Consumer Internet trends & entrepreneurship in Southeast Asia

Malaysia's digital economy is similar to Singapore and Brunei.

Recently, I was invited to speak on entrepreneurship and consumer Internet trends in a private event hosted by Penn Olson during Startups in Asia, which happened from 2nd to 4th February.

In this article, I will highlight additional perspectives to shed greater light on the ideas presented during my talk, which gave the audience a better grasp on the consumer internet space in Southeast Asia.

Two clusters of economies in Southeast Asia, based on mobile and Internet penetration rates

Glancing at the mobile and internet penetration rates in ASEAN countries, we see two prevailing trends (see slide 4 of the presentation provided below).

But before that, it’s important to note that the internet penetration rate is constructed based on the number of broadband internet subscribers divided by the total population, while the mobile penetration rate is calculated using the number of mobile subscribers (mobile phones are not distinguished as either featured/WAP phones or smartphones). As a result, mobile penetration rates are usually more than 100 percent, which just means that most users own more than one phone.

Taking into consideration the ratio of mobile and internet penetration rates, we see two clusters forming: The digital economies of Singapore, Brunei and Malaysia share very similar behaviour where smartphone ownership is becoming significant in the cities, while the Philippines, Indonesia, Thailand and Vietnam represent emerging digital economies where smartphone penetration are relatively low but the consumers uses social media with low mobile rates without knowing that they are accessing the Internet.

Looking at Cambodia, which may represent a potential digital economy of 53 million people, one can conjecture that it is heading in a similar direction as Vietnam or Thailand. As for Myanmar, the infrastructure must be built first before a digital economy can arise.

Missing elements in the Southeast Asia Ecosystem

I have indicated in my talk that there are at least three missing elements (and they may be more). Let’s start from the first issue: the lack of series A funding in the region of US$0.5M to US$2M. The reason why most investors avoid this funding range is because it’s a risky stage where a company can grow into a proper and sustainable entity or go south if they cannot find sustainable revenue streams.

As a result, most companies which can potentially grow will not be considered by investors. However, seed funding is readily available because the quantum of investment is low. To get a better chance of obtaining funding in this range I talked about, the company has to leapfrog and generate significant revenues quickly, otherwise it is very tough to move forward.

The second issue is the dearth of talent to scale the company. If we match founders from Southeast Asia to Silicon Valley, the difference is not that wide apart. The real difference is in the management team with people who are formerly from big companies that can help to scale the company. We read often from tech blogs about the movement of people from one big tech company to another, but this phenomenon is very rare in Southeast Asia. The reason is that most start-ups cannot afford the lifestyle of these executives and the opportunity of exits are very minimal.

The last issue relates to most VCs in Southeast Asia: A lot of them are former financiers and not really business operators by experience. We cannot fault them for their backgrounds, but it does have an impact on how they assess companies.

To be blunt, a former banker constructs a company’s valuation by profit and loss. If Facebook was started in Southeast Asia, they can never survive. The reason is that they did not generate any revenue or profit until their pre-IPO investment round. Of course, Facebook was a bit bet and the odds of finding companies like it are really small.