The Explosive Growth of SouthEast Asia

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With startups increasingly grabbing headlines around the world, from the fame and fortune of Silicon Valley to European hot spots such as Berlin and London, we’re often asked why we’re so excited about working with startups and social enterprises in Southern Asia.

We personally feel this is the most exciting area of the world, for a variety of reasons. Aside from the fact that it’s home to the world’s best beaches and travel opportunities, South and Southeast Asia are ripe to explode with economic growth as people come online for the first time and have disposable income as the middle class grows. It’s no wonder VCs are lining up to invest, and won’t be the only ones saying “I told you so!” 5 years from now.

The Asian startup ecosystem is poised to explode right now, so we thought we’d give a fair warning that now is a good time to jump on a plane and get the hell out there.

Why South-Southeast Asia?

VCs fuelling current exponential growth

In general, this is an exciting time to be involved in the startup world! Compass’ comprehensive report published in mid-2015 showed that, globally since 2014, there’s been a 91% increase in VC investment and a 78% increase in exit value.

Unlike previous years, this growth hasn’t been centered around developed countries. Startups in emerging economies are getting a foothold in both domestic and international markets. For example, Indian startups raised over $8 billion (40% increase from 2014) last year, closing nearly 1,000 deals with VCs (68% increase).

With the Indian government introducing startup friendly initiatives and India being host to 8 of the world’s unicorn companies (behind only the USA and China), India is one of the leading international players.

However, it’s not just India that’s taking part in the startup party. Though still far from having a mature startup ecosystem, Malaysia’s growth is also incredibly exciting. Funding in tech startups increased 96% (yes, NINETY SIX PERCENT) between 2011 and 2014 to $1.5 billion. It’s not just funding that’s flying Malaysia’s way; American lead incubators and accelerators are joining with the Malaysian government’s MaGIC program to provide a more stable diving board for growth, innovation, and foraging into new markets.

The Philippines and Indonesia are following suit, albeit on a slightly smaller scale (for now). Until 2011, the Philippines didn’t have much of a startup ecosystem. With few accelerators and little support from the government, it’s no wonder that they hadn’t managed to follow the growth of their Asian neighbours. However, 2011 was a turning point for the country when Startup Weekend stopped by. This has kickstarted startup growth in the country, and they have not looked back since.

In 2015, Philippine startups raised $40 million that was spread across 100 startups. Last year, Global Telecom announced its $50 million fund for the country and with US VC firms such as 500 Startups starting to take an interest (TwitMusic), the future’s looking rosy for the Philippine startup scene.

That’s not to say that Indonesia have been lagging behind. With less business regulations than the Philippines, the startup ecosystem is blossoming. Lazada, with a valuation of over $1.2 billion, is Indonesia’s unicorn in its stable. Other startups are raising some serious cash as well; Tokopedia just raised $100million, and Bhinneka ($22mil), BerryBenka ($5mil), and Qraved ($1.5mil) have all had great rounds of funding.

With 500 Startups, Fenox Venture Capital, and a host of other international VC firms, accelerators, and incubators setting up shop in Jakarta, it’s a very exciting time to be involved in Indonesia.

Huge, untapped potential for future growth

So why are Asian startup ecosystems, particularly in emerging economies, growing so rapidly?

First, let’s just take a quick look at the sheer population sizes of these countries.

India: ~1.3 billion People
Indonesia: ~250 million people
Philippines: ~98 million people

There are more people in Indonesia and the Philippines combined, than the entirety of the United States, making it the third largest population in the world.

Moreover, with about 1.6 billion people today living in East Asia and another 0.6 billion in Southeast Asia, this region accounts for nearly one third of the world’s 7 billion people. Throw India, Pakistan (~180 Million), and Bangladesh (~130 Million) in the mix and we’re looking at over half of the world’s population.

Yes, half of the world is in this region, and the startup ecosystems of these countries are just getting started. It’s no wonder why VCs are watering at the mouth to get a piece of this action!

It’s not just the sheer number of people that are causing the excitement either. Startups and VCs alike haven’t failed to notice the rapidly growing middle class across Asia. Back in 2009, there were around 529 million people thought to be in the middle class. It is estimated that, come 2030, there will be approximately 2.9 billion middle class citizens in Asia.

Indonesia is a perfect example of the middle class expansion. Back in 2013, there were 74 million people in Indonesia’s middle and affluent classes. This is projected to rise to some 141 million by 2020. That’s approximately 8 to 9 million a year putting themselves in a position where they can afford to be spending money on what they ‘want’ and not what they ‘need’! It’s unsurprising then that personal spending levels have increased at an average of 10% year-on-year since the start of the decade.

What were once “developing” or “third world” countries, with an imagery of poverty, are quickly becoming countries with an enormous middle class willing to spend money on products and services.

