How do B2C start-ups scale in SEA despite the fragmentation? 

SEA Overview – An exciting region with numerous challenges

Southeast Asia (SEA) is quickly becoming a focus region for new VC investments, a trend that has accelerated post-COVID. SEA comprises about 8% of the world’s population, young demographics with a median age of 30, and a growing affluent middle class with an average GDP 3 times larger than the world average. The region has seen rapid growth in smartphone usage; mobile penetration in SEA is greater than that in China, and its e-commerce growth has rivaled China’s over the last decade. This large, adaptable, young, and tech-savvy consumer base provides incredible opportunities for booming consumer-facing start-ups and the motivation for scaling across the region is strong for the most ambitious.

However, SEA is incredibly fragmented across multiple dimensions within and across national borders. Each country in the region has its unique languages, culture, history, demographic, and regulatory landscape. And despite being geographically close, scaling businesses across these markets is incredibly challenging as companies must adapt their value proposition hyper-locally across regions.

This article details the commonly used growth strategies that start-ups have been utilizing before turning to the operational challenges that start-ups in the region face.

Growth Strategies 

There are three main ways SEA start-ups position and scale themselves.  

1. Domestic Growth 
2. Cross-Region Expansion 
3. Flexible Business Model Approach 

Domestic Growth – The best option for some and the only option for many

For some start-ups, cross-region expansion is either 1) not required or 2) not possible. In these instances, start-ups look internally within their home market for growth. We see many examples of this first case (expansion is not required) in Indonesia. Indonesia is an enormous and fast-growing economy with a population greater than that of the US. And it is expected to be the 5th largest economy by 2024. As such, the market is sufficiently rich and deep for local start-ups to focus solely on domestic customers. In other words, there is no need to try and move abroad. Investors even deliberately discourage early-stage Indonesian start-ups from pursuing cross-country expansion plans. They believe regional expansion is more suitable for late-stage established market leaders.

As referenced, scaling domestically may be the only option for some start-ups. This would occur if there were hard barriers to entry, such as regulatory constraints, access to the right segment, lack of local partners, or the start-up idea is too locally focused. For example, a popular buffet booking app in Thailand is highly tailored to cultural norms around group meals in Thailand, which may not translate across borders. Other start-ups, such as those engaged in lending out expensive consumer tech productsrely on an affluent customer base. They may not find it suitable to scale out of Singapore into other SEA markets that are less affluent. They seek more similar markets, such as Australia.

Cross-Region Expansion – Going beyond the home country or SEA 

While domestic growth may be sufficiently appealing for some, other starts ups may have a more global vision in mind, which leads us to cross-region expansion. For these start-ups, their home market is too small relative to their ambition. For example, in smaller countries such as Singapore, cross-region expansion is a common option to scale up, given the limited population in the city-state. When deciphering cross-region expansion, we saw start-ups either try to expand into SEA or bypass the region and move straight into global expansion instead.

The global-expansion strategy straight away was prevalent for Singaporean-based start-ups whose market is so unlike that of other Southeast Asian countries. For example, a second hand luxury marketplace startup initially focused on Singapore as the target market. After that, they recognized Australia as the most similar market and bypassed the rest of the Southeast Asia region. Companies avoid expansion across SEA due to lack of the right affluent target segment, infrastructure, or cultural similarities that make expansion across advanced economies easier. On the other hand, we saw successful start-ups like Grab and Gojek effectively scale the SEA region without facing the need to go global. This was made possible by the strength of demand in the other regions in SEA and the fact that the inherent idea of the start up was not uniquely popular in the original locality. In either cross-region expansion strategy, the key to success is to plan early, as a large VC investor commented. Although a start-up company should focus on building the local market and operation at the beginning, developing a market expansion plan at the early stage is equally important. The expansion roadmap helps the start-up to consciously accumulate resources such as relationships with regulators, local partner networks, and local product market knowledge in SEA countries as early as possible before the company growth hits the bottleneck in the home market.

