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China’s Breakthrough And What It Means For Singapore

Abstract

This report builds upon the earlier study titled Powering Asia’s Energy Transition (2025), which introduced Thorium as a promising alternative nuclear fuel for emerging Asian economies. While the first version offered a regional overview, this updated edition narrows its focus to the People’s Republic of China, which is now widely regarded as the global leader in Thorium-fuelled Molten Salt Reactor (MSR) development.

China’s evolution, from Cold War-era experimentation through decades of institutional dormancy to the successful operation of the world’s first Thorium MSR, carries significant technical, strategic, and commercial implications. The final section of this report will examine the downstream impact of China’s Thorium program on Singapore and other small, energy-constrained nations.

*Acknowledgements: The author thanks Mr Terrence Tay, Summer Analyst; and Mr Paul Lim, Analyst for significant contributions, editorial recommendations, and research assistance to this paper. All errors and omissions are the author’s alone.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

As the global community intensifies its search for clean, secure, and scalable energy solutions, China’s foray into Thorium fuelled Molten Salt Reactors (MSRs) offers valuable lessons, not only for major economies, but also for smaller, resource constrained states. China’s trajectory in advanced nuclear development is instructive because it showcases what can be achieved through long term institutional commitment, integration of research and industry, and state coordination of innovation ecosystems.

The Chinese experience does not represent a universal model, nor should it be idealised. Rather, it is a real-world experiment unfolding at scale, with implications for countries at various stages of energy transition. For small states with limited land, high energy import dependence, and stringent safety needs, China’s demonstration of modular, next generation nuclear systems, such as the Thorium Molten Salt Reactor-Liquid Fuel 1 (TMSR-LF1) prototype and the Gansu commercial project, opens a practical pathway worth watching. As this report builds on the broader regional framing in “Powering Asia’s Energy Transition”, the following report sharpens the lens on China’s role in shaping the technological, commercial, and geopolitical contours of future nuclear energy.

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Introduction

Thorium, long regarded as a promising yet underutilised nuclear fuel, is experiencing a quiet resurgence, and China is emerging as the key driver of this revival. While global attention has traditionally focused on Uranium-based technologies, China has pursued a multi-decade effort to master Thorium-fuelled molten salt reactors. This has culminated in the recent operational success of its prototype reactor, TMSR-LF1. This report explores how China moved from early experimentation in the 1970s to a strategically coordinated national programme that now positions it at the forefront of global Thorium development.

Thorium-232 is a well-recognised fertile radioactive substance capable of generating nuclear energy. When exposed to neutrons in a reactor, it converts into Uranium-233, which then undergoes fission to produce electricity. Like other fertile materials, Thorium-232 needs an external neutron source either from fissile materials such as Uranium-235 or Plutonium-239, or from spallation neutrons. A key advantage of Thorium-232 is its natural purity, eliminating the need for isotopic enrichment and simplifying its preparation for fuel through basic chemical separation (Schaffer, 2013). Although the concept of Thorium reactors dates back to the 1960s, only in recent years has Thorium started to gain traction as a potential alternative to conventional Uranium-fuelled nuclear power (Popular Mechanics, 2025).

Emerging Asia countries include large developing countries such as India and Indonesia, and other fast-growing Southeast Asian nations. These countries are witnessing rapid urbanisation and industrialisation, leading to surging electricity consumption that often outpaces current supply. Many still rely heavily on imported fossil fuels, which exposes them to price volatility and accounted for over 50% of global CO2 emissions in 2021 (NBP, 2024). Nuclear energy is being revisited as a viable solution especially in Asia, with 145 operable nuclear power reactors, 45 under construction, and firm plans to build about an additional 60 (WNA, 2025).

This second edition builds on the foundational research covered in Powering Asia’s Energy Transition, shifting the lens from a regional overview to a focused case study of China’s technical milestones, institutional leadership, and long-term ambitions. It offers a chronological narrative of China’s Thorium journey, beginning with Project 728, followed by a pause in development, and later a revival in 2011 under the Chinese Academy of Sciences. It then tracks the design, construction, and commissioning of TMSR-LF1, paying particular attention to the changes in transparency, governance, and geopolitical signalling.

The report will examine the evolving institutional frameworks that have shaped China’s Thorium strategy, evaluate the commercial pathways being explored, and assess the broader national objectives embedded within this nuclear endeavour. Finally, the conclusion will reflect on what this means for small, energy-constrained nations such as Singapore, especially in the context of energy diversification, nuclear research collaboration, and future deployment of Small Modular Reactors (SMRs).

In this context, Thorium is not simply a scientific curiosity. It is an energy technology with strategic implications. China’s experience offers important insights into both the possibilities and constraints of Thorium energy and provides a valuable reference point for countries considering alternative nuclear pathways.