On top if this, if we break down these growing Asian populations by age, the trend is towards a growing youth-centric population. 50% of India’s population is below the age of 25 and 65% is below 35. Much of Southern Asia has similar breakdowns; 76% of the Philippine population is under 40 (with a median age of 23) and Indonesia has an incredible 60% of its population under 30!

These populations are young, hungry, tech savvy, and growing, and with their movement into the middle class, they have access to disposable income that has never been there before.

Easy access to technology

It’s not just the increase in disposable income for the youthful populations and income that’s exciting, it’s also the attitude and easy access youths have to tech. They’re the segment of the population that are more likely to be involved in online communities and use apps or the internet to connect or purchase.

As Ericson’s study shows in the chart below, by 2020, there are going to be over 6.1 billion internet users, with 80% on mobile, and where the biggest areas of growth are going to be in emerging Asian economies. With access to the internet (and apps and social accounts that come with that), opportunities for companies to connect, interact, and sell to consumers are greater than ever before.

The numbers coming out of these emerging economies are incredible. In Indonesia, Internet users grew from 55 million in 2012 to 75 million last year. That’s a 50% increase in 3 years! These populations not only have access to the internet, but they’re incredibly active on it as well.

A study by Semiocast showed that in June 2012, Jakarta had the highest number of Tweets for any city in the world. They sent nearly 2.5% of ALL tweets that month. Bear in mind the increase in internet users in Indonesia since then, making these statistics all the more incredible.

The rest of Southeast Asia is following suit. With mobile penetration at 124%, internet usage at 40% and active social media users at 32%, we can see a trend of highly interactive internet consumers.

It’s not just Indonesia that is churning out some incredible numbers. In the Philippines, close to 40 million (40%) of their population are connected to the internet, and with a pretty consistent 10% rise in users per year, the customer for web based startups is ever growing. Not only this, Filipinos are also incredibly active on social media with 93.9% of internet users active on Facebook.

This isn’t even mentioning Malaysia and the tech powerhouse that is India! As shown below, internet users across these emerging economies are incredibly active, with South Asian countries coming out top 10% of penetration of the major social networks.

Now, with the growth of the middle class all across Asia, companies are scrambling to fill gaping holes in the market, and the interest, excitement, and money are following suit.

Talent deficiencies

Though the populations are youthful and eager for new tech, they have a distinct lack of homegrown talent in specific areas of work, especially related to tech startups.

Malaysia, Indonesia, India, and the Philippines do not have universities ranked in the top 100 in the world, meaning that startups just don’t have access to talent pools that are going to allow them to compete on a global level (though we do believe there is a certain bias to these rankings as shown by this answer. IITs and IIMs produce incredibly high quality graduates).

Emerging economies are devastated by homegrown talent moving into developed economies, or “brain drain”.
Not only this, emerging economies are devastated by homegrown talent moving into developed economies, or “brain drain”, as it’s more commonly known. The World Bank Report reported that “global migration is mainly dominated by the migration of the well-educated from developing countries to developed countries, which accounts for 80 percent of all migrants”. Malaysia is losing 10% of its skilled professionals, numbers from Indonesia are largely inaccurate, but with a population that is mainly comprised of unskilled laborers, the loss of any talent is felt incredibly strongly.

Governments across South Asia realise that the negative effects of brain drain is a problem nearly every emerging economy experiences. In fact, Indian Prime Minister Modi gave a speech last year focusing on the talent that is flowing out of India to study and work in developed economies. The same is seen in other emerging economies, and things aren’t changing quickly enough to satisfy the need of the fast growing startup scene.

Changes to government regulations

In an attempt to reverse the effects of brain drain, governments are changing regulations to entice top talent to remain in the country and bring talent back from abroad.

Talented young professionals work best when involved at the forefront of their fields, and governments have realised that startup ecosystems can provide this kind of environment.

India has been at the forefront of such change for a while now, with Prime Minister Modi as an advocate of startup ecosystems and their ability to create jobs. His change of Indian law to allow seed funded companies to earn tax free seed funding should give a huge boost to a variety of startups, allowing for faster company and job growth.

Last year, the Philippines also started allowing foreign investors to own more than a 60% stake in companies, encouraging growth and the startup scene to move forward.

Why is this exciting for you?

To put it bluntly, the supply of qualified candidates is unable to keep up with the demand of hiring. The reversal of brain drain is too slow for companies to compete on an international level, or even scale effectively domestically.

Consequently, laws have been passed to allow foreign workers to occupy these roles and help take companies to the next level.

Malaysia’s relatively recent law change is now helping world class progressive companies to hire foreign workers. It also appears that Indonesia is following suit, as there have been hints dropped by leading figures in the Indonesian startup scene that the government is going to change regulations to allow foreign workers to work with Indonesian companies.

The demand for educated and skilled foreign talent has never been higher. On top of incredibly promising growth of Southeast Asian companies, young foreign professionals will get to live and work abroad in a vibrant, entrepreneurial ecosystem. If that doesn’t get you stoked, we don’t know what will.

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