Unique attributes of Southeast Asia allow it to weather economic crises and tech slumps more than other regions

One key advantage of the region is the strong balance of trade that provides a buffer against economic slowdowns. At the same time, driven by its vast geography and dispersed population, Southeast Asia presents a significant opportunity for technological inclusion.

One area with immense potential is financial inclusion—nearly 70% of the population in the region is unbanked or underbanked. This situation creates a fertile ground for companies to devise innovative solutions that bridge the gap between the population and the critical financial services they might require.

The phenomenon of leapfrogging, previously observed in sectors like communication devices, is now manifesting in the financial realm. Many individuals in Southeast Asia have skipped the stage of personal computers and directly embraced smartphones. Similarly, they are now leapfrogging traditional banking systems.

The rise of related financial services highlights the immense potential of the financial services sector in Southeast Asia. By offering convenient and accessible digital banking solutions, these services provide unbanked individuals with direct access to financial services without the need for a traditional bank account.

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Southeast Asia’s relatively younger and large population offers another unique advantage to startups. The high consumer spending driven by basic needs can act as a cushion during economic downturns, providing resilience to the market.

Notably, the youth in countries like Indonesia and the Philippines display a strong inclination towards adopting new technologies, creating burgeoning markets for innovative services and products. This trend is exemplified by the rise of social e-commerce apps, which is in parallel with the exponential growth of virtual content creators. The market for such content is widely patronised by the youth and the potential for growth is significant.

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Indonesia is the largest country in Southeast Asia and the number of Generation Z and Millennial individuals currently stands at an astounding 144.87 million people. This constitutes 53.81% of the total population. In the next decade, this demographic will enter their prime earning years, making them a crucial driver of global spending. As the creator economy flourishes across Southeast Asia, TipTip, a company within our portfolio, aims to accelerate income-earning opportunities for creators by introducing innovative ways for them to directly engage with their supporters through interactive video sessions.

Additionally, Southeast Asia has experienced a surge in tech talent across various countries. For instance, Vietnam produces 80,000 tech graduates annually, with the ratio of tech graduates to the country’s population on par with countries like India. This influx of skilled individuals contributes to the region’s growing tech ecosystem and provides a strong foundation for future innovation.

Upcoming markets or verticals that will make Southeast Asia vibrant in the next 5 years

As the region’s younger population enters their prime earning years and experiences rising incomes, the demand for consumer tech products will naturally rise in tandem. This mirrors patterns observed in other developed markets. Notably, the Generation Z cohort, which comprises digital natives, plays a significant role in driving this demand. Bain & Co reveals that digital natives aged 18-29 in urban areas spend 75% more than the median population and boast one of the highest adoption rates of consumer tech, second only to affluent consumers in Southeast Asia.

Moreover, consumption patterns are expected to shift towards online platforms. These provide convenient access to consumer tech products for users living in suburban areas outside of Tier 1 and Tier 2 cities. Currently, 43% of the digital population in Southeast Asia resides in suburban areas. Despite their significant online presence, there remains a notable disparity in the penetration rate of consumer tech—such as e-commerce and travel tech—compared to their urban counterparts. This indicates a vastly untapped market potential in suburban areas, presenting opportunities for growth and expansion.

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While attention has fairly been focused on retail digital banking services for Southeast Asian consumers, there still exists a gap in the infrastructure supporting small to medium enterprises (SMEs). Beyond Singapore, Southeast Asia harbours immense untapped potential in this area.

SMEs in the region form the backbone of its economy. The market size and potential? Over 70 million SMEs. This number accounts for nearly 40% of the region’s GDP and employs almost two-thirds of the working population. Companies that effectively cater to this market have witnessed remarkable profits. 

Lastly, healthcare presents a significant opportunity for startups to address people’s basic needs through technological advancements. The World Health Organization (WHO) reports that, excluding Singapore and Malaysia, Southeast Asia exhibits an average of only 8 doctors per 10,000 residents. This ratio falls significantly below the global average of 15 doctors per 10,000 residents. Such statistics indicate a lack of access to healthcare services for many individuals within the region. In this context, healthcare companies and startups thus have the potential to not only thrive in the space but also bridge the gap for this underserved population with innovations like telemedicine.

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Potential challenges and roadblocks that Southeast Asia may face

Southeast Asia is characterised by its diversity and fragmentation. Different countries within the region have distinct languages and regulatory policies. This may pose a challenge for startups seeking to expand across the region. This is especially true for startups with limited manpower and legal resources to navigate and understand each market’s unique background and conditions.