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Industry Overview

Asia is experiencing a dramatic rise in energy demand, driven by rapid economic growth, urbanisation, and rising living standards. Electricity demand in Southeast Asia alone is projected to grow by 4% annually until 2035, surpassing 2,000 TWh, which is more than double Japan’s current electricity consumption. This regional trend aligns with broader patterns across developing Asia, where total energy demand is expected to increase by more than 40% by 2050 (IEA, 2024).

Figure 1 Energy Production vs Consumption in the Asia-Pacific (1984 – 2023). Source: Statista

Despite the growth of renewables, fossil fuels still dominate the energy mix. As of 2023, coal and gas account for nearly 80% of power generation in Southeast Asia, and their absolute use continues to increase. However, this reliance raises sustainability concerns, as these sources are highly carbon-intensive and subject to global price volatility and geopolitical disruptions (Asia News Monitor, 2024). In parallel, regional energy production has not kept pace with demand, contributing to widening supply-demand gaps in many fast-growing economies.

Figure 2 Electricity Generation & Capacity Additions in SEA (2003 – 2023). Source: IEA

To address these challenges, many Asian nations are strengthening their climate commitments. Countries such as Vietnam and Indonesia have announced commitments to achieve net-zero emissions and are aligning their energy strategies, including exploring or building nuclear power, in line with the Paris Agreement.

Nuclear energy is gaining renewed interest as part of this transition, particularly through scalable, low-carbon technologies such as SMRs. Thorium-fuelled SMRs, in particular, offer advantages including improved safety, reduced radioactive waste, and modular scalability suitable for decentralised grids (Hussein, 2020).

Globally, Thorium-based SMR research has gained traction in countries such as India and China. India’s three-stage nuclear programme has identified Thorium as a long-term solution due to its abundance and fuel efficiency (Vijayan et al., 2016). China, meanwhile, has initiated the operation of experimental Thorium reactors (Xu, 2016). In Southeast Asia, Indonesia is preparing for SMR deployment by 2030 with floating reactor applications to supply remote islands (IEA, 2024).

In summary, the convergence of rising energy demand, unmet production capacity, climate policy shifts, and growing global interest in advanced nuclear technology positions Thorium as a promising candidate for clean baseload energy.

Figure 3 Electricity Generation by Country & Energy Source in SEA (2002 – 2022). Source: IEA

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Thorium’s Strategic Advantage

Thorium is gaining renewed global interest as a next-generation nuclear fuel due to its abundance, safety profile, reduced waste, and compatibility with SMR technologies. These characteristics align especially well with the needs of Emerging Asian economies, countries grappling with rising energy demand, reliance on imported fossil fuels, and increasing pressure to decarbonise. Thorium is approximately three times more abundant than Uranium in the Earth’s crust and is particularly plentiful in countries such as India and China.
Critically, Thorium is often a by-product of rare earth element mining, which reduces both procurement costs and environmental impact (Lainetti, 2015). This positions Thorium as a strategic domestic resource for Asian nations aiming to enhance energy security and reduce reliance on external suppliers.

Unlike Uranium-fuelled reactors, Thorium systems produce significantly less long-lived radioactive waste and avoid generating Plutonium, which is a major proliferation concern (Lung & Gremm, 1999). The key fissile isotope produced from Thorium-232, Uranium-233, can be burned in situ, reducing the risk of diversion for weapons development (Selvam et al., 2025). Additionally, Thorium dioxide has a higher melting point than Uranium dioxide, offering improved thermal stability and a lower risk of meltdown (Schaffer, 2013).

When paired with molten salt or fast breeder designs, Thorium reactors achieve higher fuel efficiency and extended fuel cycles, translating to longer periods between refuelling and less maintenance, which is an essential feature for countries with developing technical capabilities (Moir & Teller, 2005). Thorium’s integration with SMRs is especially promising for geographically dispersed and infrastructure-constrained regions. SMRs offer scalable, compact, and cost-effective alternatives to traditional gigawatt-scale nuclear plants, which often require USD 6 to 9 billion in upfront capital and over a decade to construct (World Nuclear Association, 2024). In contrast, Thorium SMRs are factory-built, deployable within 2 to 4 years, and can be installed incrementally which is often at a capital cost of USD 500 million to USD 1.5 billion, depending on scale (IAEA, 2022). This model aligns well with the needs of Southeast Asian markets such as Vietnam, Indonesia, and The Philippines, where infrastructure bottlenecks and constrained fiscal space hamper energy transition efforts (IEA, 2023).

Among these, Indonesia stands out as a regional leader in Thorium deployment. ThorCon International, a Singapore-based firm, is spearheading development of the TMSR-500, a 500 MWe Molten Salt Reactor (MSR) composed of two sealed 250 MWe modules, each designed for eight years of continuous operation before off-site refurbishment. In March 2025, ThorCon’s Indonesian subsidiary made history by submitting the first-ever nuclear reactor licence application in the country (ThorCon International, 2025; NucNet, 2025a). The plant is slated for Kelasa Island, chosen in part for its Thorium-rich monazite residues from historical tin mining. With an estimated capital cost of just USD 1.1 billion (NeutronBytes, 2022).

