Southeast Asia’s Tech Startups: Has COVID 19 Changed the Investment Outlook?

Southeast Asia’s tech ecosystem has gone from strength to strength over the past decade attracting local and international investors seeking outsized returns in the region’s dynamic and fast-growing markets.

Today, however, given the unfolding global health crisis and economic fallout from COVID-19, there are understandable concerns about the region’s startup ecosystem and future investment outlook.

At Binarystar Ventures, we share some of these concerns. The reality is every region in the world has been economically impacted by the global events which have unfolded this year, and Southeast Asia is no exception.

The good news is, the region is faring far better than most, and economic impacts will likely be short-term. From our perspective, with strong market fundamentals and unprecedented digital transformations playing out across the region, the best and most significant investment opportunities are still ahead of us.

What we see is a region undergoing profound and unstoppable digital transformations across government and business that will continue unabated and even accelerate as a result of COVID-19. We see strong market fundamentals throughout most of the region, which will serve to further drive these opportunities and open up unmatched growth prospects for new companies in the mid to longer-term.

We’ll also start to see a rapidly maturing investment ecosystem starting to bear fruit in the coming years — delivering a more hospitable environment for founders and providing more opportunities for startups to scale up and exit.

Market fundamentals

A rapidly transforming region of over 650 million, SEA remains on track to become the fourth largest single market in the world by 2030. With a young and tech-savvy population, rising incomes, and increasing demand for new digital products and services, there are exciting opportunities for startups looking to build and grow tech-enabled businesses.

The impact of COVID-19 on economic growth in Southeast Asia is significant. Growth in the region is forecast to drop to 1% in 2020 but is expected to recover sharply to 4.7% in 2021. This compares favorably to most other markets worldwide, where growth is set to remain weak for several years. In major industrial economies like the US and EU, economic activity is set to contract significantly in 2020 before recovering to 1.8% in 2021.

If we look to the mid to longer-term, a promising story emerges.

Asia is set to contribute approximately 60% of global growth by 2030, with South-East Asia, China, India driving the vast majority of this growth. Perhaps even more staggering, Southeast Asia and the wider Asia-Pacific region will also be responsible for 90% of the 2.4 billion new middle-class members entering the global economy.

At the same time, a digital wave that began around a decade ago is expected to continue sweeping across Southeast Asia, driving a new Internet economy and massive investment opportunities.

A recent report by Google, Temasek, and Bain estimated that the value of Southeast Asia’s Internet economy more than tripled between 2015 and 2019, and is projected to reach US$300 billion by 2025 (up from $US100 billion in 2019).

Southeast Asians are outpacing the world (even China) in embracing the mobile economy. Indonesia has the world’s highest mobile e-commerce penetration rate, while Thailand leads in mobile banking penetration, with 74% of the country’s Internet users accessing banking services via mobile devices.

Across the region, particularly in countries such as Indonesia, where approximately 60% of the 260 million Indonesians are under 40 years old, enormous opportunities exist to build new digital businesses in e-commerce and online entertainment.

Equally so, there are vast investment opportunities in an array of sectors where enterprises (especially SMEs) and large swaths of the population remain severely underserved such as finance, healthcare, and education.

These are all but a few examples. Overall, we see many significant opportunities over the next decade stemming from a rapidly growing middle class, booming Internet economy, and other digital transformations.

A maturing investment ecosystem

Southeast Asia’s startup scene is still relatively young, but much has changed over the last decade. It certainly isn’t Silicon Valley, but it ain’t the wild west anymore either. Today’s startups have access to more significant funding and exit opportunities, and can now enjoy operating in a more hospitable business environment than in years past.

Southeast Asia’s startup ecosystem continued to mature with investment activity largely unabated over the past decade. 2019 witnessed strong growth at most deal sizes, an increase in exits, and improvements in follow-on funding rates, signalling a growing and healthy ecosystem.

Of course, with both startups and investors responding and adapting to the Covid-19 pandemic, significant declines in the total number of deals and exits, and the amount of capital invested can be expected in 2020.

We expect investment activity to bounce back in the mid to longer-term due to the solid underlying market fundamentals and the digital shift sweeping over the region. A greatly matured investment ecosystem will also deliver startups a more hospitable operating environment and support structure, propelling more opportunities for startups to grow, scale, and exit.

Southeast Asia’s tech startup ecosystem has produced many tech unicorns over the last decade, including companies such as Grab, Bukalapak, GoJek, Lazada, and Tokopedia.

These unicorns have begun acquiring local startups in recent years, driving investment activity via venture arms and spurring further innovation within the ecosystem by setting up accelerators across the region. They have been joined by other tech unicorns from around the world who are now swooping in and looking to acquire exciting new startups whose valuations have yet to reach the levels typical of the US and Europe.

Corporate venture capital investments from family-run businesses and multinational conglomerates across the more traditional industries like manufacturing and real estate have also been on the rise and will continue to increase as the need to diversify, innovate and digitally transform becomes more acute in the coming years.

Another positive sign for the ecosystem going forward is that local stock exchanges have slowly become a viable and trusted option for successful companies to IPO. This is in addition to traditional exchanges such as the Australian Stock Exchange (ASX) and Singapore Exchange.

A decade ago, much of this would have seemed unrealistic. The region’s rapidly maturing startup and investment ecosystem shouldn’t be overlooked by global investors. Today and into the future, this ecosystem will serve as a significant driver of startup growth, innovation, and exits.

BINARYSTAR is a deep technology fund that invests in seed to series A stage companies and helps them scale throughout Asia. We partner with management teams providing them with the capital, product
management, technical development, and regional partnerships to accelerate growth and build enduring businesses.