How Southeast Asia's thriving tech ecosystem has led the regional VC/PE expansion
I recall a conversation with a venture capital (VC) client in his penthouse office in downtown Jakarta when I first moved there in 2016. The client managed one of the largest Indonesian VC funds at the time, and Indonesian President Joko Widodo had just visited the Google, Facebook and Twitter headquarters in Silicon Valley.
Inspired by his visit, the president had declared that the Indonesian government planned to grow the country's digital economy to become the largest in South-east Asia.
Was this realistic, I asked my client. It seemed like such an ambitious target when revenues in the country then were mainly derived from offline channels. My client was, however, optimistic, citing Indonesia's rising middle class, growing Internet and smartphone penetration, and many inefficiencies that created ideal conditions for the growth of digital companies.
These predictions turned out to be extremely prescient. Then the pandemic came and pushed this growth through the roof.
Some 70 million consumers across South-east Asia purchased goods and services online in 2020 for the first time, reported Facebook and Bain & Company last September.
As tech ecosystems in the region continue to grow, individuals and institutions have begun placing bets on how to best capitalise on these changes. VC fund managers in Singapore and the region have their nose on the money, and have been taking the lead in riding this wave.
A study from business consultancy Bain pinpoints that the rise of VCs coincided with the rise of South-east Asia's unicorns from 2014 to 2017. In particular, these were South-east Asian tech companies that attracted much attention. Singapore's Grab, Sea and Lazada, along with Indonesia's Gojek, Tokopedia and Traveloka, along with a few other companies, raised their Series A rounds during this period. The result was the doubling of the total private equity (PE) deal value in South-east Asia from US$5 billion in 2013 to US$10 billion in 2014. This number continued to soar to US$15 billion in 2017.
It is clear that VC and PE firms have decided to double down on South-east Asia. But what specifically about the tech ecosystem here, drove this decision? Here is my take.
First, VCs can no longer justify looking away from South-east Asia's digital economy, an undeniably significant part of the region's tech offerings. The opportunities for gains in this market appear boundless.
Anyone who follows the VC and tech space would have heard of the oft-cited report on the South-east Asian digital economy by Google and Temasek. This was first published a few weeks after I arrived in Indonesia in 2016.
The report had originally predicted that the South-east Asian digital economy would grow to US$200 billion by 2020, a number which has since been revised upwards to US$300 billion. The amounts pouring into the region continue to grow too – South-east Asia startups raised US$8.2 billion in 2020, unchanged from 2019 and unimpeded by the Covid-19 pandemic.
The perfect bridge
In the first 9 months of 2021, venture-backed companies raised more than US$17.2 billion. That is almost US$63 million a day, and more than double the funds raised in 2020.
Second, the nature of technology ventures themselves prove alluring to investors. Most of these ventures are aimed at providing access to once out-of-reach goods and services for the average man on the street.
From edtech to medtech, these companies serve as the perfect bridge for VCs to tap on the capital available in the region's markets. Combined with increasing Internet and smartphone penetration, these ventures are poised to achieve at least a decent level of success. If you are wondering exactly how much opportunity there is out there, the region comprises some 400 million Internet users, most of whom are young and tech-savvy, according to one of the region's leading VCs, Jungle Ventures.
According to Preqin, a data provider focused on the alternative assets industry, the 6 largest Asean-focused VC funds in the market as of July 2021 are headquartered in Singapore. These firms are Arbor Ventures, Altara Ventures, Golden Gate Ventures, Jungle Ventures, Monk's Hill Ventures and Openspace Ventures.
This is due in no small part to Singapore's efforts to reduce the risk involved in investing in such cutting-edge technology, while actively promoting innovation and growth.
On one hand, the regulatory landscape in Singapore has evolved significantly to accommodate the growth of the digital economy. We all know the ease of setting up a company in Singapore and the absence of prohibitively expensive capital gains tax has made it an attractive jurisdiction.
Beyond this, the government has drafted numerous new pieces of legislation, keeping pace with the development of technology in the region. For example, the introduction of Variable Capital Companies (VCCs) has provided investors with greater flexibility and creativity to strategise. The Payment Services Act (PSA), which addresses digital tokens and payments, also closely follows developments in the e-commerce and cryptocurrency spaces. The presence of legislation significantly reduces regulatory risks that may arise from errant players in the industry, or capricious behaviour from governing bodies.
On the other hand, Singapore's government continues to actively encourage the growth of the tech ecosystem. This February, the Singapore Budget allocated S$24 billion over the next 3 years to co-fund the costs of trials and adoption of emerging technologies. These include 5G, artificial intelligence and cybersecurity tech, among others.
It is clear that there are numerous opportunities for entry in South-east Asia, which we can expect VCs to take up. For one, there are plenty of impending exits also currently looming in the market including the likes of Grab and GoTo.
Beyond this, due to the maturation of startups set up earlier in the decade, and the presence of new entrants, VCs have a variety of strategies to choose from here.
While larger funds have opted to bridge the Series B and C funding gaps in the region by injecting larger investments, plenty of new opportunities have arisen for firms to also attempt to capture value in the earlier phases of a startup's life cycle. VCs like Venturra Discovery, ACV and Wavemaker, among others, have opted for this strategy in the wake of the region's booming tech ecosystem.
However, we also need to be cognisant of the challenges ahead. These vary across the various South-east Asian nations. Indonesia, for example, will need to overcome its shortage in technology professionals and slow rates of digital adoption outside metropolitan areas. This is different from the challenges that more developed digital economies like Singapore and Malaysia face. In these areas, the focus instead lies in retraining, reskilling and the provision of relevant equipment.
In the last 5 years, venture capital has funded over 2,000 startups and technology companies in South-east Asia. The Covid pandemic has not stopped venture capital interest in the region, with over 200 deals achieved in 2020. We can expect continued strong investment interest and momentum in South-east Asia – particularly Singapore and Indonesia – in tech as the regional growth story.
This article was first published here on The Business Times.
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