Moreover, ThorCon’s plans to establish a domestic reactor module manufacturing facility promise to create local jobs, accelerate technology transfer, and reduce costs through mass production (NucNet, 2025b). The initiative sets a strong precedent for how Thorium can deliver not just clean energy, but also industrial development and economic multipliers across Emerging Asia.

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Competitive Positioning

Thorium vs. Conventional Nuclear and Other SMRs

Thorium-fuelled reactors offer distinct competitive advantages over both traditional large Uranium reactors and Uranium-fuelled SMRs. Conventional reactors typically generate 1 to 1.5 GW, requiring massive upfront capital and long lead times. In contrast, Thorium SMRs are modular and mid-sized (10 to 300 MWe per unit), enabling phased deployment, lower per-project investment, and suitability for smaller grids (IAEA, 2022). ThorCon’s initiative in Indonesia is a strong validation of this model.

In safety and siting, Thorium Gen-IV designs such as MSRs offer inherent advantages. They operate at atmospheric pressure and include passive safety systems, reducing exclusion zones and enabling installation close to cities, industrial hubs, or even floating platforms which gives the flexibility that traditional Pressurised Water Reactor (PWR) / Boiling Water Reactor (BWR) plants lack (Reuters, 2025). Such adaptability shortens deployment timelines, improves public acceptance, and provides versatility across varied geographic contexts.

Thorium also outperforms in fuel cycle sustainability. Unlike conventional Uranium reactors, which use less than 1% of mined Uranium and generate long-lived transuranic waste, Thorium cycles breed U-233 more efficiently and dramatically reduce minor actinide production (Lung & Gremm, 1999). Some Thorium MSR configurations can even consume legacy Plutonium stockpiles, positioning them as not only effective means of power generation but also tools for responsible nuclear waste management (Schaffer, 2013).

Finally, Thorium’s proliferation resistance enhances public and regulatory trust. While U‑233 can be weaponised, its typical contamination with U‑232, which emits intense gamma radiation makes diversion extremely difficult (Kang & von Hippel, 2001). This “clean slate” narrative can help countries overcome dual-use concerns and ease international partnerships and financing, setting Thorium apart from Uranium-based programmes.

Thorium vs. Renewable and Fossil Alternatives

Thorium reactors provide firm baseload power with high-capacity factors (80% to 90%), unlike solar and wind, which require costly and space-intensive storage to manage intermittency (IEA & OECD NEA, 2020). In densely populated regions such as Singapore or Manila, where land is scarce, SMRs can generate significant electricity on a compact footprint. For instance, a 500 MW SMR may require just 4 to 10 hectares of land, while an equivalent solar PV installation could need 400 to 4,000 hectares, making SMRs a compelling option when paired with renewables in land-constrained cities (Bryce, 2022; ITIF, 2025).

Moreover, the Levelised Cost of Electricity (LCOE), which represents the average total cost of building and operating a power plant over its entire lifetime, for newly built nuclear plants is projected to range between USD 40 to 80/MWh, depending on technology maturity and financing structures (IEA, 2020; OECD NEA, 2020). Advanced reactor designs, including Thorium-based MSRs, are estimated to achieve LCOEs as low as USD 45/MWh, due to passive safety features and simplified fuel cycles (World Nuclear Association, 2023). In comparison, combined-cycle gas turbines (CCGTs) typically incur capital costs of USD 1,000 to 2,000 per kW, but their competitiveness is sensitive to volatile fuel prices (IEA, 2020). Meanwhile, renewables coupled with battery storage often result in higher system-level costs due to intermittency and backup requirements, with storage-inclusive LCOEs frequently exceeding USD 90 to 120/MWh (Lazard, 2023).

Thorium thus joins the elite club of clean, dispatchable, and cost-effective energy solutions – uniquely targeting markets where large nuclear plants fail, and where renewables alone cannot guarantee reliability.

High Energy Density, Small Footprint for Urban Areas

Thorium SMRs offer a uniquely powerful combination of exceptional energy density and compact deployment, making them ideal for densely populated, space-constrained regions in Emerging Asia. A 100 to 200 MWe SMR can deliver continuous baseload power from just a few acres, dramatically less land than utility-scale solar or wind farms that produce equivalent output (Idaho National Laboratory, 2024).

For instance, meeting even 10% of Singapore’s approximately 600 MWe demand via solar would require rooftops and offshore installations across nearly the entire island. In contrast, just two to three Thorium SMRs could supply the same energy footprint from a fraction of the land and be sited near demand centres, reducing grid expansion needs.

