonesia, has already made significant contributions by enabling communities to develop carbon sequestration projects and facilitating financing or offsetting initiatives in the country.
Globally, Natural Climate Solutions (NCS) such as Agriculture, Forestry, and Other Land Use (AFOLU) have the potential to abate seven gigatonnes of CO2e per year. Southeast Asian countries, including Indonesia, can play a vital role in achieving these ambitious targets. Indonesia alone can abate up to a significant 20 per cent.
In fact, Indonesia has the second-largest global potential to provide low-cost, natural climatic solutions for decarbonisation, and it possesses about 66 per cent of the investable forestry carbon stock in SE Asia — the highest in the region.
In closing, the startup landscape in Southeast Asia, while nascent and undergoing a reality check, also holds the promise of a bright future, given its unique advantages and untapped potential.
By leveraging this potential and circumventing the hurdles, the region can indeed transform into a robust startup ecosystem. It may not be an overnight metamorphosis, but with the right mix of innovation, strategic foresight, resilience, and dedication, Southeast Asia can witness a quantum leap in its startup scene.
As we chart our way through the challenges and headwinds, let us not lose sight of the tremendous opportunities that lay ahead, for Southeast Asia may well be the next big frontier for startups.
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