A dumb American’s perspective on investing in Southeast Asia

We recently announced at Hustle Fund that we will start investing in Southeast Asian software startups, and my new business partner Shiyan Koh, who just moved back home to Singapore, will be leading the charge on that.

I was in Singapore last week, and I was blown away by the amazing opportunities that Southeast Asian entrepreneurs have ahead of them.  It’s one thing to hear from other people that Southeast Asia (SEA) is up-and-coming, but it was totally another thing to go there and talk with so many people about the future.

I haven’t seen this movie yet, but it’s not (entirely) quite like this. Originally posted by peik-lin

Here are a few thoughts that come to mind from just my short trip there.  I’d be curious what other people in-region think about this (and keep in mind, I won’t be doing the investing there; Shiyan will be 🙂 ):

1. There are opportunities galore

People like to use chronological analogies, so if I had to do that here, I would put investment opportunities in SEA at around 1997.  To add some context, I loved learning about all the low-hanging-fruit investment opportunities there are.

Basic infrastructure is just being tackled and getting strong traction right now.  For example: payments via Grab and others such as AliPay are coming into the region.  Basic marketplaces like Carousell are big or getting big, but there are plenty of opportunities for “large niche marketplace” plays to emerge.

In this first inning of software companies in SEA, major consumer businesses have started taking off, but so many other categories are just starting to emerge.  B2B, for example, hasn’t even really started as a category yet (more on this below).  Health is another area that has a lot of low-hanging fruit opportunities and, in some countries, is less regulated than in the US (for better or worse).  Fintech, too, has many areas that have not yet been tackled – payments for the banked population is just the first step.  This really resembles the era when in Silicon Valley, we had Yahoo, EBay, and Craigslist.  PayPal was not around yet, but ideas were starting in payments.

I think if I were an entrepreneur who was location-agnostic, I would definitely move to Singapore and start a business there.  I can think of 20 clearly big low-hanging fruit opportunities in Southeast Asia that would be great to go after, but in contrast, it’s really difficult to even think of one clearly big opportunity in the US.  Obviously, the US still has plenty of big opportunities ahead of it (more on that below), but the low-hanging fruit around “infrastructure” has been established.  Messaging and email generally works.  CRMs and marketing tech generally work.  Ads generally work.  Marketplaces generally work.  Payments work.  People in the US can pay for things electronically and can get most services and goods today from the internet. Infrastructure and services in the US generally work, so improvements in these areas are all incremental.  Entrepreneurs can still make money improving these areas, but infrastructure improvements in the US are incremental in contrast to SEA, which are right now binary opportunities.

2. Building for Southeast Asia is less about tech and more about hustle

All of that said, because infrastructure takes a lot of pure, brute force and hustle to drive adoption, the kinds of entrepreneurs who will thrive in this type of ecosystem are those with a lot of hustle and strong business mindset.  All the low hanging fruit opportunities that I mention above are not tech revolutions; they are all about customer adoption.  In many cases, the tech required to execute these businesses have been done elsewhere  (payments, marketplaces, etc.).

Customer adoption is always hard wherever you go, but it’s arguably even harder in a place where there aren’t ready distribution channels.  The interesting thing about the US market is that online customer acquisition these days is actually fairly straightforward for most customer audiences.  You can build a SaaS company and get to $1m ARR fairly easily while 10 years ago this was very difficult to do.  This is because we now have the infrastructure to do things like look up decision makers on LinkedIn or elsewhere and find online-means to reach people.  In SEA, there are some pieces of infrastructure that have been established and exceed the US.  Mobile penetration in SEA is much higher than in the US (on a volume basis).  This makes it easier to do customer acquisition for a consumer-based company.  For B2B, for example, decision makers for older businesses can’t be easily found online.  In other examples, if you’re selling to unbanked populations, not only is the customer acquisition hard, but you also have to do operational things like collect cash, which US startups don’t have to worry about.

I think this explains why we tend to see consumer businesses emerge first; tech-savvy internet users are easiest to reach.  Other customer audiences are laggards in adopting the internet.  Startups formed to serve them need to wait until they come online so that the customer acquisition can be faster.

3. B2B requires selling to other startups

This brings me to my next point.  Throughout my trip, lots of people (investors, startup ecosystem builders, entrepreneurs) told me that they are puzzled about why B2B hasn’t taken off yet, even though that seems to be the next opportunity.

Here’s my take on B2B: if you look at the US ecosystem, most of the high flying B2B companies got to their level of growth because of fast sales cycles.  These fast sales cycles tend to come from selling to other startups.  Slack, Stripe, Mixpanel, and Gusto grew by selling to software startups.  The accounts start small but increase quickly when some of your startup customers become big within 5 years.  I noticed this with my startup LaunchBit. We started by selling to startups too, and within a few years, the startups who found success both with us and just in general grew their accounts with us considerably.

In Southeast Asia, if you are starting a B2B company right now, you will likely need to be selling to older or slower-moving industries.  That sales cycle can be long, but in 3-5 years or so, if a lot of startups emerge in the ecosystem, then the B2B sales cycle selling to SEA startups will become fast.  Here’s a concrete example: we met with a health company based in Thailand who flew to Singapore to pitch investors.  They showed us how they were communicating with their consumer customers – all through LINE messenger.  There were literally hundreds of threads of conversations in LINE.  At some point, as the startup grows, those conversations are going to become a real pain to keep track of.  Can you imagine doing all your business in LINE?  (I fully realize that a lot of people do all their business in WeChat in China).  You can imagine that at some point, there will be new marketing automation companies that will start building marketing communication software to allow companies to communicate in a more organized manner en masse via LINE to their customers.  However, this will only become a big opportunity if there are lots of startups using LINE.  So, I think we are probably 3-5 years out for large B2B opportunities to emerge because a lot of startups need to get started first.