SMRs often achieve high-capacity factors typically between 90 to 95%, substantially higher than most solar PV and wind farms. This reliability is critical for powering energy-intensive urban infrastructure such as cooling systems, transit networks, and data centres. In contrast, solar and wind capacity factors generally stay under 40%, necessitating extensive battery storage or backup generation to maintain grid stability (ITIF, 2025).

In ASEAN nations, where infrastructure is varied and islands remain underserved, the modular, deployable nature of SMRs offers a strategic solution to expand electricity access while adhering to climate goals (ERIA, 2021). This aligns with studies in Energies, which conclude SMRs can match renewables on cost while offering the reliability demanded by urban grids in developing countries (Vinoya et al., 2023).

Inherent Safety and Public Acceptance

One of the most compelling attributes of modern Thorium MSRs is their inherent safety, directly addressing the primary barrier to nuclear deployment: public fear. MSRs operate at ambient pressure and utilise passive safety systems, notably freeze plugs that automatically drain molten fuel into a containment safe basin if temperatures rise or power is lost, eliminating core-meltdown risk and reliance on external systems (Hargraves & Moir, 2010). This design simplicity reduces emergency planning requirements, lowers insurance costs, and accelerates regulatory approval, especially important in high-density or island settings across Emerging Asia (Ho et al., 2023).

Fail-safe designs significantly lower project risk premiums by minimising the potential for accidents, public opposition, and costly regulatory delays. By emphasising transparent safety narratives that highlight the reactor’s inability to explode, its automatic shutdown, and its production of significantly less long-lived waste, developers foster social license more effectively than conventional uranium plants. This rising public sentiment in favour of safer nuclear options is well-documented in stakeholder studies and public opinion analysis (Bisconti Research, Inc., 2023).

MSRs also excel in waste reduction and sustainability. Compared to traditional Uranium-fuelled systems, Thorium cycles generate much lower volumes of high-level, long-lived radioactive waste and avoid Plutonium production entirely (Wadjdi et al., 2021). Some designs enable in situ burning of existing actinides, effectively converting nuclear waste into usable fuel.

In combination, these features such as passive safety, public trust, and minimal waste position Thorium MSRs as not just technically advanced but as politically and socially viable. In contexts where regulatory environments are sensitive to public concerns, and where climate goals and circular economy principles are increasingly central, Thorium presents a credible opportunity especially for dense, rapidly growing urban regions in Emerging Asia.

Energy Security for Emerging Economies

Thorium presents a strategic path toward energy independence for countries endowed with significant domestic Thorium reserves. Nations such as India, Indonesia, and Malaysia, particularly regions such as Kerala and Odisha in India, and the Bangka-Belitung Islands in Indonesia, hold some of the world’s most extensive Thorium deposits, embedded in monazite beach sands and tin mining by-products. India alone possesses a total of over one million tonnes of Thorium within an estimated 11.9 million tonnes of monazite resources, accounting for 25% to 30% of global Thorium reserves (Cosmos Magazine, 2024). Similarly, Indonesia’s National Nuclear Energy Agency (BATAN) reports approximately 137,000 tonnes of recoverable Thorium, mainly in Bangka–Belitung, Kalimantan, and Sulawesi (KAI Putri et al., 2022).

Harnessing these resources could dramatically reduce reliance on imported fuels such as coal, LNG, or Uranium, which are subject to global price volatility and geopolitical constraints. For India, with limited domestic Uranium, Thorium has long been seen as a cornerstone of its three-stage nuclear programme to underpin long-term energy security (Cosmos Magazine, 2024). In Indonesia, Bangka–Belitung tailings, currently seen as environmental liabilities could be converted into valuable fuel assets, with pilot Thorium power plant studies already underway to support local electrification and energy autonomy.

Investments in Thorium-based energy are expected to attract strong government support via streamlined licensing and financial incentives aligned with national energy independence goals. Indonesia, for example, is planning a domestic Thorium reactor project on Kelasa Island as part of its decentralised energy strategy (Invest Indonesia, 2024; Indonesia Business Post, 2024). Similarly, international partnerships highlighted by the Thorium Energy Alliance’s memorandum with El Salvador demonstrate rising global recognition of Thorium’s potential role in energy self-reliance (ANS Nuclear News, 2025; Thorium Energy Alliance, 2023).

Early engagement in Thorium development signifies participation in a national energy transformation, bearing reduced political risk, alignment with climate and energy security objectives, and co-benefits in local industrial supply chains. This positions Thorium not merely as a fuel source, but as a strategic lever for resource-rich countries to achieve autonomous, low-carbon, and politically resilient power systems.

