Southeast Asia’s Decade of Digitalisation
Conversation with Jon Russell of The Ken
Southeast Asia’s digital potential was at a time Asia’s best kept secret, with China and India stealing the spotlight in this part of the world. This is not surprising considering in the beginning of the last decade, people in the region were just beginning to use Facebook. And now in a 180 degree turn of events, this region is actually seeing a surge in the number of unicorns being born.
Jon Russell moved to Thailand in 2008 and began covering the tech space just when this region began its journey of digitalisation. I had the opportunity to chat with him on his journey since and what his take is on the ecosystem moving forward.
So let’s start with how Southeast Asia looked when you started out and how has it evolved since then?
So when I came to Southeast Asia, there were a few startups and at the time I didn’t really even know the distinction between a company and a startup. There were some companies that had been around and one of them was sold to McAfee in the late 2000s. I came from the UK in 2008 and at the time Facebook was huge in the UK but nobody used it in Thailand. The year I moved here everyone began to sign up and you would see a million people signing up on average every week. At the time, I was a freelance writer so I started writing about how many people joined Facebook in Thailand, Indonesia and the Philippines each week.
Now, social media sites like Facebook are very widespread in this region. But even now, in terms of a country like Thailand, startups still haven’t really broken through. There’s lots of big corporations that own most of the business here, and they tend to attract the talent. The Philippines has a similar story but if you look at Indonesia, it has its own startup culture. The biggest driver of that is the government which is helping them to grow that extra step from a decent sized startup to a billion-dollar company. So government involvement is quite important and I think Singapore is doing this quite well also.
Overall, Indonesia has emerged as the big player where you’ve got companies like Gojek and Tokopedia that are worth billions of dollars with 6–10 others that are upcoming. The interesting thing now is, do they expand regionally or do they just stay in Indonesia? it’s still early but what Gojek has done right is that they stuck to Indonesia first, whereas Grab went after eight countries from the get-go. Grab’s position is much stronger in the region but in Indonesia they’re clearly not the number one player so the key question is what is the best way to take on the region. That’s a question that I never even thought about in 2008. In 2008 to see the position that we have today, with six to eight billion-dollar companies in SEA wasn’t thinkable to me. Everything changes over a 12 year period in any country but in Southeast Asia, the speed of change has been unprecedented.
And if you’re looking at it from the venture capital side — some of the VC firms that I talked to for the first time when I was starting out as a reporter in 2012 were raising a $5 million angel fund but now the same funds are raising $200 million funds and a growth fund on the side. That is the best kind of lens to see the changes in the region through, because funding is what is driving the ecosystem on. If you look at Jungle Ventures, they had a $5 million fund in 2012–13 and now they have a $120 million fund, which is a huge jump. That just shows the kind of the kind of growth that we’re talking about.
The growth that Jon talks about has also attracted players from more mature markets in terms of startup ecosystems. China’s tech majors like Alibaba, Tencent, and JD.com have been investing heavily in the region, since Alibaba’s landmark acquisition of Lazada in 2016 and Tencent’s investment into Shopee in 2017. Now US tech giants have also started making strides in the region, with Facebook and PayPal claiming their stake in Gojek’s recent US$1.2 billion funding round.
With billion-dollar companies emerging from within the region and capital pouring in from abroad, the question of the potential of Southeast Asia players and industries/sectors to dominate Asia vis-à-vis China and US counterparts is interesting to understand.
In the future, do you think dominant players like Grab and Gojek would expand across Asia as you mentioned or do you think it would be players from China or the US that dominate this market?
There are some companies that are expanding through this region like Shopback, that just raised money recently. They are already pretty big outside of Southeast Asia in Australia and Korea and are looking at other markets too. Carousel is another good example. But it depends on the business- for Grab and Gojek, it would be pretty tough because they’d be going into markets where they have zero branding and it’d be costly to compete with the local players. They might go into tier two and tier three countries in Southeast Asia but at this point, it’s going to cost them a lot more than they’re going to get back, especially during COVID-19. But there’s definitely SaaS companies in Southeast Asia that have been pretty successful in growing outside of the region. There’s lots of talent here so for the right business, it’s possible even though we haven’t seen it on a large scale yet. This is particularly true with SaaS and online selling businesses over more operational heavy businesses.
For Chinese companies, it used to just be the larger Chinese companies like Tencent, Alibaba and JD.com that came into this region. Now that’s evolving, especially looking at the Facebook and PayPal deal with Gojek. I didn’t see that one coming because US companies mostly perceived Southeast Asia as a place where they could make money through Facebook, Google, YouTube ads. But what has happened is that they’ve focused on India for the last two or three years and are now shifting towards Southeast Asia. Google has programmes that it runs in countries called NBU (Next Billion Users). They first focused on India but are now also looking at Southeast Asia. They’re beginning to realise that there’s a huge market here even though it’s a very tough place where every country has common features, but it’s not the same and it takes a different kind of approach to crack that country.
The Chinese companies, on the other hand, seem like they’ve already gone to the next level. Ant Financial has invested in almost every country in Southeast Asia. In terms of Fin-Tech, they found a FinTech business, put capital into it to buy up a decent stake and send over engineers to help them with tech. It’s still early days, but that could be quite a huge deal. So you can definitely see compared to five years ago, when any kind of investment deal from outside of the region was seen as being huge but now they’re happening on a very regular basis. And everyone’s got a different kind of approach. The US companies had been sleeping on Southeast Asia but it looks like after the Facebook deal, that’s not gonna be the case anymore.
