20 unicorns will emerge in Southeast Asia by 2030, predicts Asia Partners’ Nick Nash

It’s a “golden age” for aspiring unicorns in Southeast Asia, according to Nick Nash, co-founder of growth equity investment firm Asia Partners. At current levels of affluence, the region is in a sweet spot – the same zone that China and Japan were at when a majority of their tech companies went public.

Nash was formerly the group president of internet company Sea, which runs gaming platform Garena, ecommerce site Shopee, and payments platform AirPay. He stepped down from the role in December 2018, after the Singapore-based firm’s October 2017 trade debut on the New York Stock Exchange. He went on to launch Asia Partners in January this year.

Delivering the keynote address at the 2019 Tech in Asia Conference in Jakarta, Nash said that at present, Southeast Asia’ current zone of per capita income sits between China and India. At this zone, discretionary income increases exponentially – around six times – when income doubles, creating an opportunity for businesses looking to scale.

He added that most of the tech companies in China went public in or around that “zone of affluence” – a point where spendable income grows from 5% to 15% of total income – which occurred in the country between 2003 and 2013. Korea and Japan experienced a similar trajectory.

The same phenomenon could explain why it was challenging to build a large-scale business in India, despite its vast population potential of 1.3 billion. “On average, each of them only earns US$2,000 a year, and only US$100 of that is discretionary,” Nash said.

He observed that every Chinese tech company that listed in the last 25 years did it in four steps. “They laid the table with telecommunications. [Then] they had a first generation of web companies, a second generation that was a little bit more specialized, and a third generation of very mobile- oriented companies that were also very offline-enabled.”

By studying the Chinese playbook, Nash predicts that 20 more unicorns will emerge from the region in the next decade, coming from sectors across online-to-offline, online health, social/chat, ecommerce logistics, and online travel, among others.

Playing to home court advantages

Southeast Asia’s complexities could be part of its home court advantage “because if something is complicated, at least we [Southeast Asians] can understand and navigate it,” Nash noted.

Local companies have prospered and even outdone their global competitors in some instances, thanks to their understanding of local markets as well as mastery of the supply chain and cross- border interactions.

“You’ve got six major economies, and all of them have a different gift,” Nash pointed out. Companies can go regional by capitalizing on each country’s relative strengths: the size of Thailand and Indonesia’s gross domestic product and population, Singapore’s accessibility global capital markets and abundance of technical talent – an advantage that Vietnam also has.

Many of today’s tech startups have another edge that their predecessors didn’t: their founders are alumni of companies that are already regional. The 10 pan-regional “academies” like Gojek, Garena, Grab, Lazada, Facebook and Google etc. – have collectively produced over 20,000 “graduates,” and 10% of them have gone on to put up their own businesses.

Armed with experience in navigating Southeast Asian markets, members of a growing Lazada mafia are setting up shop in the region. The experience of building a company from nothing to unicorn status imparts valuable lessons, such as how to be more operationally efficient, former executives told Tech in Asia. This alumni network could also open doors for potential investment deals down the line.

Unlike previous generations in which entrepreneurs generally met people in a university setting or through family networks and consultancies, the current crop of founders can pull together their peers from regional companies like Grab and Gojek – peers who already know how to build a regional business.

In the last few years, a rising number of Indonesians have been studying in other Southeast Asian countries like Malaysia and Thailand, but this practice can be encouraged on a larger scale, Nash said.

China’s tech boom was fueled by a dramatic upskilling of its workforce – 11 times as many Chinese students are pursuing undergraduate degrees in the US today than two decades ago. The ongoing trade war and military tensions between the US and China presents an opportunity for Southeast Asia to take advantage of a “low-hanging fruit” – to obtain engineering and specialized professional degrees abroad. “A lot of people who used to go to America from China – those seats are now empty,” Nash adds.

A missed opportunity

Though over 200 investment firms – including family offices – in the region back companies that seek seed funding and over 26 firms invest in series A and B rounds, only about three companies are looking to plow in between US$20 million to US$100 million in series C or D rounds, Nash revealed.

But that stage is the crucial bottleneck that stands between businesses struggling to scale and those that rise to unicorn status.

Investors like Singapore’s sovereign wealth fund Temasek Holdings are putting more resources into earlier-stage fundings. Last month, Vertex Venture Holdings – Temasek’s venture capital arm – raised US$290 million for a new fund that targets growth-stage companies. The Vertex Growth Fund is expected to invest between US$10 million to US$15 million per startup.

Temasek has also launched a US$50 million joint venture fund focused on logistics and invested in at least one seed-stage startup.

The investment firm, however, remains “very focused” on the segment of “aspiring unicorns” valued between US$100 million to US$1 billion, Rohit Sipahimalani, joint head of Temasek's portfolio strategy and risk group, told the Straits Times earlier this month.

“There’s an old joke that it’s easier to raise US$400 million or US$4 million in Southeast Asia than it is to raise US$40 million,” Nash said.

According to Nash’s calculations, US and China are doing about 700 and 130 of those deals, respectively, every year. He added that in Indonesia, such deals happen at a frequency of 0.0039 per million citizens annually, which means it’s 600 times harder to raise a series C and D in Indonesia than it is in the US.

But less money is being allocated into such funding, even when taken in dollar terms. “[North] America puts 0.12 basis points of its gross domestic product into those deals every year. Indonesia is putting 0.5 basis points of its gross domestic product annually,” he added.

Nash urged investors to rethink the way they look at Indonesia. It’s a market where commercial real estate has the same risk-return ratio as the tech sector, and yet the former receives much more capital than the latter.

Capital market activity is telling: in the 1990s, Indonesia was a “very active” user of the US capital market, Nash said. From 1990 to 2000, Indonesian firms raised about US$9 billion in capital markets, and a quarter of that came from the US – more than the money raised from Chinese companies.

Yet from 2001 to today, there hasn’t been a single Indonesian IPO in the US. “There’s no legal or structural reason for that. Indonesia remains the fourth-most important country on the planet and the top two in terms of growth, yet the Chinese have continued to tap into the US market for growth and we haven’t,” Nash added.

It’s a more dismal picture when the tech sector in Indonesia is singled out. “In the 1990s, 55% of the capital they raised came from the American stock market. But in the 2000s, none of them did.”

https://www.techinasia.com/20-unicorns-emerge-southeast-asia-2030-predicts-asia-partners-nick-nash