Modular Deployment and Scalable Economics

A core strength of Thorium-based SMRs lies in their modular design, which enables standardised manufacturing, serial deployment, and scalable capacity expansion all while addressing the cost, schedule, and financing risks that have historically burdened conventional nuclear megaprojects (Locatelli et al., 2014; Ingersoll, 2009). Unlike traditional gigawatt-scale nuclear power plants, which often require USD 6 to 9 billion in upfront capital and over a decade to build, modular SMRs can be prefabricated in factories, transported to sites, and installed within 2 to 4 years, significantly accelerating time-to-revenue and reducing interest during construction (Zheng et al., 2020).

This approach offers clear advantages for emerging economies, particularly those with constrained fiscal space and fragmented demand growth. Rather than committing to a large-scale installation from the outset, policymakers and developers can begin with a single 50 to 100 MWe Thorium reactor to meet baseline energy needs and incrementally expand capacity by adding modules as demand grows. This phased deployment model mirrors successful practices from other industries such as aerospace and semiconductor manufacturing where unit costs fall along predictable learning curves due to design repetition and volume economies (Vinoya et al., 2023; Locatelli et al., 2014).

For instance, Southeast Asian nations such as Indonesia and the Philippines are especially well-positioned to adopt modular SMRs due to their archipelagic geographies, moderate demand centres, and logistical limitations that hinder centralised grid solutions (Nian, 2017). The ThorCon TMSR-500 model exemplifies this strategy: each 500 MWe plant comprises two 250 MWe molten salt modules, designed for factory production and sealed eight-year operation cycles. Plans to establish a manufacturing hub in Indonesia reflect the vision of regional self-sufficiency through mass production and local assembly, potentially lowering costs through domestic supply chains and repeatable construction workflows (NeutronBytes, 2022; ITIF, 2025).

Moreover, modularity directly improves investment viability. Shorter project cycles reduce financing risk and exposure to policy shifts, while incremental expansion allows capital to be deployed in stages, which improves capital efficiency and enables positive cash flows early in the asset life. This “deliberately small” reactor philosophy enables reactors to match regional load profiles more flexibly than traditional baseload plants, thus minimising the risk of stranded capacity and improving project internal rate of return (Ingersoll, 2009).

In summary, the modular deployment paradigm shifts nuclear from a bespoke, government-led undertaking to an infrastructure product that is standardised, financeable, and scalable. Thorium-fuelled SMRs stand out in this context, offering high safety, simplified fuel cycles, and a lower entry cost for emerging markets. As manufacturing processes mature and policy frameworks adapt, the modular Thorium SMR may form the backbone of a decentralised, low-carbon energy architecture across Asia.

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Risks and Mitigations

Thorium-based nuclear systems, particularly MSRs and SMRs, offer compelling benefits, yet several risks remain when considering their deployment in Emerging Asian markets. Two central concerns are technological uncertainty and regulatory barriers, both of which must be addressed through structured mitigation strategies.

Technology Risk

Although Thorium MSRs promise higher efficiency and inherent safety, many designs remain at the experimental or pre-commercial stage. Material corrosion, especially the interaction between Fluoride-based molten salts and structural alloys is a major technical challenge (Wu et al., 2022). The Molten Salt Reactor Experiment (MSRE), for instance, encountered over 200 operational interruptions due to corrosion and control system instability (Lyman, 2022). Furthermore, the fabrication of Uranium-233 from Thorium and its reprocessing pose logistical and technical hurdles not yet industrially resolved (Daigle, DeCarlo, & Lotze, 2024).

These risks can be mitigated through phased demonstration projects, especially in collaboration with experienced nuclear research institutions (e.g., China’s TMSR pilot in Wuwei). Recent developments in materials science, including high-throughput screening of corrosion-resistant nickel-chromium alloys using atomistic modelling, have shown promise in identifying stable reactor materials. Exposure can also be reduced by linking capital deployment to technical milestones, diversifying across Thorium SMR developers, and supporting shared R&D infrastructure.

Regulatory

Most countries lack dedicated frameworks for licensing advanced nuclear technologies. The absence of streamlined, SMR-specific licensing pathways could lead to multi-year delays and regulatory ambiguity (Caballero-Anthony & Trajano, 2017). As demonstrated by the lengthy regulatory review faced by SMRs in advanced economies such as The United Kingdom, emerging markets may face even longer timelines without targeted reforms.

Mitigating regulatory risk requires early and active engagement with national regulators and regional policy platforms such as the ASEAN Network of Regulatory Bodies on Atomic Energy (ASEANATOM), which was established to foster regional cooperation in nuclear safety, security, and safeguards. Proposals for “graded approaches” and safeguards-by-design have gained traction and are being evaluated by the International Atomic Energy Agency (IAEA, 2022). Aligning projects with national decarbonisation goals, such as Indonesia’s commitment to net-zero and nuclear inclusion in its 2030 roadmap, can secure greater political backing (Murakami & Anbumozhi, 2022). Developers can also invest in public education and community engagement, as public sentiment has a demonstrable influence on nuclear policy in democracies (Vinoya et al., 2023).

