In 2021, Southeast Asia's unicorns, or billion-dollar companies, stand out due to increased private equity funding for young tech companies. Increased smartphone usage among the younger generation, a growing middle class, and widespread internet usage are driving investment in the sector.
The COVID-19 pandemic accelerated digitization, and tech companies quickly expanded their teams thanks to low interest rates and abundant liquidity. Consumers are rapidly adopting e-commerce, food delivery platforms are also on the rise, and the push for innovative technology solutions, especially in the financial sector, is attracting more investment. This is driving investment in young companies and workforce growth in the technology sector.
The presence of unicorns in Southeast Asia invites a greater flow of cheap liquidity into the region. Unicorns use investment to rapidly expand their businesses through discounts and incentives. The primary goal is to gain market share, while financial sustainability is secondary.
In 2022, the business models of unicorns and startups are affected by the global economic slowdown. Declining investment has triggered adjustments in the tech industry, resulting in falling valuations.
The spirit of growth, albeit at a loss, has been replaced by a focus on sustainability and profitability. Tech companies, especially unicorns, mitigated financial losses by laying off thousands of workers in restructuring efforts.
In 2022, only eight startups made it to unicorn status, down from 23 in 2021. By the end of 2022, Southeast Asian tech companies had secured US$2.88 billion in funding, the lowest in two years. Private funding also fell 32 percent to US$15.8 billion, down from US$23.2 billion the previous year.
In the midst of the difficult funding climate, investors, including banks such as HSBC, have begun to create specialized debt funds to help fund startups. This provides a way for new companies to obtain working capital without reducing founders' ownership.
Unicorns are also adapting their strategies to the more limited availability of capital. For example, Coda Payments, a Singapore-based provider of cross-border monetization solutions, sold a second stake to provide returns to early investors and founders without raising new capital. Coda has entered the North American, European and Latin American markets and introduced new payment services that are expected to lead to profitable growth.
Governments in Southeast Asia need to continue to implement funding and incentive programs for startup companies. Some countries, including Singapore, have done so by developing programs such as Startup SG, which supports high-tech businesses, seed funding, commercialization, and technology development. Under this program, the government invests alongside outside investors in promising startups.
Another challenge for startups in the region is attracting the best talent. Larger ASEAN countries such as Indonesia, the Philippines and Vietnam have the potential to provide a tech workforce. Indonesian President Joko Widodo has pledged to develop local talent with the support of global companies such as Google, Huawei, and Gojek. Areas such as artificial intelligence, data science, and software engineering are growing.
Vietnam has more than 400,000 IT engineers, according to the IT Market Report, and the country's universities produce about 50,000 IT graduates each year. Talent in Vietnam can staff startups with expertise in blockchain, machine learning, artificial intelligence, and data science. The Philippines also has English-speaking tech talent to support startups, especially in cybersecurity, e-commerce, and fintech.
The potential for unicorns is amplified by the significant portion of Southeast Asia's population that is unbanked or underbanked. Fintech plays an important role in bringing new and innovative financial and insurance solutions to this segment. In the financial space, Vietnamese buy-now-pay-later platform Fundiin, founded in 2019, operates in a country with a credit card penetration rate of only 5 percent. The platform allows consumers to make purchases by paying in three monthly installments.
The lifestyle industry is also growing in Southeast Asia, with a large middle class base. Examples include Partipost in Singapore, founded in 2016, and Social Bella, an online beauty service provider in Indonesia.
Innovation is also making inroads into the food industry in Southeast Asia. Shiok Meats, founded in 2018, focuses on laboratory farming of shrimp and crab. As part of the alternative food movement in Asia, companies like these have the potential to solve the global food crisis in the future.
Unicorns and tech startups need to adapt their business models to survive and grow during the current economic uncertainty, including streamlining operations, improving corporate governance, and being smarter about attracting and retaining talent. They can also take advantage of the current global uncertainty. As the technology competition between the US and China develops, Southeast Asia is becoming an attractive destination for foreign investors and companies.
However, the region has also shown resilience despite economic challenges, supported by a mature investment ecosystem that will continue to fuel the growth of unicorns. Increased government policy and funding for tech startups, particularly in Indonesia, would be beneficial. The diversity of entrepreneurs in the region is also a key driver of innovation.
Reference: East Asia Forum
