Southeast Asia tourism: Thinking small

A multicultural region with a dozen different languages and erratically varying levels of sophistication in commercialization infrastructure, Southeast Asia is not an obvious playground for start-up scalability. But for investors in the region’s nascent travel industry, the roadblocks often represent a ticket to ride. 

CyberAgent Ventures is among the latest venture capital firms to put money behind this philosophy by contributing to a $5.6 million Series A round in Nida Rooms, an Indonesia-based hotel reservation services provider now active in Thailand, Malaysia and the Philippines. The investment strategy was based on Nida’s willingness to pursue a local strategy across several jurisdictions when large would-be competitors could not be bothered.

“It’s pretty tough for start-ups that are doing exactly the same thing as Expedia or Agoda, but there are opportunities because the big players still haven’t paid that much attention to local and regional travel within Southeast Asia,” says Nobuaki Kitagawa, a managing director at CyberAgent. “This is a period when start-ups can play the game in smaller, immature markets that are not a priority for the internationals.”

This scenario could mean that Southeast Asia’s inherent scaling difficulties will allow a greater variety of travel start-ups to set themselves up as locally-geared takeover targets for the global giants. At the same time, it also places a certain onus on VCs to double down on creativity in deal sourcing, with a preference for small, agile operators.

Travel is not usually considered the hottest development area in Southeast Asia’s fast-growing and multifaceted economy. But a number of venture capitalists are quietly aflutter about the sector’s promising demographic intersections, especially in light of an encouraging example set by China’s tourism industry in recent years.

“Southeast Asia is the next hotspot for travel growth,” says Simon Akeroyd, vice president of corporate strategy for Amadeus Asia Pacific, a travel-focused VC investor, technology provider and accelerator. “You have a rapidly growing middle class keen to spend more of their discretionary income on lifestyle and services, including travel, and young populations that are tech-savvy, well connected and eager to travel. Nearly seven in 10 Southeast Asian travelers are millennials. The region is ripe for a boom in travel, and I think we’ll see a big focus on putting infrastructure in place to support this growth.”

Research by Google and Singapore’s Temasek Holdings has nominalized this outlook by projecting that Southeast Asia’s online travel spend will grow at a rate of 15% a year to reach $76 billion by 2025. Although flight bookings are expected to represent just over half of this market, most VC investors – including Amadeus – are focusing on niche entrepreneurial inroads around activities and end-to-end experience packages as well as novel marketing approaches that combine B2B with B2C strategies.

Mixed bag

As an umbrella sector for a number of commerce and logistical services, travel inherently comprises a range of venture plays in any jurisdiction, including food, lodging, transport and entertainment. In Southeast Asia, these markets benefit from a unique multiplier in the juxtaposition of developed and emerging economies. In this regard, the principal emerging themes encompass intra-regional travel; new interest from Chinese travelers; Australia and business travel; and domestic travel patterns differentiated across the 10 ASEAN members.

Internal travel has attracted particular interest in Indonesia, where the combination of a large population and disparate geography is believed to underpin Southeast Asia’s strongest hotel booking space. In addition to CyberAgent, VCs betting on accommodation include Convergence Ventures, East Pacific Capital, True Capital Partners and Gobi Partners, which backed a $2 million round last year for Airbnb-style player Travelio.

Indonesia’s apparent early strength in this area, however, is something of an exception to the rule. While hotel booking is regarded as the most profitable of travel-related transactions, low barriers to entry and the prevalence of international incumbents has made scaling difficult for start-ups, even at the single-country level. As a result, ancillary services and packages that cater to hyper-local needs have taken the fore in regional venture strategies. This has given renewed momentum to the notion that travel is not just about pleasure trips, business trips – or even catching a plane.

Malaysia-based Catch That Bus has been following this philosophy since 2012 with a ticketing platform that is slowly digitizing one the most ignored travel segments of the online era. The company is targeting a $6 billion-a-year intercity bus market in Southeast Asia, with current routes across Malaysia, Singapore and Thailand and an eye on expansion in Vietnam and Indonesia. It has received backing from Jungle Ventures, 500 Startups and the Singapore government’s Spring Seeds Capital.

“Bus travel is on the rise because it’s necessary travel rather than aspirational travel,” says Ashwin Jeyapalasingam, co-founder and chief operating officer at Catch That Bus. “With increased urbanization, more people are living in big cities, but they have to take the bus when they go back to their home towns. That’s where we’re seeing the rise in traffic – between second-tier and third-tier cities, rather than between first-tier cities.”