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China’s Motivations

China’s pursuit of Thorium-based nuclear energy is underpinned by a combination of strategic, economic, environmental, and geopolitical motivations. These motivations reflect both domestic priorities, such as energy security and industrial innovation, and global considerations, such as climate commitments and technological leadership.

Energy Security and Resource Independence

China’s rapidly increasing electricity consumption amplifies its urgency to secure reliable, long-term energy sources. Asia is expected to account for half of the world’s total electricity use, with China alone consuming one-third of global electricity (IEA, 2023). This growing demand, coupled with the nation’s ambition to sustain economic growth, makes energy security a strategic priority. Thorium offers a promising pathway to strengthen this security due to its abundance and domestic availability. Geologically, Thorium is 4 times more plentiful than Uranium, and China possesses significant reserves embedded in its rare earth mineral deposits (IAEA, 2023; World Nuclear Association, 2024). By investing in Thorium reactors, China can reduce its dependence on imported Uranium, which currently powers much of its expanding nuclear fleet (World Nuclear Association, 2024).

Moreover, the sheer scale of China’s energy needs magnifies the appeal of Thorium’s long-term potential. Studies suggest that a single Thorium-rich deposit, such as those in Inner Mongolia, could theoretically supply China’s energy needs for thousands of years (Hurst, 2011). While these estimates are ambitious, they underscore the strategic advantage of exploiting a fuel source that is both abundant and locally accessible. With electricity consumption continuing to surge due to urbanisation, industrialisation, and technological growth, Thorium represents a means for China to future-proof its energy mix while reducing vulnerability to global Uranium market fluctuations.

Figure 4 Electricity consumption by region (1990–2025). Source: International Energy Agency

Rare Earth Synergies and By‑Product Utilisation

Thorium is among the most abundant actinides, with global reserves estimated to be 4 higher than Uranium (Jyothi, Santos, & Costa de Melo, 2023). In China, Thorium is commonly found alongside Rare Earth Elements (REEs) such as Neodymium and Lanthanum in Minerals like Monazite and Bastnaesite (IAEA, 2023; World Nuclear Association, 2024). China’s dominance in REE extraction, accounting for more than 60% of global production, gives it a unique advantage in accessing Thorium at a low-cost by-product (Times of India, 2025). The extraction process of REEs naturally concentrates Thorium, which historically was treated as radioactive waste, incurring environmental and regulatory challenges (Su, Gao, Ni, Xu, & Sun, 2021). By repurposing this Thorium for use in molten salt reactors, China can transform a problematic waste stream into a high value energy resource (IAEA, 2023).

The abundance of Thorium through REE mining means that the material is already being extracted and stockpiled. Leveraging this co-production not only improves the economics of Thorium fuel but also enhances China’s ability to scale reactor deployment without incurring significant additional mining costs. This synergy reinforces China’s long-term strategy of integrated resource utilisation, ensuring that every component of its REE industry contributes to economic and strategic value. Moreover, Thorium’s abundance positions it as a potential cornerstone of a sustainable nuclear fuel cycle, reducing resource constraints that have historically limited Uranium-based reactor programmes (World Nuclear Association, 2024). As global demand for REEs continues to grow for high-tech applications such as electric vehicles and wind turbines, Thorium availability in China will expand correspondingly, strengthening its potential for energy independence and innovation leadership (IAEA, 2023).

Figure 5 REE Production and Reserves by Country (2024). Source: US Geological Survey, Mineral Commodity Summaries

Climate, Sustainability, and Safety

China’s pursuit of Thorium-fuelled MSRs is closely aligned with its national policy priorities, particularly those outlined in the 14th Five-Year Plan (2021 to 2025), and the carbon neutrality pledge for 2060. China is projected to consume one-third of the world’s electricity by 2025, with electricity demand growing faster than any other region (IEA, 2023). Meeting this demand while reducing emissions requires low-carbon baseload power, and Thorium MSRs offer a pathway that aligns with Beijing’s “dual carbon” strategy (carbon peaking and carbon neutrality). Projects like TMSR-LF1, which achieved criticality in 2023 and successfully operated at full power with Thorium fuel in 2024, are proof-of-concept milestones for clean nuclear technologies that aim to complement renewables and gradually phase out coal (Krepel, 2025). The planned 60 MW Thorium power station in Gansu’s Gobi Desert, due to start construction by 2025, reflects China’s commitment to scaling this technology for commercial deployment (Zadeh, 2025).

Unlike many Western countries where nuclear power faces public opposition, China’s government has actively promoted nuclear innovation as part of its national energy security narrative. Thorium MSRs are particularly attractive to policymakers because they address both waste, and safety issues that can hinder public trust. The Chinese Academy of Sciences (CAS), through its Shanghai Institute of Applied Physics (SINAP), has emphasised that Thorium-based systems produce 80 to 90% less long-lived radioactive waste compared to Uranium reactors, reducing the need for expensive long-term geological disposal (IAEA, 2023).

