Setting the Scene: SEA vs. the Goliaths

WHERE DOES SOUTHEAST ASIA (SEA) STAND IN THE WORLD OF VENTURE CAPITAL?

SEA has grabbed the attention of global venture capitalists, who are attracted to the region’s strong fundamentals and are diversifying from rising valuations in developed markets.

Rewind 15 years back. Enter the titans. In the 2000s, investors such as Sequoia Capital and Accel Partners started betting on Chinese and Indian ventures. Some of their Asian investees successfully listed on the Nasdaq or the NYSE, or were sold to trade buyers. For the most part, SEA remained off the radar.

In a twist of fate, Sequoia, arguably the world’s most illustrious venture capitalist, decided to include SEA startups in its $530m fund launched in India in 2014. That led to its first major bet in SEA, when it joined Japanese telecoms giant SoftBank in investing a combined $100m in Tokopedia, an Indonesian e-commerce platform. It was a monumental moment for SEA.

So how does SEA stack up against the big boys? I find that most reports on venture capital don’t do a great job of depicting the landscape in a clear and simple manner. So I’ve collected the data from a few reports and crunched them myself. Let’s take a look.

The chart above shows that SEA has experienced the fastest ‘average’ annual growth in both deal volume and value over a 5-year period. This suggests that money has poured into SEA quicker than it has anywhere else. It also implies that perhaps capital is being redirected from mature ecosystems (such as USA and Europe) with higher valuations to less developed markets. In layman’s terms, SEA offers more ‘bang for an investor’s buck’. Prices of startups are still several orders of magnitude lower in SEA.

Southeast Asian startups look like veritable bargains when compared with startups in the West. Particularly when you recognise that some of the fastest growing economies are in SEA and the region is home to about 10% of the world’s 7 billion people. There is massive upside potential given the growth in Internet penetration and online consumption.

Venture capital is a bit like betting. It’s underpinned by option theory. I’ll explain this in a later post… but in the meantime, imagine if you had money to bet on some eggs to hatch. Ceteris paribus, you would probably prefer to bet on 10 eggs than one.

$10 billion company from the Valley is A LOT for investors to chew. A set of tapas of 10 x sub-$1 billion companies from SEA is more appetising. It also looks the better hedge. As startups in the West become unsustainably expensive, investors on the prowl for more palatable deals need look no further than SEA.