Non-recreational travel investment strategies are not limited to the low-income groups targeted by bus players, however. Southeast Asia’s emerging jet set is beginning to play a larger role in a $4.7 billion cosmetic medical travel space currently dominated by affluent foreigners coming into the region to exploit cheaper surgery options.

The lead players in this space currently include Amadeus-backed TopDoctors and DMP-backed Medical Departures, a Thailand-based company that is globally active but tracking its fastest growth in Southeast Asia. This traction has been attributed in part to rising discretionary spending power within the region and a resurgence in the discount airline industry.  

“When you look at the travel and medical patterns in Southeast Asia, they basically overlay on top of each other,” says Paul McTaggart, the founder and CEO of Medical Departures, who has seven years of managerial experience at Expedia. “The travel for medical care is very intra-regional because you’ve got low-cost carriers that can get you quickly and cheaply to your destination. We’re a natural benefactor of the low-cost carrier effect.”

The higher relative market share for no-frills air service in recent years could be an accelerating factor for Southeast Asia travel compared to the China development story, which unfolded with more reliance on pricier traditional carriers. As a result, intra-regional hopper flights are expected to continue driving the travel start-up ecosystem, even as an ongoing evolution in the Chinese market drives important pan-Asian overlaps. 

Following China?

CyberAgent’s Kitagawa notes that a close correlation between growth in travel and economic development will allow Southeast Asia to replicate the success of China’s tourism industry during the next few years. “Of course unlike China, Southeast Asia will require growth in various countries, but that’s not going to hinder the travel industry because the region is already so integrated by cross-border business and movement of people,” he says.

This view is echoed by investors active in the region with varying degrees of confidence in specific country-level potential, segment saturation points and the wiggle-room for new business models between the coverage areas of existing international brands. The idea that the major players are no longer adequately meeting demand for new opportunity sets, however, appears to be a universal mantra – especially as the Southeast Asian and Chinese travel scenes blur together.   

“We’re sitting on a pot of gold over here, where there’s just continuously growing demand for different kinds of content,” says Victor Chua, a vice president focused on Southeast Asia at Gobi. “Chinese tourists are so tired of tours where they are taken to the ginseng shop and the jewelry shop to get them to buy stuff. The younger generation of travelers from China aren’t looking for that anymore.”

Gobi acted on this rationale last year with a $500,000 seed round for Vietnam’s Triip, a company that organizes customized tours with a strong emphasis on local expertise and personal interaction. The idea is to cater to a demand for immersion and cultural inclusion through the curation of unique experiences at a grassroots level. Interestingly, the service is English-only.  

The diverse nature of Southeast Asia means that language remains a critical stumbling block for start-ups looking to scale, even in neighboring markets. Touristly, a Malaysian English-only activities booking agent sold a 50% stake to AirAsia earlier this year for $2.6 million, in part to benefit from the budget airline’s experience rolling out multilingual programs. 

“You can get a decent swath of customers through the English market, but if you really want to get into places like Indonesia and Thailand, you’ve got to go local and use local languages to target customers,” says Aaron Sarma, founder and CEO of Touristly. “And if you’re going to acquire a customer in that language, your platform has to be optimized to deal with that customer in the same language.”

Cross-cultural customer acquisition and service capacity are common value-add needs among Southeast Asian start-ups, but they are often viewed as a more critical make-or-break factor in the competitive hospitality industry. This challenge is aggravated by the region’s usual headwinds around talent shortages and weaker government support versus the Chinese or Indian ecosystems.

For Jungle, which has been investing the sector since a $1 million seed round for Singapore’s TravelMob in 2011, the spectrum of travel opportunities boils down to a number of essential technology and mobile trends. This perspective refocuses a sometimes disarming diversity as a familiar demographics-driven venture play, albeit against an unprecedented backdrop for balancing adventurousness with diligence about fundamentals.

“Penetration of smart phones, internet and social media has created several homogenous market opportunities in Southeast Asia,” says Amit Anand, founder and managing partner at Jungle. “Combined with the universal availability of infrastructure providers such as payment processors, logistics providers and digital marketing partners, this has enabled start-ups to scale across the region much easier and faster than before. We are excited to partner with teams that have unique perspectives on opportunities in the region and a proven ability to hire and retain talent.”

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• Topics
• Southeast Asia
• Technology
• Consumer
• Early-stage
• Indonesia
• Venture
• TMT
• Jungle Ventures
• Malaysia
• CyberAgent Ventures