Thorium MSRs also directly address the safety concerns raised by incidents such as Fukushima. China has more than 50 operational nuclear reactors, many of which are located near coastal or densely populated regions. A major accident could stall nuclear expansion and undermine clean energy plans. To counter this, China has invested in passive safety systems, such as those demonstrated in TMSR-LF1, where molten salt fuel can drain into a passive cooling tank and solidify in the event of overheating. Additionally, Thorium’s proliferation resistance is strategically important for China, which seeks to position itself as a responsible nuclear technology exporter under the Belt and Road Initiative (BRI). By offering non-Plutonium-producing reactors with low proliferation risk, China can make its Thorium SMRs more attractive to countries that need energy solutions but lack nuclear infrastructure or face international regulatory scrutiny.

In summary, Thorium MSRs are not just a technical experiment for China; they are an integrated part of national climate, industrial, and geopolitical strategies. From the Gansu demonstration plant to the TMSR-400 small modular reactor designs, China is leveraging Thorium to reduce its carbon footprint, enhance energy self-sufficiency, and establish itself as a global leader in advanced nuclear exports. These reactors, by combining low-carbon baseload capability with enhanced safety and minimal waste, are central to China’s vision of becoming the world’s leader in clean, secure, and scalable nuclear energy technologies.

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Commercial Benefits for China

Energy Independence

China’s pursuit of Thorium reactors is motivated by the potential to strengthen domestic energy independence. With its electricity demand continuing to grow at unprecedented levels, China currently imports significant amounts of Uranium to fuel its nuclear power plants, creating a strategic vulnerability in global energy markets. Thorium, however, is abundantly available within China’s borders, particularly as a by-product of rare earth element mining in provinces such as Inner Mongolia, Sichuan, and Jiangxi (Jyothi, De Melo, Santos, & Yoon, 2023). By exploiting these domestic reserves, China can significantly reduce its reliance on imported fuels and secure long-term access to a stable energy supply.

The potential energy yield of Thorium further enhances its strategic appeal. Studies suggest that a single Thorium-rich deposit in Inner Mongolia’s Bayan Obo rare earth belt could supply power for many decades, if not centuries, when used in advanced molten salt reactor systems (Interesting Engineering, 2023). This level of self-sufficiency would not only reduce the costs associated with fuel imports but also keep more economic value within China. Domestic mining companies and processing facilities involved in rare earth production, such as the Baotou Rare Earth Group, would benefit from the increased demand for Thorium, transforming what has historically been a waste product into a high-value resource.

In addition to energy security, the local economic benefits of Thorium utilisation are significant. Developing Thorium reactor infrastructure and the associated fuel cycle could boost domestic industries, from reactor manufacturing and chemical processing to high-temperature alloy production. This aligns with China’s broader industrial strategy under initiatives such as Made in China 2025, which emphasises self-sufficiency in advanced technologies and critical materials (NSI, 2024). By building a domestic Thorium supply chain, China is positioning itself not only as a global leader in clean energy technology but also as an economy that maximises the value of its natural resources while reducing exposure to external energy shocks.

First Mover Advantage

If China succeeds in being the first nation to commercialise MSR technology, it will achieve a decisive first mover advantage in a market that is expected to expand significantly over the next two decades (Jiang et al., 2022). China has already built a track record for exporting nuclear technology through projects such as the Hualong One reactors in Pakistan, including Karachi K-2 and K-3, as well as its agreement with Argentina to construct the Atucha III nuclear power plant (Madani, 2021). These projects demonstrate China’s ability to offer a comprehensive package of financing, engineering, fuel supply, and long-term technical support (Zheng et al., 2021). If Thorium MSRs are successfully deployed at home, Chinese companies such as China National Nuclear Corporation (CNNC) and SINAP could replicate this export model on a larger scale, using Thorium technology as a unique selling point to differentiate themselves from Western and Russian competitors. (Hibbs, 2018)

China’s Belt and Road Initiative (BRI) provides a strong platform for this expansion (Li, Liu, & Yu, 2023). Many BRI partner countries, including Bangladesh, Kenya, and Indonesia, are actively seeking affordable, clean energy solutions but face barriers to adopting conventional large-scale nuclear reactors due to cost, safety concerns, and infrastructure requirements. Thorium SMRs, which require less cooling water and feature enhanced safety systems, could be offered as turnkey solutions tailored to the needs of these emerging economies. The ongoing Gansu project, which will build a 60 MW commercial Thorium power station in the Gobi Desert by 2029, is intended to serve as a showcase of China’s engineering and technological leadership. By perfecting the design and demonstrating operational success, China will be in a strong position to market its reactors abroad as proven, reliable, and safe.