That said, we are definitely interested in looking at these types of opportunities even as early as now because they take time to build.  🙂

4. Southeast Asia is fragmented

It’s fun to just lump every SEA country together, but the reality is that SEA is quite fragmented in a way that the US is not. (by language, culture, regulations, etc. – though sometimes the US seems quite fragmented – hah).

I think it’s great if startups have big ambitions of serving audiences globally, but it’s really important to tackle one market well first.

The market that everyone seems to hone in on is Indonesia.  Indonesia has 250m+ people, so it’s close to the size of the US.  However, it’s important to segment further.  If you’re trying to go after a banked population that has disposable income, then the addressable segment is probably more like 100m people.  This is still a really large market, though.

Once you start talking about population numbers closer to 100m people, then other countries start to rival Indonesia in size.  Vietnam, for example, has strong tech adoption and has nearly 100m people.  Thailand has nearly 70m people.

From our perspective, while it’s important to be cognizant of market size (for example, Singapore has ~5m people but is a great hub for building a business even if not a large addressable market on the island itself), I met a lot of people who were overthinking the SEA market landscape.  As a startup, focus is super important, and nailing your product or service for one market of 5m people or 50m people is already really hard to do.  And that one market – whatever it is – should be the focus before trying to dabble in many markets that all have completely different languages, culture, and regulations.

However, this seems counter to the advice that many entrepreneurs seem to receive in the region.  If other investors are looking for you to expand to Indonesia even when you’re still tiny, then you may need to think through your strategy on fundraising.  I fully realize that sometimes you have to adjust your plan to make your company more amenable to fundraising, but at the same time, VCs don’t always have the best advice either.  This is a tough balance.  So maybe you start with Indonesia if you’re familiar with the market.  Or maybe you start conversations with VCs well before you start your company to understand how people think about addressing one market really well before expanding.

Garden by the Bay Mid Autumn Decorations

5. Liquidity opportunities for investors are unclear

Ultimately, as an investor, I think about how a company can eventually get liquidity.  And right now, even though some of the markups of high flying SEA companies are good, it’s unclear what the “typical” path of a successful large startup looks like in this region.

In the 90s, going IPO was a common liquidity path in the US.  After consumers became wary of IPOs, M&A became the much more dominant path, though IPOs are coming back in favor again in some cases.

What this looks like for SEA is unclear, and what’s even more unclear is the timeframe.  In China, the path to liquidity can be 5 years or fewer.  In the US, our darling unicorns often take a decade and sometimes longer to exit.  Will large US or Chinese tech companies be purchasing companies for large amounts in SEA?  Is that strategic to them?  Or will these companies go IPO?  And depending on the country, will investors even be able to get their money out once they’ve made money?  These are all questions that we have discussed and frankly don’t know the answer to, but we are betting this will be figured out in the next few years while our investments mature.

6. What are opportunities in saturated markets?

This trip got me thinking about opportunities in saturated markets.  In the US, I’d argue that most categories are crowded.  Crowded markets aren’t necessarily bad; it proves demand.  If entrepreneurs can get to a certain level, any exit is good for them.  For VCs, it’s different.  This is where entrepreneur and VC incentives don’t align.  A lot of VCs – especially microVCs like us – will generally sit out of crowded markets because they don’t have the capital to pour into their companies to compete and become big winners. Smaller exits are not good for VCs because they really need their winners to make up for their losers plus return more.  We can debate the VC model all day, but that’s another topic for another day.

In the US, the big opportunities as I see it are:

  • Products and software for unserved consumer populations along the lines of gender, race, and ethnicity;  fashion tech, for example, is an area that has been long ignored
  • “Super high tech” that alters how we live life dramatically; think flying cars and everything that Elon Musk dreams up
  • Providing software to a new generation of tech savvy people in the workplace OR consumerizing B2B software for the phone; for example, every doctor and construction worker today can use technology but 10 years ago, that was not necessarily the case

This means that entrepreneurs need to be more specialized in skillset than in a landscape like SEA.  For example, if you are an entrepreneur building a new kind of autonomous vehicle, you really need to have a strong engineering background.  On the other hand, if you are building a new kind of ecommerce product for an underserved customer segment, in many cases, you may not need to be technical at all, but you really need to know how to go after your customer persona to be able to out-target more general competitors who are going after a broader segment.

What this means, I think, is that we will still continue to see a lot of really interesting technologies emerge from the US as well as even more products and services that will serve just about every consumer and B2B demographic.  All of these are all still large opportunities, but I think the ideas that win here will just be much harder to come up with.

Just my $0.02.  Would be curious for your thoughts.

One thought on “A dumb American’s perspective on investing in Southeast Asia”

  1. Hi Elizabeth, First of all, this article is definitely not dumb :). I work with a Southeast Asia-based VC and this article covers the general trend in SE Asia well, in my opinion. I especially agree with this “you may not need to be technical at all, but you really need to know how to go after your customer persona to be able to out-target more general competitors who are going after a broader segment.” There are still many fragmented industry in the region where a little bit of digitisation and ‘tech’ can create values to both B2B and B2C customers.

    On the topic of liquidity, from our observation, SE Asia exit scenario in the past 5 years are still dominated by secondaries to larger institutions who, not only came from China, but also from local tech companies and Japanese strategics; this is especially in the recent year with the emergence of local tech ‘giants’ such as Grab, Gojek, Traveloka, etc. We collected this market trend here: https://www.cento.vc/southeast-asia-tech-investment-h1-2018/

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