How Venture Capital in Southeast Asia differs from the United States
VCs in Southeast Asia are typically smaller firms with less than $100 million raised
What is the typical deal size?
In Southeast Asia, the average deal size is smaller than in the United States.
Southeast Asia deals are typically $500K to $2 million for seed investments and $5 million to $10 million for Series A.
In the United States, investors typically will make a follow-on investment of between $5 million and $10 million on a Series A investment.
However, on a Series A investment in Southeast Asia, an investor might make a follow-on investment of between $2.5 million and $8.5 million for Southeast Asian companies with good growth metrics and traction in the market.
The average ticket size of Series A investments is about US$10–20M (US$1–2M to Seed Stage).
Does that mean that U.S.-based VCs do not have much interest in investing in early-stage startups in Southeast Asia?
Southeast Asian startups that get U.S.-based venture capital are often startups that have already built traction or have achieved some level of product-market fit before they raise venture capital from investors outside their region.
This means it is even more difficult for U.S.-based investors to participate as early as they can when dealing with startups outside their region because they must wait until there is proof that there has been traction before investing at an early stage like Seed or Series A rounds.
Additionally, U.S.-based VCs tend to invest larger amounts than they would invest if they invested within their own region because of currency risk or other factors related to international transactions as well as regulatory systems differences and delays in closing deals.
What is the typical exit strategy in Southeast Asia compared with the United States?
Southeast Asian startups tend to sell for smaller amounts than in the United States. Southeast Asian startups typically sell for less than US$10 million. Most of the early exit strategies are mergers and acquisitions.
However, there are a few Southeast Asian startups that have gone public on the NASDAQ or NYSE markets, like Singapore-based SEA Group.
What are some of the challenges Southeast Asia startups face?
There is an overall lack of venture capital access in Southeast Asia. The funding ecosystem is less mature in Southeast Asia than it is in the United States.
It’s also difficult to raise venture capital in a developing country like Vietnam because the startup ecosystem itself is underdeveloped — there are very few local investors or angel investors who have participated in early-stage deals or who can lead rounds for local companies.
Another challenge is that some countries like Vietnam do not have enough successful startup stories to prove that a company can become successful with help from venture capital.
The lack of track record makes it harder to prove that they can be successful as an investment opportunity for outsiders who do not have as much insight into what’s going on inside a country like Vietnam when compared to someone who has lived there for years and understands its culture, its market conditions, and its regulatory system.
There also is no active secondary market for startups, so there are no mechanisms in place to allow founders who want to sell their companies to exit without bringing their company public first or selling it back into the same ecosystem where they got their initial funding from angel investors or other early-stage investors.
There are only a handful of instances where VCs have been able to invest in companies at Series A after seeing them at earlier stages, but this happens very rarely and often requires strong strategic value add by the investor (e.g., Sequoia Capital’s investment into Grab).
What are some of the positive trends in Southeast Asia?
Southeast Asia is experiencing an upward trend in startup activity. Startups today have more options to raise venture capital than ever before. In the past, there were few VCs that had previously participated in deals with startups in Southeast Asia and there were no other active secondary markets for startups.
Today, there are more VCs that have participated in deals with startups located outside the United States and there is now an active secondary market for pre-IPO tech companies.
It’s also easier to raise capital than it was a couple of years ago because there are more venture capitalists who are active participants in the Southeast Asian investment ecosystem today than in previous years.
Additionally, the Internet penetration rate in Southeast Asia is growing quickly and this has created an enabling environment for startups to grow their businesses online.
The Internet penetration rate has already reached around 80 percent among people under 35 years old, which represents a great opportunity for e-commerce ventures like Lazada or Shopee to serve consumers who want to shop online instead of going to brick-and-mortar stores.
Southeast Asian countries have much lower labor costs than other regions, so many startups leverage low costs coupled with relatively high Internet penetration rates to provide products and services that can compete globally against brands that do not yet have a presence in developing countries like Vietnam or Indonesia.
