The ecosystem for startups and tech entrepreneurship in Southeast Asia has grown considerably in the past few years. We are no strangers to these startups in Southeast Asia – Grab, Tokopedia, GoJek, Shopee, VNG, we can name more.
Demographics and the macro economy are often cited as the biggest factors in play – that probably explains why Indonesia was the hottest market in the last four years.
But these are not the full picture. You probably realised that ecosystems in different countries are at drastically different levels of maturity, as well as paces of development.
And often, such disparity does not necessarily correspond to the level of economy (in GDP per capita). One example is that Vietnam and the Philippines have very similar levels of population and GDP per capita, and even similar levels of mobile internet connectivity, but the former has a much more vibrant startup scene, and also received 50 times venture funding compared to the latter in 2019.
Why? We thought that three more reasons might be at play:
Varying levels of education
To succeed as a tech entrepreneur, you also need certain skills to be able to start and manage any startup with considerable initiative and risk.
While there might be exceptions, entrepreneurs are often characterised by high intelligence and high level of openness. For a founder, good education and exposure are important in setting the foundation for critical thinking, and also often in providing a good network where he or she can tap in for help (or funding).
If you look at the US, India or China, you would understand the alumni effect in successful startup clusters.
Also, for a tech startup to succeed, you need to have more than determined, strategic and resilient founders. You also need good quality talent that is willing to work for it. Here, the more prepared countries again make a difference.
For example, Vietnam has over 40,000 new IT-related graduates each year, with students gaining exposure to computer science at a young age.
Their young, tech-savvy population with a strong interest in tech-related careers will help fuel the growth of tech startups. With the country producing more top computer engineers compared to its neighbours in Southeast Asia, this might be one reason why Vietnam’s startup scene is booming.
Of course, there is an argument that if you do not have enough well-trained (and experienced) domestic talent, you can import. However, in any country, importing can’t be done at scale. You will have issues with culture, integration, and commitment.
Look at the struggle Lazada is facing now.
Even though Southeast Asia is one of the world’s fastest growing internet regions, internet penetration rate varies across the countries. In many countries the rapid development only happened recently – through the sale of smartphones and improving 4G infrastructure.
However, just looking at (often fast growing) internet penetration is missing the whole picture. Depending on your business model, more infrastructure is required (and they are often not growing as fast as internet penetration). For instance, you will need good logistic infrastructure for ecommerce, KYC and collection infrastructure for fintech lending, and payment infrastructure for many of the transactional platforms.
While mobile internet opens up a lot of news to a new, direct way of distributing content, goods and services, we need to go back to the basics – do we have the infrastructure that is needed?
Otherwise you might end up in a situation where you work 200% of your time, burn all your funding, and still can’t grow.
Government & regulations
While most countries have policies and even funding in place to support the development of startups, still, in many countries regulations are unclear, and often changing.
It is fair that the startup sectors are fast changing, while policies and regulations need to adapt. However, the correct way is not to change regulations often (which create uncertainty for both startups and investors), but to have light touch guidelines in place first, while trying to make a clear, more comprehensive, and resilient set of regulations. Singapore did that well in ride hailing, shared bikes and scooters.
If entrepreneurs have to spend all their time dealing with the public sector, and (trying to) complying with regulations which are effectively moving goal posts, it is hard to see sustained growth of the startup ecosystem.
Southeast Asia is made up of a combination of mature, emerging, and frontier markets, reflecting economies that are uniquely diverse. Startups and investors will have to approach this region carefully while threading through the different regulatory requirements.
Can money solve everything?
Some investors hold the mindset that more investment can help push the talent, infrastructure and regulations.
However, this can sometimes become wishful thinking – no matter how much money is put on the table, some countries will probably still not open up multi-brand retail to foreigners. Too much is at stake.
And education takes years to fix, experience takes at least months to accumulate.
Therefore, the correct approach for investors and founders is to look at all the factors – is everything ready for you to take off?
If not, you certainly do not want to become the first player to educate the market.
Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected]