Why 2019 is a pivotal year for Southeast Asian startups

With a rising middle class and a booming startup scene, Southeast Asia sits where China did 10 years ago – on the cusp of a major economic boom fueled by the tech industry. The only questions over the last few years have been: When will the tipping point be reached? And when will Southeast Asia mature from a promising regional market into the next big world economy?

I’ve seen promising signs that in 2019, our region may finally reach that tipping point.

The 10 nations in the region (Singapore, Indonesia, Malaysia, Cambodia, Vietnam, Thailand, Brunei, Laos, Myanmar, and the Philippines) are projected to form the fifth largest economy in the world by 2020.

More importantly, local companies are driving much of the growth. Southeast Asia is now home to eight unicorns, including Grab, the ride-hailing company that beat out Uber for regional dominance in early 2018.

For these burgeoning tech giants, expanding outside of the region is an obvious next step. Tech startups will also continue to take the lead in bolstering the regional economy. Here are three of my predictions on where Southeast Asian startups will be in 2019.

Diversity at home will prepare startups for expansion abroad

A key challenge for companies looking to expand internationally is how their products or services will be adopted across national borders.

Successful startups in Southeast Asia are uniquely prepared to overcome such hurdles, as they are already accustomed to working within diverse environments. For example, in Indonesia alone, more than 700 languages are spoken across 17,000 islands.

Geography also plays a role. Singapore is a densely populated urban area with more than 5 million people packed in just 278 square miles of land. By contrast, almost half of Indonesia’s population is rural, with only two major cities in its 735,400 square miles of land.

Consumers’ purchasing power and habits are also diverse. According to the World Bank, the GDP per capita of Singapore, Southeast Asia’s wealthiest nation, is nine times larger than Indonesia’s, 24 times larger than Vietnam’s, and 44 times larger than Myanmar’s, one of the region’s poorest countries.

Internet penetration in the region ranges from around 23 percent in Laos to 80 percent in Singapore. Startups that plan to expand in the region must learn to adapt their product as well as their sales and marketing strategies to account for these major disparities.

I’ve seen some startups rise to meet the challenge. Go-Jek has built a business model that works both on the crowded streets of Jakarta (where the traffic condition is one of the worst in the world) and in rural areas with no paved roads. The company is now expanding into several countries in Southeast Asia.

There’s also Traveloka, which has partnered with over 100 domestic and international airlines and have expanded beyond the region, thanks to a US$350 million investment from Expedia last year.

An influx of “sea turtles” will fuel global growth

In the early 2000s, when China’s startup ecosystem was still relatively new, the term “sea turtle” was slang for Chinese citizens who studied abroad and then returned home to start their own companies.

Today, Southeast Asia’s burgeoning economy is also starting to pull more of its own sea turtles back home – a trend that is likely to accelerate the tech scene’s expansion. For example, six out of every 100 Singaporeans live abroad, a much higher proportion than is common in other developed nations such as Australia, the US, and Japan.

However, 82 percent of expatriate Singaporeans surveyed by recruiting firm Robert Walters indicated that they would move back home given the right opportunity. With large tech companies like Google and Alibaba expanding or opening new facilities in Singapore, expatriate software engineers and app developers will only have more reason to return.

Sea turtles are already playing a major role in Southeast Asia’s tech scene. For example, there are sea turtles on the founding teams of unicorn startups Go-Jek, Grab, and Traveloka. However, I believe that the global experience and outlook of these returnees will only become more important as startups in the region look to expand into foreign markets.

Innovations may help solve inefficiencies at home

Despite the rapid growth of Southeast Asian economies, there are still systemic inefficiencies that are holding the region back. For example, only 27 percent of people living in Southeast Asia have bank accounts, leaving over 400 million unbanked.

Fortunately, many of these gaps can be bridged through technology. Grab, Go-Jek, and DHL have all launched initiatives to provide financial services to people who don’t have banking accounts, and a number of regional fintech solutions have popped up to grow customer bases with mobile apps.

Many banks in the region are also unable to provide loans to most people because there is a lack of data-collecting infrastructure. This gap has allowed loan sharks to proliferate. According to a Credit Suisse report in October 2017, over one-third of Thailand’s population doesn’t qualify for bank loans, leading to US$100 billion worth of underground lending.

To provide alternative credit-scoring data, peer-to-peer (P2P) lending companies have emerged. In April, Singapore-based Funding Societies, a P2P lending platform, raised US$25 million in series B funding. The startup has also increased its base of lenders to more than 60,000.

Small-to-medium enterprise working cap loans have also emerged, allowing for more unsecured funding to help eligible companies deal with more working capital and cash flow needs. For example, one of our portfolio companies, Finaxar, helps finance small businesses and provides new credit options through integration with cloud accounting platforms.

The incorporation of artificial intelligence in Southeast Asian companies also has the potential to address some of the data collection issues in finance and other verticals, unlocking US$311 billion in annual profits.

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After years of steady growth, it has become clear to me that the tech startup ecosystem in Southeast Asia has finally reached a tipping point. The process of regional expansion has helped the region’s most successful tech companies acquire the skills and experience they need to expand globally.

An influx of experienced returnees from abroad has also exposed local startups to key lessons from foreign markets. Finally, fintech startups and other data-driven businesses are closing the infrastructure gap and making it possible for Southeast Asia to compete on the world stage.

With all of these factors at play, the conclusion is clear: in 2019, the time is ripe for the region to give birth to its first major global company.

This article was first published on The Next Web.