Southeast Asia start-ups: Connecting the dots

After spending years convincing entrepreneurs from all over Asia that the Lion City was the place for fast-growing start-ups, Singapore-based accelerator JFDI.Asia is now telling its latest batch of foreign founders they can stay home - at least for part of the time.

Unlike previous iterations of the JFDI.Asia accelerator, the program will also be partly delivered online so start-ups from overseas can cut costs and stay close to their customers. The idea could be seen as a radical departure from the notion that the very purpose of an accelerator is to bring start-ups and their mentors together.

On the other hand there is a logic in trying to develop a model the can leverage technology - JFDI.Asia claims to be experimenting with "transformational technologies" like workflow app Slack to virtualize its offering - to better connect start-up which their investors while keeping them local. Should the online program prove a success, JFDI.Asia is even considering going entirely online in future, while offering partial online programs from other regional centers.

JFDI.Asia is not the only early-stage investor in Southeast Asia looking at ways to manage the sometime conflicting goals of regional expansion and local competitiveness. As a regional hub Singapore still sees the bulk of investment activity in the region, but at the same time the ecosystem is becoming more decentralized. Successfully taking advantage of the early-stage opportunity in Southeast Asia will in many ways depend on investors' ability to work across borders, but doing so convincingly is a challenge.

"There is a general idea that the most successful Southeast Asian start-ups have to be able cover the region and I subscribe to that," says Khailee Ng, a venture partner with 500 Startups in Kuala Lumpur, "A local champion that can scale quickly can still get an attractive exit, but it takes a regional champion to get VCs really excited."

AVCJ Research's data illustrate the importance of working across jurisdictions to support portfolio companies. Firstly, the ecosystem has seen a lot of growth. Last year, $1.25 billion was invested in 96 early-stage rounds, compared to $601 million for 125 rounds in 2013. It remains to be seen whether 2015 can match this total, but the $303 million already invested across 60 rounds represents a marked improvement on the $254 million committed to 67 deals in 2010 and 2011 combined.

A local champion that can scale quickly can still get an attractive exit, but it takes a regional champion to get VCs really excited - Khailee Ng

There has also been geographical change. In 2010, more than half of the start-ups to get funding were based in Singapore, while the rest were divided between Indonesia and Vietnam, plus one deal in Cambodia. Today, Singapore still takes the largest bite (about 41%) - followed by Indonesia (26 %) - but countries like Thailand, Philippines, and Malaysia are beginning to feature more prominently.

Start-up state

Part of the reason Singapore has flourished as a start-up hub is its status as Southeast Asia's only developed economy: it can offer start-ups better security, rule of law, lower taxes, and easier access to capital.

"I think each country has its own strengths and we have to play to those strengths," says Hugh Mason, co-founder of JFDI.Asia. "Singapore's strength is that it has money to invest and a stable fiscal and economic environment."

Another important factor in Singapore's success is support from the government which has been clear about it ambitions to create Southeast Asia's Silicon Valley. JFDI.Asia is an example of this. When it set up in 2010, the accelerator received its first capital injection in the form of a government grant. Another factor is the number of multinational companies headquartered in Singapore that can provide capital, resources and talent. Amit Anand, co-founder of Jungle Venture explains that this was part of the logic behind setting up in Singapore.

"Singapore has always been a hub for tech companies because it is easier to build a team here that has knowledge of operating Southeast Asian markets," he says. "Our value proposition has been that we can help start-ups move out their home market and expand overseas. So, if you look at Jungle's portfolio you will see that the majority of our portfolio companies have been regional from day one."

Singapore-based Travelmob, a Singapore-based social networking website for booking accommodation and room rentals in Asia, is a case in point. The company received $1 million in seed funding from Jungle in 2012 and then went on to expand region-wide, before being acquired by HomeAway the following year.

Software-as-a-service platform Trade Gecko - which offers inventory services - also started out in Singapore with JFDI.Asia's accelerator program. It subsequently received backing from Jungle, before using Singapore as platform broadening its footprint to neighboring jurisdictions.

However, it is worth noting and that both these start-ups exist in the software and internet space. Nicko Widaja, an angel investor and program lead at Jakarta-based Indigio Incubator, explains that this sector has a number of advantages when looking to expanding regionally. "The biggest challenge for start-ups looking to expand is that they need a product that is easily replicable with low acquisition cost," he says "Consumer SaaS [software-as-a-service] is a good example of easily replicable product - for example, you won't sell different versions of Dropbox in two different countries."

This observation is shared by Paul Srivorakul, co-founder and chairman with Ardent Capital in Bangkok, who also notes that many SaaS and mobile apps start-ups prefer to base them themselves in Singapore, as it offers better access to regional and global markets.

However, Singapore is not just a place for start-ups to base their operations. 500 Startup's Ng observes that of the 17 Singapore-registered companies his firm has backed in the past 12 months, just 10 are registered in the jurisdiction. They do this chiefly as a means to access additional sources of capital. This he says was the case with Playbasis , a Bangkok-based gaming specialist that registered its parent company in Singapore so that it could apply for funding from the National Research Foundation (NRF).