Flexible Business Models – A strategy considered by the early-stages

Some start-ups try to scale location agnostically and shift their efforts moving through B2B, B2C, and B2B2C business models. This is particularly true with digital start-ups that do not need a physical footprint within a region.

For example, an EdTech start-up started as a B2C company, offering online language courses to students. After suffering from stagnated customer growth, they shifted their strategy to a B2B2C model, partnering with primary schools to offer language courses and eventually broke through the growth bottleneck. In another example, a low GI food solution provider, started with a B2B business model, where the marketing and customer acquisition cost is lower than in a B2C model. The demand from corporate clients is usually large and stable. However, when facing these big corporate clients, a new start-up’s bargaining power on price is extremely low, which results in massive pressure on the start-up’s product profit margin. This pushed the founders to look at the B2C market. With growing health awareness in the B2C market, the local Singapore population is more willing to pay a small premium for healthy options due to limited market offerings. The success in the B2C market can also be used as proof of product attractiveness for corporate clients. Using B2B / B2B2C models can offer vast benefits, particularly in enhanced distribution networks. However, shifting between business models is extremely hard and can risk the company losing focus and being overstretched. Therefore, this strategy only lends itself to start-ups that can be flexible and nimble when choosing how to grow in the early days.

Operational Challenges and Solutions

Hopefully, you can see that amongst these strategies for growth are a plethora of challenges each company faces. We will now dig deeper into why these growth strategies are not straightforward at the operation level and discuss some potential ways the start-ups we spoke to have overcome these challenges. 

Challenge 1: Talent 

The talent crunch is a major bottleneck for up-and-coming start-ups. Finding the right talent was an issue for more than 80% of the start-ups we spoke to. The talent shortage problem exists in both junior employees needed for day-to-day operations and senior management. 

As mentioned, finding junior employees can be challenging. We spoke to a company that provides a portfolio of rental apartment properties and co-living spaces in Thailand. The founder reminded us that the local workers are more transitory and seasonal because Thailand is a tourist destination. It is hard to create job stickiness in the long run. Junior talents in tech-related roles such as tech product manager and developer are also in deep shortage. For example, in Indonesia, even traditional local companies only set up sales and operations centers in Jakarta while outsourcing tech talent to India or other regions.

We also heard that it is very tough to find qualified senior management, especially experienced managers with large team management capacities. One might have thought that sourcing talent from overseas might be a solution. However, it’s been noted that overseas talent often has teething issues working with local teams. One founder remarked that it is” like your body rejecting a foreign entity.” It is paramount that leadership is local and understands local norms.

The good news is that the situation is improving. The rising SEA tech unicorns such as Gojek, Tokopedia, and Bukalapak are accelarating the development of local talents in the tech industry.

Challenge 2: Logistics 

Geographically, the region is extremely complex. For example, the two largest countries by population in the region are Indonesia and the Philippines. These are island nations with over 17,500 and 7,500 islands, respectively. Though not all islands need to be served, geography represents a complex logistical challenge for e-commerce firms. The islands create challenges for start-up sales activities, partner coordination, and distinct cultural norms due to the inefficient intermingling of the islands. Speaking to a large e-commerce provider in Indonesia, we realized how important data was to ensure that the hubs were efficiently pre-stocked to prevent high transportation costs during delivery. But even with the most advanced practices, costs can easily get out of hand. Similar geographical challenges occur in countries on the Asian mainland too. Vietnam, Thailand, Laos, and Cambodia have vertically elongated geography. As a result, connecting economic hubs within the country is logistically time-consuming.

To tackle the logistic challenges, some start-ups focus only on one island in the country and slowly expand outward. For example, start-ups we met in Jakarta chose to focus their business activities on Java Island. Though the island represents a significant portion of Indonesia’s economic activity, the choice also has largely to do with avoiding the inconvenience of operating in other islands. Another solution employed by e-commerce providers is to outsource delivery operations to its logistic service partners so they can focus on the core of their business within Java. 