Regional startups encounter a talent crunch despite tech layoffs in larger companies. While tech giants have been reducing their workforce, emerging startups still face a shortage of talent in tech-related fields. Skilled employees are often recruited by legacy companies that are undergoing digital transformation initiatives. Consequently, startups must strive to exceed their targets and achieve more with limited manpower.

The full realisation of potential growth in sectors such as logistics and e-commerce depends on the development of key infrastructure. Governments in the region are actively taking steps to address this challenge, with projects like the Trans Java and Trans Sumatra Toll Roads in Indonesia. The establishment of robust infrastructure is essential for startups to leverage and expand their operations effectively.

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Southeast Asian customers tend to be price-sensitive, which can impact the adoption of emerging technologies. Affordability becomes a significant factor, and it varies across different regions within Southeast Asia. According to Trading Economics, Indonesia’s GDP per capita stands at US$11,858, Thailand’s at US$17,077 and Vietnam’s at US$10,628. In comparison, the global average GDP per capita (PPP) is US$21,283.

These statistics reveal that consumers in Southeast Asia have lower disposable incomes even after accounting for the differences in the prices of goods and services. The disparity means that consumers with lower disposable incomes in the region may face challenges in affording new technologies that come with higher price points. Thus, startups must learn to juggle the costs associated with developing new products and align them with the price points that consumers are willing and able to pay.

While angels, family offices and venture capital (VC) funds are growing in Southeast Asia, there is still a lack of funds, particularly at later stages of startup growth. The Southeast Asian VC scene is relatively nascent, leading to fewer LPs (Limited Partners) investing heavily in funds in the region. Startups may encounter difficulties in securing sufficient funding, necessitating creative strategies to attract investment and support their growth plans.

Several markets in Southeast Asia experience political uncertainty, which can impact business operations and investment climate. Fluctuations in government policies, regulatory changes and geopolitical factors may introduce uncertainties and challenges for startups operating in the region. Staying informed and adaptable becomes crucial to navigate through such uncertain environments.

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The bright spots in the future of Southeast Asia’s tech ecosystem

The future of Southeast Asia’s tech ecosystem is filled with exciting prospects and opportunities. There are several key areas that are likely to shape its trajectory.

One of these areas is Artificial Intelligence (AI). The integration of AI into existing startup products or new product ideas presents a promising avenue for growth. However, it’s important to acknowledge that the adoption of AI technology may currently be costly and not cost-effective for companies in the region. While the AI sector holds immense potential, startups in the region need to carefully consider the feasibility and financial implications of implementing AI solutions at this stage.

Another area of significance is the growth in VC investments. Private investments, particularly in Singapore, have been robust, but emerging markets in Southeast Asia are also experiencing an increase in investment. As countries like Indonesia and Thailand become more competitive in terms of funding opportunities, we can expect to see a surge in the growth of startups across different parts of the region. This rise in VC investments may pave the way for the emergence of new unicorns and bolster the overall startup ecosystem.

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ClimateTech will be another area that many investors will be watching closely. Southeast Asia, with a strong commitment from 9 out of 10 ASEAN members to achieve net-zero emissions by 2050, holds significant potential for growth in the ClimateTech sector. Communities in Southeast Asia are expected to be at the forefront of the climate revolution, creating opportunities for innovative startups to develop solutions addressing climate challenges.

Globally, Natural Climate Solutions (NCS) such as Agriculture, Forestry, and Other Land Use (AFOLU) have the potential to abate 7 gigatonnes of Co2e per year. Southeast Asian countries, including Indonesia, can play a vital role in achieving these ambitious targets. Indonesia alone can abate up to a significant 20% 

In fact, Indonesia has the second-largest global potential to provide low-cost, natural climatic solutions for decarbonization, and it possesses about 66% of the investable forestry carbon stock in SE Asia—the highest in the region.

In closing, the startup landscape in Southeast Asia while nascent and undergoing a reality check, holds the promise of a future utopia, thanks to its unique advantages and untapped potential. By leveraging this potential and circumventing the hurdles, the region can indeed transform into a robust startup ecosystem. It may not be an overnight metamorphosis, but with the right mix of innovation, strategic foresight, resilience and dedication, Southeast Asia can witness a quantum leap in its startup scene. As we chart our way through the challenges and headwinds, Southeast Asia may well be the next big frontier for startups.

Gary Khoeng is a Partner based in Indonesia at Vertex Ventures Southeast Asia and India. He focuses primarily on covering Indonesia’s burgeoning startup ecosystem. Prior to joining Vertex, Gary was actively investing in early-stage opportunities for entrepreneurs at an Indonesian fund across various sectors including e-Commerce, Fintech, Media and SaaS.

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