What are some sectors that you’re most bullish on at the moment in Southeast Asia?
I think it’s the same across most of the world at the moment because people are locked down so I’d say entertainment, games and education. None of these actually come from this region, especially because YouTube is such a huge focus for entertainment. There’s also very few games from the region, although Sea’s Garena does have a pretty big one- Free Fire.
Edtech is definitely interesting because, in Thailand, I don’t really know any edtech companies. There are some but they focus on tutoring because trying to disrupt schools was tough pre-pandemic whereas, parents often pay for tutors. Edtech is something that I’m quite curious about, because I haven’t seen it outside of Indonesia and Vietnam.
But in terms of being bullish, one of the positive things about this region being so young is that as a startup, most investors are pretty invested in companies. Most businesses that have raised venture capital and that are on the way to doing something notable have been able to raise capital again. Because of that, you haven’t heard as many startups going bankrupt in Southeast Asia as you might have thought during this time. My hunch is that investors are making sure that the companies that they’ve already backed are in the right position to get through this period to the other side.
And are there any particular sectors that you’re bearish on in this region?
Ride hailing is obviously one that is a work in progress because the big gameplay that they have, hasn’t come to fruition yet. It’s a long-term plan- it’s fintech, it’s banking, it’s payments and so there’s obviously a massive question mark over whether that can be done. So I’m not particularly bearish, but I’m definitely aware.
As a reporter, you go through cycles where you don’t take things at face value. So you don’t always realise what’s gonna happen to these companies that are making grand and bold predictions that might not work. WeWork is a good example. If people just started following companies for the first time and read about WeWork’s plan on paper, it might sound interesting but in reality, there’s so many other factors. Southeast Asia hasn’t yet had that process where big companies that have made outrageous bets, haven’t pulled them off yet.
But if you’re looking to see what the sort of WeWork test could be [in Southeast Asia] — it would be Grab and Gojek, particularly Grab because they’ve raised so much more capital and because their business is much more stretched across the region. On the other hand, Gojek as a single market player, you can imagine that some of this stuff could actually work right. So I wouldn’t ever say that I’m bearish but I’d say that I am aware.
There’s been some good examples like when Lazada was bought by Alibaba, people considered it as such a validation for Southeast Asia. But actually, the reality was that it was not a great exit for investors because they were expecting to build the Amazon of Southeast Asia. They were looking at a $50–60 billion exit instead of a $1 billion dollar exit. Having said that, we haven’t really had a colossal failure yet in Southeast Asia and I wouldn’t really wish for that either.
One of the challenges with Southeast Asia is that it’s operationally very difficult. Even Amazon, which is the king of execution, hasn’t really achieved much in the region. They’re still only in Singapore, with no investment deals and no expansions. If Amazon is not able to nail it quickly in Southeast Asia, that just shows how hard it is. There’s a lot of factors you wouldn’t think about if you’re running a business across multiple countries and with different conditions and varied culture, so you could be bearish on any startup in Southeast Asia.
The resilience of Southeast Asia startups is truly noteworthy. Even though one could be “bearish on any startup in Southeast Asia” given the colossal obstacles to growth in the region, the ecosystem is still maturing and there’s a lot of room for discovery and new business models to emerge.
Despite the growth, this region has not been immune to the impact of COVID-19 creating a massive challenge for startups here. Although it is difficult to still see how the pandemic will shape the future of the ecosystem, there are some emerging trends that are interesting to learn about.
The last question that I have is, how do you think COVID-19 will impact the future of the startup ecosystem in this region?
It’s going to depend from country to country because just based on Thailand where I know a lot of people who unfortunately have been let go by their company or their small business, it’s hard for them to be bullish. A lot of startups also have had to downsize and had to pivot but it’s an evolving situation and it’s hard to tell right now. People are definitely more careful about how they spend and a lot of the pivots that companies have tried are still early days.
People say that a crisis presents an opportunity and maybe there are some companies that will pivot to a business model that makes more sense to them in the future that they wouldn’t have gotten to if it hadn’t been for COVID. But unfortunately, the immediate reality is that people have lost out on income so the futures are uncertain.
I also think the real worry is economic impact. Travel and hospitality is such an important threat across the entire region because it’s a decent chunk of GDP in a lot of countries. That obviously has an effect on other businesses too. I looked at some GDP predictions, and Thailand is one that’s gonna get hit the hardest in the region, which is kind of ironic, because Thailand didn’t suffer COVID as badly as others which just shows how everything is interconnected. It will definitely vary country to country. Thailand, for example, will probably open up some travel between countries, so it’s gonna start to come back but the chances of it returning to where it was pre-COVID according to people in the industry is 18–24 months.
The current companies that you see, there might be some kind of change in the hierarchy and how they rank. For example, Traveloka is one of the unicorns but there’s no way they can continue to be in that position during COVID.
So I’m still optimistic for startups, because I think that at this point, they have become a thing in sight in Southeast Asia. There’s also lots of governments that are supporting them and corporations that are realising that they either need to have a fund/startup thinking inside their company. So I think that that mark has been achieved, but just means that the current field is not gonna might not look the same in like two or three years time when hopefully all of this passes.
