How to spot Asia’s next unicorns

For investors and entrepreneurs, following the crowd can be an irresistible instinct. Indeed, going against the grain requires a great deal of discipline and courage.

But here’s the problem: investing in startups has never been more popular in Asia, resulting in a lot of noise as to which opportunities are best for investment, says David Corbin, director of content strategy at Tech in Asia, at our annual Tokyo conference. Citing Tech in Asia data, David describes how the region is seeing massive increases in funding. At just US$6 billion in 2013, the aggregate amount rose to US$25 billion in 2014. It’s on track to hit US$45 billion in 2015.

The number of industries with more than US$1 billion in funding has soared too. Only ecommerce surpassed that amount two years back, but in 2015, 12 industries are slated to surpass that ceiling.

What’s staggering is how many of Asia’s unicorns – startups with over US$1 billion in valuation – arose soon after the financial crisis in 2008.

Tokopedia and Flipkart, ecommerce leaders in Indonesia and India respectively, were started in 2009. Korea’s online shopping leader Coupang, transportation app Ola, and Japanese news aggregator SmartNews got off the ground the year after. Then, 2011 saw the launch of taxi app GrabTaxi, online groceries site RedMart, and WeChat.

These companies saw their growth accelerate and their valuations soar in subsequent years.

Industries in Asia benefitting most from the funding boom are payments, media, and education. Payments was at US$29 million in 2013. It’ll reach US$248 million in 2015. Media is set to soar from US$20 million to US$456 million this year. Education will see growth from US$57 million to an expected US$1.5 billion.

Let’s turn to sectors that aren’t so hot anymore. Virtual currency is stagnant, while productivity software is expected to get only US$7 million this year.

“There are a million Slack clones out there, many of which are annoyed at being Slack clones because they’ve existed for five years already,” says David.

While gaming has grown from US$161 million in 2013 to a projected US$436 million this year, it has actually slid from the seventh most-funded vertical in 2013 and could wind up 21st this year.

“Gaming is hard. It’s hard to create hit after hit after hit,” says David.

The way to win

David Corbin, Tech in Asia’s director of content strategy.

So here’s the dilemma: with all these data in our hands, how do we decide which verticals to back, and hence increase our chances of creating or backing an impactful startup?

Speaking of hot sectors like media, education, and payments, blindly getting into these industries may not be a good idea since there’s a likelihood of falling into the trap of conventional wisdom.

So the best way to go about it would be to follow what Tokopedia or GrabTaxi did: get into an industry just early enough to ride on a rising wave.

While that alone may be sufficient in the past, things are changing. More Silicon Valley companies are seeing Asia as a lucrative market, and are making concerted efforts to tackle it early. Uber, Stripe, and Github are just some examples.

The trick is to seize opportunities that put a premium on localization, giving Asia-first startups a huge advantage over Silicon Valley. Defensibility and secret knowledge is the name of the game.

Logistics and healthcare are examples of industries that will see the next Asian unicorns, given how the environments in Asian countries differ from the US and from each other. In Southeast Asia, we’re seeing companies big and small rising up to meet the demand spike for ecommerce deliveries. Due to the regulatory and infrastructure challenges in the region, it’ll be hard for competitors from the West to make a dent.

The goal, therefore, isn’t just to build a unicorn. “It’s to build a unicorn that can go to war,” says David.

This is part of the ongoing coverage of Tech in Asia Tokyo 2015, our annual conference taking place on September 8 and 9.