‘The company set up in Singapore just to make sure they could potentially get the funding," says Ardent's Srivorakul. "It is incredibly smart for the government to lure these start-ups , but in terms of where its real operations and opportunities are - other than financing - it is Indonesia , Thailand and Vietnam."

Local heroes

VCs looking to invest in start-ups operating in sectors that require more local expertise might not see as much value in targeting on Singapore companies. E-commerce-focused Ardent, which is also very active in Indonesia, falls in this category. Srivorakul adds that more and more founders are seeking opportunities outside of Singapore, particularly where they see larger addressable markets.

"Many start-ups would first try to do Singapore first, and then they go into Malaysia," he says. "But what we are starting to see now is that more are actually trying to go into Indonesia straight away."

HappyFresh, which uses smart phone apps to coordinate deliveries of fresh groceries, followed this strategy. Originally set up in Malaysia, the company raised its first seed round in March before expanding into Indonesia, and then Thailand. The challenge for companies in this space is being able to expand into new markets while maintaining a strong local presence.

Khailee Ng, a venture partner with 500 Startups, adds that this can be difficult given the speeds at which start-ups must expand regionally - especially if they are coming from a small domestic market. One of 500 Startups' Malaysia investments is ride-hailing app GrabTaxi. It launched in 2011 and received an undisclosed Series A round from 500 Startups and Vertex Venture the following the year. The company has since raised more than $530 million from six investors across four rounds. Its most recent round came earlier this month when Coature Management put in $200 million.

"Most start-ups will try and get one country right and then go to the next country, learn from execution and do a third country," says Ng. "But I have seen more companies with regional ambitions, like GrabTaxi, that are collapsing the timeframe. They will do one country and within three months they will open in a few more."

One way start-ups might typically achieve this is to take a fly-in approach, putting together a team of expatriate founders that it can drop into a country to launch local operations, not unlike German incubator Rocket Internet and its e-commerce start-ups. Grabtaxi, on the other hand, went hyper-local, using a minimal amount of foreign talent and hiring as many locals as it could.

By contrast - due to the size of their addressable domestic market - some start-ups based in Indonesia are under less pressure to expand into new markets. E-commerce specialist Tokopedia, for example, has raised has received five rounds of funding, most recently raising $100 million from Japan's SoftBank Corp. and Sequoia Capital in October last year. The company has yet to expand outside Asia. Similarly, Bukalapak, another Indonesia-only e-commerce player, is now on its Series B round of funding.

Politicians focus on things like policy frameworks but from a start-up point of view that is not so much of a barrier as stuff like freedom of movement - Hugh Mason

The idea is that if these companies can become the number one - or even number two - in Indonesia they can generate attractive returns in a small amount of time by focusing on expanding nationally, and perhaps later be acquired by a larger player. This is not just in the e-commerce sector.

"Food is an exciting area, we are seeing a lot food tech companies get good valuations and there is a lot of investor appetite," says Ng. "Every local champion is backed by a VC and every country has its own local version of Yelp and they are getting rolled up and expanding to other parts of Southeast Asia."

The ASEAN angle

Where there is a need to expand regionally, it can still be a difficult to work across borders. Jungle's Anand says that language and culture do not really present a challenge; rather, the problems that normally arise from regional expansion are regulatory. Arguably, greater integration between Southeast Asian countries could come through the likes of the Association of Southeast Asian Nations (ASEAN), but the issue goes beyond economic integration.

"Politicians focus on things like policy frameworks but from a start-up point of view that is not so much of a barrier as stuff like freedom of movement," says JDFI.Asia's Mason. "For example it is still difficult for Filipinos to get on a plane and come to Singapore, even if they have money."

Meng Weng Wong, co-founder of JFDI.Asia alongside Mason, identifies two forces that will eventually bring about greater integration for Southeast Asia's early-stage ecosystem. First are the top-down effects of regional governments on tariffs, trade barriers and access to work visas. Then there is the bottom-up effect of entrepreneurs seizing opportunities in payments, logistics, and outsourcing. For example, a regional payment gateway solutions can abstract away the diversity of currencies in the region.

Similarly, JFDI.Asia has developed a platform for its start-ups called Legalese that converts legal documents for different geographies so founders can better handle jurisdictional diversity in terms of paperwork and investment structures. Jungle's Anand echoes Wong's optimism. "I feel that eventually Southeast Asia will look more and more look like one homogenous market," he says. "More people will set up multiple offices across the region capturing the best value provided in that market."

As is becomes easier to connect jurisdictions in Southeast Asia it is clear to see why some might question whether Singapore can remain a hub for the region - the focus may instead gradually shift towards somewhere like Jakarta or multiple sub-regional outposts. But, JFDI.Asia's Mason doesn't view it as an either-or scenario.

"It is tempting to look for competition but maybe the trick is to look for collaboration," he says. "If you look at the whole of Southeast Asia, there are 600 million people - of those maybe 60 million are middle class - and if you work on an individual country basis you have tiny pockets of markets. But if you think pan-ASEAN then you could have a bigger pportunity than North America or Europe."

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• Topics
• Early-stage
• Southeast Asia
• Southeast Asia
• Ardent Capital
• JFDI.Asia
• Jungle Ventures
• 500 Startups
• Indonesia
• Thailand
• Singapore
• Venture