A different perspective to Southeast Asia’s startup ecosystem

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map_southeast_asia In this article, I provide a different perspective to an article from Jon Russell (The Next Web) about the four major issues that deals with the strengths and weaknesses challenging the Southeast Asia’s technology startup ecosystem. The article is originally published in SGEio.

Article originally published in SGEio
My friend Jon Russell from The Next Web has recently penned that there are four issues challenging Southeast Asia’s startup ecosystem: risk aversion, fear of failure, lack of big firm presence and immature ecosystem.

To his credit, he has spotted some inherent weaknesses of a diverse market fragmented not just by geography but also business culture. In a similar reflection, Michael Smith Jr from Spuul focused on the lack of enough big firms.

While there is a lot of hurrah with the arrival of 500 Startups to the region, there are several trends that might deter the growth of the ecosystem — the purpose of this article is to open a discussion on what these might be.

Both perspectives from Jon and Smithy highlighted the macro trend of people moving from the west to east, but local infrastructures have to cope with a set of challenges. An interesting but not surprising conclusion that emerged from their analysis is that not all global technology companies have localized their offerings to the market.

While companies like Google are selling their advertising services to local advertisers, their developer and technical support on other product offerings which are central to the startup ecosystem in this region are not in their focus at all.

To present a different perspective from what Jon and Smithy have discussed in their article, I present four trends that complements or extend the case from Jon’s earlier article. My perspective stem from how regional companies have also deterred potential investors from entering the market and at the same time crushed the potential growth of the startup ecosystem.

1. Subtle brain drain: In the past few years, we observed three interesting waves of activities which are leading to a brain drain in Southeast Asia.

The first type of activity is the “acqu-hire” model where we saw a few examples: Octazen by Facebook and GridBlaze by a US company. In the first case, Facebook took the technical talent to build up their engineering capability but also leverage on the business people to set up Facebook for Southeast Asia in the past few years.

In the second case, the US company is basically migrating talent over to Silicon Valley. It is actually economical for a US company with global focus to acquire Southeast Asian companies at a cheaper cost than within US, where the valuation can be unrealistic.

The acquisition of Koprol by Yahoo! is another example. They acquired a Foursquare like service and if the post acquisition-integration effort for Koprol to Yahoo! had been successful, Yahoo! would have effectively bought an under-priced FourSquare to bolster their efforts in location-based services.

If acquiring companies in Asia are cheaper for a US company, the same goes for talent. While everyone’s eyes is zooming in on the exaggerated successes of Southeast Asia startups that receive funding, very few are focused on how several companies have stolen talent from local universities.

A lot of people complained about the dearth of talent from local universities. Actually, they exist but the problem is that companies from the United States like Quora, Palantir and Facebook are snapping the smart ones out from Singapore to Silicon Valley. That’s the second wave.

They can replicate the same model to source for talent around Southeast Asia, particularly Philippines, Indonesia and Thailand. These companies have been supporting local hackathons and events for the universities with the aim of acquiring overseas talent.

The last wave of activity is that the interesting Southeast Asian companies are leaving the shores and head to Silicon Valley. We saw the successes of Semantic3, Wallwisher (now Padlet) and TwitMusic going into Silicon Valley from Southeast Asia. These companies originated from the region but they found no investors remotely interested in them. If the local investor community or regional companies do not buck up, we will see more of them leaving the shores. That comes to my next point.

2. Premium to acquire quality local talent is not an option for regional companies: Even though the subtle brain drain has depleted Asian talent, the local and regional companies are not stepping up in the way that they should. The best way to do this is to compare the best technology companies in East Asia (the China-Korea-Japan axis) against Southeast Asia.

We have not seen many significant acquisitions within the region by local companies. If you look at Singtel’s acquisition of Amobee vs HungryGoWhere, the difference in scale is easily observable. The local companies are valued atfar less in acquisitions against the ones from US and Europe.

It’s cultural that Southeast Asian regional companies do not want to pay a premium for acquisition of assets. They tend to do things on the cheap but spend a lot in acquiring US or European assets. Seriously, there are a lot of innovation going on and if someone in the US got it right, they can reverse acquire technologies for the same capability on the cheap and bring them to US.

The difference is arbitrage because the US company can pay a better premium (which is considered cheap to them) against the regional companies. If they can do the same for talent, I am sure that they can do the same for companies as well.

3. The so-called Series A investors is non-existent: Let’s not kid ourselves: “Series A” is non-existent here. The so-called series A in Southeast Asia is really a Series C/D investment firm pretending to be early stage. You see a few features recurring among these so-called Series A firms: (a) they are run by financiers, not business operators hence all technology companies are evaluated based on profit and loss (P&L) spreadsheets, (b) they are looking for revenue to growth companies and (c) they have no specialization in operations except financial engineering.

4. Only those with revenues survive in Southeast Asia: If you want to win in Southeast Asia, you have to be revenue-first, period. Here’s how I am going to advise everyone who plan to set up a company here in Southeast Asia: There is no problem in getting seed stage and money from Series C and upwards. But there’s a huge gap from USD1M to USD4M.

So, what’s my perspective for startups in Southeast Asia? Take the seed money and be really disciplined in how you spend it. Focus on making revenues everyday until you become profitable, then you will become attractive to the series C investors.

Author’s Note: BL is an investor to Padlet via Thymos Capital.

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Bernard Leong

A Pragmatic Idealist

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