Challenge 3: Culture 

Culture is one of the main reasons why foreign business models cannot be directly replicated in Southeast Asia. Often users interact with services in ways different from other advanced nations. For example, consumers in SEA love Super apps. Grab, Gojek, and Shopee are prime examples of this. They offer a wide variety of services within the same ecosystem and achieve a high level of efficiency. Consequently, other apps also try to position themselves as super apps providing various services within the same platform. A number of consumer finance focused apps strive to target users’ end-to-end financial well-being and trading journey. Healthtech startups integrate healthcare, wellness, and insurance within the same ecosystem.  

Religious factors also play a role. For example, Indonesia is Muslim dominant country. And several financial and other organizations target strict adherence to Sharia and Halal compliance to meet the religious needs of consumers to satisfy local norms. Even cultural norms determine start-up ideas. In Thailand, group dinners are common, and the norm is for the most senior member to foot the bill. A buffet booking app has partnered with restaurants and built plans to make this process possible and affordable when organizing large group dinners. 

As we have mentioned in the “Talent” section, a local leadership team that is able to tailor the services to the local culture is the key to navigating through SEA’s diverse market.

Challenge 4: Funding 

The landscape of funding sources in Southeast Asian countries varies drastically.  

Singapore

According to Crunchbase 2022 data, Singapore has 372 VC organizations out of 560 in the whole Southeast Asia region. Thanks to its well-established legal system and efficient government, Singapore attracts funding from all over the world, ensuring local start-ups have relatively easy access to capital.   

Indonesia

As one of the most popular foreign capital destinations in SEA, Indonesia has abundant funds from both foreign and local sources. These investors not only provide capital but also act as capable partners, given their years of experience working with traditional businesses in these countries. However, local funders tend to be more hands-on when dealing with founders. They require more control and interfere in the day-to-day activities of the start-up. Hence, some founders look towards foreign funding sources, who grant them more freedom to operate. 

Thailand

Unlike Singapore and Indonesia, foreign investors are less in Thailand due to limited market size and regulatory restrictions. Thailand start-ups mainly rely on local funding sources. These sources include wealthy families and big corporations from traditional industries. However, early-stage start-ups usually find it challenging to find suitable investors. On the one hand, capital from wealthy Thai families usually favors late-stage private equity investments with lower risks. On the other hand, CVCs run by corporations in traditional industries usually have limited capability in guiding tech start-ups in the new internet era.  

Vietnam

Before 2021, foreign investments are not so common in Vietnam due to its young start-up ecosystem and regulatory restrictions similar to those in Thailand. However, in 2021, the Vietnam government approved a new foreign investment cooperation strategy for the 2021-2030 period to reform the business environment and increase foreign investment from certain countries. Vietnam aims to improve both the quantity and quality of foreign investment, especially in high-tech and digital economy sectors. 

Challenge 5: Regulations 

Navigating the regulatory environment in SEA countries is complicated, particularly for non-local founders. Issues such as repatriation of wealth, ownership attributed to citizens, and often ill-defined regulation make it challenging. In this environment, identifying the right partners to work with becomes crucial. Some organizations operate as local partners for traditional foreign companies looking to expand into Indonesia. For start-ups, this becomes even more important. Identifying the right partners is crucial for charting the appropriate growth plans and dealing with regulations that are often unclear and constantly changing. Start-ups find themselves operating in grey areas and are forced to be nimble to adapt to sudden changes in rules and interpretations. 

Challenge 6: Education and Awareness 

There is also a general lack of awareness among the population that the services these innovative start-ups offer are useful. So, start-ups often need to spend significant amounts of time and energy trying to educate users about the need for a specific app and how it could benefit them over the long run. Fintech startups often direct direct significant resources to build educational materials on financial well-being. This ensures that users can use the platforms more effectively, increasing stickiness. 

Summary

In summary, SEA presents many opportunities but has equally difficult operational challenges. An Indonesia-based start-up typically can focus on its domestic market when it comes to scaling strategy. In contrast, a start-up in other parts of SEA usually needs to prepare a cross-region expansion plan early. Regardless of the strategy, a start-up will likely have to deal with common challenges such as talent, funding, and regulations. While there is no single solution fit for all cases, setting up a leadership team with local knowledge and finding the right partners is usually the first step to go.