Another positive trend is that local entrepreneurs now feel more confident about their ability to become successful as a result of seeing companies like Grab, GoJek, or Tokopedia build successful businesses by solving real problems using technology and growing fast without having to raise huge amounts of capital from investors like SoftBank from Japan or Alibaba from China.
These local entrepreneurs want to replicate this success by building new companies on platforms created by previous successful founders who have been able to build scalable businesses with little capital available from investors.
What are some of the challenges Southeast Asia startups face?
Southeast Asian startups face many of the same challenges that U.S.-based startups face, but there are also some unique challenges that only affect Southeast Asia.
For example, local startup founders in Southeast Asia still are not completely sure about whether or not investors outside of their region will be interested in what they have to offer.
If entrepreneurs do not understand how to market themselves to investors outside of their region, they should consider hiring a professional fundraising advisor who can help them present themselves to investors in a way that is appealing and convincing.
Local startup founders also need to be careful about whom they approach for funding because there are a lot of scams out there — it may seem like it’s easy to raise capital but it’s actually very difficult, as most local startup founders will fail if they try to raise capital without identifying and targeting the right investor who is well-positioned to support their business opportunity.
Another challenge is that even though many Southeast Asian countries have an increasing number of VCs with experience working with companies from outside the United States, many of these VC firms have only been around for one or two years and do not yet have a track record of success with early-stage deals by companies located outside the United States.
Therefore, it can be challenging for local startup founders who are trying to validate whether or not those VC firms will be interested in investing in their company because they lack a track record with early-stage deals outside the United States.
One more important challenge is that startups in Southeast Asia must deal with corruption in many countries — the problem is often worse than what entrepreneurs experience when dealing with government officials or venture capitalists located within the United States.
All too often, government officials ask entrepreneurs for money if they want their businesses approved by government regulators for permits or licenses needed for day-to-day operations.
Corruption can be so bad that local entrepreneurs must keep their business plans secret and do not discuss them publicly because sharing their business plans could lead to corruption charges from government officials who want bribes from them.
The risk surrounding corruption makes it even more difficult for local startups founders to raise capital when compared with U.S.-based entrepreneurs because foreign investors often feel like they risk losing their money if corruption becomes an issue when doing business in developing countries like Vietnam or Indonesia where corruption is more of a problem for businesses than in the United States.
What is the biggest market opportunity for Southeast Asia startups?
The biggest opportunity for Southeast Asia startups is to find new markets outside of their own countries because they have a lot to offer companies located in developed countries around the world.
For example, local startup founders in Singapore, Malaysia and Indonesia have a lot to offer U.S.-based startups because they have a lot of highly educated people who speak English fluently, live in countries where there is an abundance of low-cost labor, and are often willing to work for low salaries.
The combination of these factors mean that local startup founders in Singapore, Malaysia and Indonesia can lower their costs when compared with U.S.-based startups and become more competitive with them for customers around the world who want to hire people located outside of their region to do outsourced tasks that can be completed by local workers living in developing countries like Singapore, Malaysia or Indonesia.
Another opportunity for Southeast Asia startups lies in using AI technology to create new products or services that are not available anywhere else around the world because most other parts of the world lack access to the type of data found within Southeast Asia (data that contains information about millions of people living across many different cities and villages).
For example, a company could use AI technology with publicly available data generated by millions of local people living across many different cities and villages within Southeast Asia — and then combine this data with other publicly available data from other parts of the world — to come up with new products or services that may not be available elsewhere around the globe (at least not yet).
This combination could potentially result in new products or services that could serve as new business opportunities for investors looking for breakthrough innovations — and while it may seem like it’s easy to create such innovations on paper today, it’s actually very difficult to make them happen in real life without an abundance of data about many different types of people living within one small geographic area (such as Southeast Asia) so that AI technology can be used effectively based on what people are saying or doing within multiple locations at the same time.
About the Author
I am the Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students teach and learn better. I am also a mentor and angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
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