, Singapore

Not just a global echo: charting the evolution of Southeast Asia’s tech ecosystem

By Chris Sirise

Southeast Asia has finally stepped out of global tech’s shadow but is our ecosystem at the cusp of great growth or facing a very real risk of burning out?

The technology ecosystem in Southeast Asia is benefitting from the flywheel effect, with talent and capital flooding the ecosystem, thereby attracting more talent and capital. Development has accelerated hugely over the last three years, and I believe it will continue for the next decade. But this didn’t just happen at random.

What does a thriving ecosystem need?

Behind any great unicorn stands an ecosystem. But how do these systems come to exist? As the writer Hemingway put it, change happens “gradually, then suddenly.”

The recipe to make this happen sounds almost too simple. Governments start by offering grants before venturing into co-investment schemes to support emerging startups. Then, they strategically tailor support to target industries and adapt policy to keep scale-ups within their nations. But when we dive into the weeds, what stands out most is a deliberate and strategic focus on attracting the best talent. Get the people right, and the rest follows.

Typically, while governments take on the early risks, private capital bides its time. Angels start to invest, first in small amounts, but numbers grow as investors from more developed ecosystems enter the emerging space. As startups become profitable, their founders begin to invest back in the ecosystem. Venture Capital (VC) enters the scene once there are startups to invest in, and funds tend to grow in size proportionally with the number of startups launching. As the ecosystem matures, so do the funds available, with international players moving toward emerging ecosystems while startups begin to go public or exit.

Potential founders often move to more developed technology ecosystems, or toward established companies. As investment begins to circulate, entrepreneurs leverage their experience to launch a local company, and as startups grow, so does the interest in working for them.

This is a general overview of how technology ecosystems generally come into existence. So how closely did Southeast Asia match this trajectory?

The Southeast Asian evolution

As the region recovered from the Asian Financial Crisis, governments started to establish VC funds in the late 2000s. This risky bet led to the creation of future unicorns like Tokopedia and Sea, which started by bootstrapping their own growth in 2009. By playing this leading role early on, governments both absorbed the risk and made a bold statement of confidence in the tech sector.

At this time, VCs were seen as the ‘scrappy’ younger sibling of private equity. In Southeast Asia, associates and partners were poorly paid, and funds didn’t have the capital to follow portfolio companies into their Series A rounds. Meanwhile, the stigma around startups deterred potential angel investors, who could’ve helped bootstrapped companies to scale.

With funding so concentrated at seed, a thriving variety of startups started to develop, which in turn attracted more capital into funds in the 2010s. This helped the scaling journey of startups like Carousell, Grab, and Shopback - all notably from Singapore.

We’ve now reached a stage where larger funds are sourcing startups at the seed level, to reduce rising entry valuations. Many funds now support multiple stages of investment, instead of specialising in a specific stage, which strengthens our financing ecosystem at the early stages.

Talent used to aspire to stability or opportunities overseas. As the region’s ecosystem has developed, educational initiatives, like the National University of Singapore’s Overseas Colleges programme, expose ambitious students to more developed ecosystems. This likely influenced the generation of entrepreneurs founding companies and forging a local startup culture in the 2010s. Some of these pioneers are now beginning to re-invest in their younger peers.

Where the tech ecosystem stands in Southeast Asia

Today, Southeast Asia is a buzzing and thriving tech ecosystem that no longer recreates successes from the West, but pioneers innovations across the board - especially in embedded finance - and attracts talent from across the world.

But we are at an inflection point.

While our ecosystem is buzzing, it is reaching a temporary ceiling. Series C funding and beyond - whether that’s undertaking an IPO or going public through a SPAC - remains in the hands or the pockets of global funds.

Local investors need time to attract more capital that can be channelled into a wider range of innovative startups that have reached this scale. But they need to do this without breaking the current momentum of growth. The ecosystem is still relying on government support, especially for immigration policies which affects access to talent, and regulations which affect certain verticals such as fintech or blockchain startups more. This ties ecosystem development to policy decisions. When the going is good, this is an incredible catalyst. But if, say, a global pandemic dominates the policy agenda, it can create an environment of uncertainty as the sector is left slightly unmoored.

We are also still building the imperative for ‘giving back’ within the community. Those of us who received capital to kickstart our own journeys are beginning to recycle our wealth by investing in startups. But it is yet to happen at a significant or systemic level.

Where can Southeast Asian technology go next?

While the road ahead is far from smooth, there’s plenty of reason to hold hope for what we could do. After all, the pandemic is a once-in-a-century event - if there’s a time to take bold risks, it may as well be now.

As Southeast Asia’s ecosystem matures, the number of senior operators with experience in manoeuvring a startup through the choppy waters of growth increases. These operators can play a critical role in mentoring more junior colleagues. This genuine community would create an exciting environment for the best talent globally to operate in - and thrive.

More capital must be recycled to accelerate the virtuous cycle of growth. Angel communities, venture capitals, and an increasing number of operator-led micro-funds are becoming mainstream. With the growing body of expert operators beginning to back entrepreneurs, startups will benefit from the double investment of capital and experienced insight.

Perhaps most importantly, operators, investors and educational institutions alike need to invest in creating the conditions for audacious and innovative ideas. Emerging markets are still flush with so-called “low-hanging fruit” issues but set against multi-dimensional barriers to growth. To truly tackle huge problems, we need huge solutions - which generally need long runways to take off.

An ecosystem-wide call to action

Our region has overcome many barriers to successfully step out of the global shadows, and into the limelight as an emerging force of technological growth. But with a hotpot of global crises threatening to simmer over, we cannot afford to be complacent.

I’m calling on my fellow operators to mentor less experienced founders or operators in their network, and give them the hand up they wished they had. And I’m calling on experienced founders invest in the next generation of entrepreneurs.

Southeast Asia’s startup ecosystem is at an inflection point: we are at the cusp of great growth - or we risk burning out.

I truly believe that by strengthening the foundations of our ecosystem, we can catalyse a virtuous cycle of sustained growth within our region that uplifts emerging economies and entrepreneurs alike.

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