Thailand VC: Tough nut to crack

Whenever a prime minister of a conservative developing country urges his people to support local tech start-ups, it is held up as evidence that populist sentiment for modernism, internationalization and riskier investment classes is finally evolving. When the leader in question also happens to be military strongman with complete control over policy implementation and local media, the message becomes all the more convincing.

This is what happened in Thailand late last month when General Prayut Chanocha officially opened the Startup Thailand 2016 fair at the National Convention Centre in Bangkok. The event served as a publicity vehicle for the government's new THB20 billion ($574 million) venture fund, which aims to foster 10,000 start-ups in the country by 2018.

The proposal has been interpreted as a promising step toward reversing the longstanding cultural roadblocks that have held back Thailand's venture ecosystem. According to AVCJ Research, start-ups have received only $87 million of venture investment since 2011 in Thailand, compared to $450 million in Vietnam and $146 million in Malaysia.

They need to realize that English is not a foreign language – it’s a business language – Bart Medici

The problem with the government revitalization plan, however, is in its lack of detail, which suggests that the process of catching up with neighboring competitors will have to happen gradually across a number of fronts.

"It takes three or four iterations to calibrate such programs before they start yielding results," says Dmitry Levit, founder and general partner at Southeast Asia-focused venture capital firm DMP. "The result sought by the government might not even be financial returns; it could be company creation or employment. Right now, it's just an announcement and will require reading of the fine print to assess fully."

Inherent conservatism

If the initiative is to be successful, it must overcome various obstacles tied to social insularism and conservatism. Even as the government - formed by a military junta in 2014 - pushes for more start-up investment support, an entrenched resistance to speculative, negative cash flow business models has continued to color the local VC landscape.

It is evident in Intouch Holdings' investment in restaurant review website operator Wongnai Media - the first-ever Series B for a Thai start-up from a domestic VC. Although the deal helped stoke positive sentiment at the Bangkok conference, it also represents a decidedly safe play in an established business. This preference for proven operating models has limited capital flows to many start-ups, resulting in a lack of tech-related IPOs on the local stock exchange and a self-propagating scenario of risk aversion.

At the same time, it is difficult for entrepreneurs to grow new businesses through practical local integrations. As such, the Thai start-up ecosystem requires an uncommonly intense attention to offline relations in order to get access to the necessary licenses, media outlets and partnerships. "Many foreign start-ups find it challenging to crack the Thai market as they struggle to build enough local network and product market fit," says Johannes von Rohr, founder of local venture builder and accelerator Rabbit Internet.

Von Rohr advises foreign companies penetrating the Thai market to forge local alliances and understand industry practices before adding value through innovation. "Foreign companies must be careful not to address the market with concepts that go against Thai business practice or culture," he says. "The role of foreigners is best in structure and planning. In terms of execution, closing deals and building relationships in the market, a foreign team will struggle where a Thai team will succeed."

The wisdom of this approach was demonstrated recently by e-commerce operator Zalora, which was compelled to abandon an expansion effort in Thailand after sticking to a playbook that appeared at odds with the nuances of the domestic business environment. Marketing decisions were made from Singapore and included the rollout of high-end brands that failed to connect with Thai consumers. Its exit from the country was made to domestic retailer Central Group for only $10 million, representing a significant loss versus a total project investment estimated to exceed $60 million.

Hard lessons about playing by Thai rules, however, may say more about the country's nature than any strategic missteps made by its would-be developers. Thailand remains defensive about adopting global business practice standards compared to Hong Kong, Singapore and much of Southeast Asia.

"If your workspace or website is only in Thai, it's good for the Thai market, but you're not opening up to the rest of the region," explains Bart Medici, founder of Bangkok Entrepreneurs, a group that organizes English-language events to promote foreign participation in the local start-up community. "They need to realize that English is not a foreign language - it's a business language. It took a long time for Europeans to understand that, and now it's time for Asian countries to understand it too."

Growth to come

So far, cross-border deals have focused largely on Japan, which recently cooled investor jitters around Thailand's political stability by reaffirming its economic ties to the country. This vote of confidence has been echoed in Indonesia, where heady valuations are said to be making investors look more closely at internationally active Thai groups such as Orami and aCommerce.

These deepening regional relations indicate that though Thai business culture still requires significant modernization, the country's economic gravity in the region holds significant potential. DMP's Levit sees roots of an imminent growth spurt in the country's unsung role as a major revenue driver for Asian tech companies such as Lazada, a breeding ground for success stories like Agoda and a leading player in the key internet-enabled sectors of payments and travel.

"All of these factors become visible first to entrepreneurs, then to industry insiders and slowly to the media and the global investment community," he says. "In DMP's opinion, there will be a surge of VC interest into Thailand this year following the waves we saw going into Malaysia last year and into Indonesia 2-3 years prior."

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• Topics
• Southeast Asia
• Venture
• Technology
• Fundraising
• Thailand
• TMT