Snippets from this interview were included in Nikkei Asian Review for their “WeWork shock has investors wary of Southeast Asia startup bubble” piece. You can read the full article here.

Q: We see some headwinds faced by Southeast Asian unicorns, such as the slowing global economy, WeWork valuation shock and Uber/Lyft IPO flop. How would these affect Southeast Asian unicorns’ growth strategy and IPO plan? Would they be able to continue raising big funds as they did before? 

A: While it is taking less and less capital to start a company, it is also taking more and more capital to scale globally. The road to IPOs for technology companies has become longer, with the likes of Tiger and Softbank raising the tickets for later rounds. The resulting abundance of private capital has enabled the region’s unicorns to take longer to go public, with megafunds essentially taking the place of public market investors. 

For companies this has become an opportunity to focus on growing even further across the region and expanding their portfolio of services. For private capital, especially the megafunds, there is a concerted effort to create new markets and scale technological niches globally. This reflects the strong belief many investors have in the region’s potential to continue producing more fast-growing, highly valuable companies, even amidst the global headwinds. 

Such global events are reflective of how the capital markets view unicorns which have raised unprecedented amounts of private capital without a viable business model. In the end, however, a sustainable financial model, profitable business and fast growth are still well received, as seen with B2B SaaS companies like Zoom.

In particular, the gaps in Southeast Asia’s market infrastructure have also given rise to business models different from US counterparts, spelling better financial sustainability leading up to IPOs for these unicorns. While Uber / Lyft are purely on-demand transportation platforms, Grab / Gojek have managed to build strong payments platform as part of their ecosystem. 

Q: Do you think, actually some of Southeast Asian unicorns are overvalued?

A: Valuation is ultimately a question of supply and demand, rooted both in the confidence of investors in the entrepreneur and the entrepreneur in the venture. With the gravity well Southeast Asia has created in the global economy in terms of capital and talent flows, investors in the region have always been optimistic with the growth of companies in the region. 

At the same time, the more money has poured into the region, the smarter this money has become. Both sides of the deals have gained more prescience when it comes to the implications of funding at different stages of growth. This means that while there is healthy competition among investors to unearth value, this is less likely to boil over, especially if the companies are unable to deliver financial performances that justify their valuation at subsequent stages. Funds in the region are also taking a more active role in helping their portfolio companies grow, going beyond the capital and offering hiring and tech services to address the toughest challenges founders in the region face. 

Q: Southeast Asian unicorns are still loss-making. What could they do to reach profitability fast? Do they need some business restructuring? 

A: It is more important than ever for a company to have a clear path to profitability at an early stage. Growth and profitability and do not have to be on opposite ends of the spectrum, and smarter money is making it possible to do both at the same time. Doing both means looking at growth not just as a function of market share and transactions, but also of value exchanged across a product or service — how much more value can customers derive from the platform? 

For unicorns, answering this question has led them to acquire, invest in, or partner with smaller players to incorporate more services that could boost usage on their platform. Go-jek for example has acquired many fintech players to tap into payment gateways more accessible to specific markets. Grab on the other hand is speculated to be in talks to merge OVO with Ant Financial-backed DANA to dominate the Indonesian online payments market.  

Scaling value in Southeast Asia is burdened by infrastructure and logistics costs that come with wider distribution of product, but tech companies are in a position to take on an asset-light and cost-effective approach to growth — without needing the war chest to invest or acquire. Janio for example works with localized logistics partners across several countries to cover the variety of logistics needs clients may have to export goods. 

Q: Particularly on Grab and Go-Jek. Do you think both companies will continue growing or one company will win at some point in the future? 

A: Given the megafunds and heavyweight tech companies backing Grab and Go-jek, the question will not be whether or not these companies will continue to grow but in what direction will the growth be. While both are mass horizontal platforms, the future of tech platforms is hyper-vertical growth. Instead of spending runway to capture basic services across verticals, the focus will be on extending services across entire customer lifecycles. This will prove to be more cost-effective as it plays into the existing customer base and increases retention.  

Ultimately both Grab and Go-jek will have to prioritize certain verticals over others, as well as certain markets over others. Where they place their bets will determine their growth trajectory, and who will win in specific markets and verticals.     

Q: Unicorns have captured majority of startup investment in this region. (According to the Google-Temasek report, $16B of the $24B startup investments went to unicorns since 2015.) Do you think this trend will continue? What could smaller startups do to attract investors?

A: Unicorns have become vehicles for investors, both private capital and large tech firms, to tap into the region, given the massive customer bases these platforms already have. For example, Masayoshi Son recently committed $2B through Grab to invest in AI and green vehicles for Indonesia. This trend will continue as more global investors take interest in the region, and more unicorns emerge across specific verticals and markets.

At the same time, some startups are pulling away from larger players, establishing themselves in underserved verticals. The unbanked still comprise a majority of Indonesia’s population at 66%, especially in second and third-tier cities. Traditional industries like healthcare, property, and education are still at the cusp of disruption. These startups on the frontiers of innovation are developing unique capabilities and their own distribution networks, reducing dependencies on unicorns. 

*Given that the larger the company the more capital is needed for it to grow, vis-a-vis less capital needed for each startup at early stages, it is also not as surprising that unicorns have captured majority of startup investment. 

Q: Thailand does not have unicorns and the country’s startup ecosystem is relatively small, though it is the second largest economy in Southeast Asia. Why is this? From VC’s viewpoint, is Thai market attractive?

A: There is a triple-cocktail driving Southeast Asia towards an inflection point — increasing internet penetration, the rising middle class, and an influx of entrepreneurs and talent. With GDP per capita at $6K, 52.9% internet penetration, and government opening up more opportunities for founders, the scenario is no different in Thailand, albeit slowed down by the influence of large family conglomerates, extending even to the VC scene with the dominance of CVCs. While traditionally cautious and restrictive, regulations are also becoming more supportive of the experimental nature of startups. In the past year, the country set up a “regulatory sandbox” for fintech companies.