Why New Venture Capital in Southeast Asia has to find niche sectors and supporting industries
Southeast Asia (“SEA”) is home to four of seven of the world’s highest-performing emerging economies: Indonesia, Malaysia, Singapore, and Thailand. According to McKinsey: GDP per capita for these countries has grown at least 3.5% per annum since 1965. More recently (since 2000) we should include Vietnam & Myanmar to this list with an average GDP per capita growth of 7% and over the past 8 years the Philippines has also exceeded the yearly GDP growth per capita by 3.5%.
SEA is now in a golden era for tech startup growth as people’s livelihoods improve. In 2018, the average per capita income of SEA countries reached $4,600, similar to that of China in 2007 when the country started its tech boom.
I’ve explored the macroeconomics extensively before in this article. So in this article I want to zoom in and try to define a workable thesis and strategy for venture capitalists.
New venture capital has to be smarter, carve out niche sectors and identify supporting industries where they can find value and success.
Let’s look at the following:
- What does the economic growth mean for venture capital investing?
- Where should we deploy venture capital to generate returns?
- What are the exit strategies?
Economic growth and it’s impact on venture investing
The growth of the middle class (their spending power) in the region over the past years has carved out a few booming industries (“main sectors”) where large amounts of venture capital has been deployed.
The main (growth) sectors can be classified as:
- Ride hailing (including food delivery)
- e-Commerce
- Online Media
- Online Travel
- Digital Financial Services
Where initially (2010–2015) most new companies in these main sectors were focussed on acquiring users. The goal now is to convince users to stay on their platform for longer and become a real ‘customer gatekeeper’. This means competition in these main sectors is increasing, leading to lower prices and more options for users.
Venture capitalists entering the above main sectors now are likely too late if their goal is to become the ‘biggest’ or ‘customer gatekeeper’.
New venture capital has to be smarter, carve out niche sectors and identify supporting industries where they can find value and success.
Where do we deploy venture capital?
Venture capitalists should look at opportunities that fit in the ecosystem of a trend and not so much at the trend/ sector leaders where there’s a lot of cash being burned to win over consumers.
For example: since eCommerce is a trend, it makes sense to invest in logistics businesses as they also have a growth role due to the explosive growth of the sector leaders in the ecosystem.
Investing in niche sectors and supporting industries provide several advantages to venture capitalists:
- Companies are typically overlooked leading to lower valuations
- Companies in the main sectors might be interested to acquire these businesses
- There are opportunities to build partnerships with main sector leaders and leverage their financial resources so we don’t need to spend substantial money on convincing/ winning consumers
- There’s a path to building healthy businesses while reaching at least $100 million in valuation
Example
A great example of a niche sector player is one of our portfolio companies that is working on digitizing street food in Southeast Asia. A niche industry that food delivery players such as Foodpanda and Deliveroo does not want to operate themselves. However after showing significant traction, the main sector leaders have now deployed capital in our portfolio company. This could be a potential exit for the shareholders where the company valuation is expected to be at least $100 million.
Bottom-up approach
Even though our thesis revolves around several industries and countries that we predict will move into a direction of growth, most important is that we focus on what an individual opportunity can bring and not only try to predict the macro (top-down) future and then just invest in companies that match the prediction.
We have to accept that companies such as Uber could not have been predicted as few people saw the taxi industry as a large opportunity.
“Throw that crystal ball out, you can’t predict anything. What you can do is recognize when lightning strikes.”
Exit strategies
Most exit opportunities in Southeast Asia have been realised through M&A. There have been few large IPOs.
As the region continues to attract more VC capital, the same will happen for PE capital to seize later stage opportunities, this fits with our thesis as set out above.