The commercial benefits of this leadership go beyond construction contracts. Reactor exports involve long-term fuel supply agreements, operational training, maintenance, and technical services that can last for decades. For example, the Hualong One reactors exported to Pakistan have created enduring economic relationships through fuel supply contracts and operational support spanning their entire operational lifespan. Thorium reactors, with their advanced fuel cycle and unique safety features, could generate even greater revenues through licensing agreements and technology partnerships. China could also leverage its domestic intellectual property on Thorium MSRs to secure royalties from international reactor projects, further enhancing its earnings while establishing Chinese technical standards as the global benchmark (Valori, 2021).

In addition to energy exports, Thorium technology offers new opportunities for Chinese industries. Shipyards and maritime companies are already exploring Thorium-based nuclear propulsion for cargo vessels to achieve zero-emission shipping. If successful, China could dominate a lucrative new niche by exporting nuclear-propelled merchant ships or modular marine reactors (Interesting Engineering, 2023). This aligns with China’s broader industrial and economic strategy to lead in green technologies, particularly in sectors like maritime transport, where the International Maritime Organization’s decarbonisation rules are creating demand for innovative solutions.

The strategic value of Thorium reactor exports also extends to diplomacy and soft power. By offering BRI countries access to safe, low-cost, and proliferation-resistant nuclear power, China can strengthen bilateral ties and enhance its image as a global leader in clean energy. Unlike traditional Uranium reactors, Thorium MSRs produce negligible plutonium, which reduces international concerns over nuclear proliferation and makes these systems easier to export under global nuclear governance frameworks. This approach supports China’s ambition, outlined in the 14th Five-Year Plan, to position itself as a leader in next-generation clean energy technologies and to expand its international influence through sustainable infrastructure partnerships.

As Southeast Asian nations explore Thorium-based energy, China’s progress may set regulatory and technical benchmarks for the region. This opens space for China to assume a normative leadership role in shaping how thorium reactors are standardised, certified, and accepted across ASEAN, especially as others like Indonesia and Vietnam begin laying groundwork for future deployments.

Engineering the Next Energy Export

China is in an excellent position to replicate its industrial export playbook in Thorium MSRs, mirroring its success in the electric vehicle (EV) and solar photovoltaic (PV) sectors. From 2018 to 2023, Chinese EV exports surged by more than 1,000%, rising to nearly 1.6 million units, with export revenues soaring from USD 295 million in 2018 to USD 36.7 billion in 2023, with 70% of exports going to markets such as the EU (Zhou, 2023). China applied the same model in solar PV, scaling domestic capacity, driving down costs, consolidating supply chains, and exporting competitively to the world (Zou et al., 2017).

In the case of Thorium MSRs, China can use the same levers: large state-backed capital, vertically integrated supply chains from rare earth mining to high-performance salt chemistry, domestic factory standardisation of reactor modules, and Belt and Road strategic partnerships. The country already controls much of the global rare earth processing that produces Thorium byproducts, and has developed corrosion resistant Nickel Molybdenum alloys in collaboration with Australian Nuclear Science and Technology Organisation (ANSTO). With government coordination comparable to the “whole-of-government” approach seen in EVs and batteries (Graham, Belton, & Xia, 2021), China could package reactor technology, fuel supply, safety training, and licensing as turnkey solutions to partner countries. Memoranda of understanding with foreign governments, export finance via Chinese policy banks, and standardised licensing templates could lock importing states into Chinese technology systems for decades ahead (Li, Liu, & Yu, 2023).

Moreover, just as China helped set standards in solar panel certification and EV charging infrastructure, it could lead in establishing norms for Thorium reactor licensing, safety frameworks, and fuel reprocessing rules. Combined with its lead in materials, nuclear engineering, and operational experience, China is effectively positioning itself to dominate not only reactor sales, but also the broader global institutional architecture around next-generation nuclear power (Discovery Alert, 2024).

In parallel, neighbouring countries such as Indonesia are also pursuing Thorium-based MSRs, most notably through the privately-led ThorCon initiative. This effort, which aims to deploy barge-mounted MSRs offshore, illustrates the diversity of development models emerging across Asia. While China relies on a state-driven model, these regional projects create opportunities for China to position its technology as the default standard. By offering integrated support in reactor design, regulatory assistance, and operational training, China could anchor a broader Thorium ecosystem in Southeast Asia, underpinned by rising regional energy demand and the search for cleaner baseload alternatives.

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Timeline and Progress of Thorium in China

China’s interest in Thorium-fuelled reactors can be traced back to the 1970s, when the country launched “Project 728” in response to industrial energy shortages. Heavily influenced by the United States’ Molten Salt Reactor Experiment (MSRE) at Oak Ridge National Laboratory, Chinese scientists constructed a test reactor at the Shanghai Institute of Nuclear Research, now SINAP that achieved criticality in 1971 (Chinese Nuclear Society, 2020; Liu et al., 2020).

However, faced with limitations in technology, industrial capacity, and economic resources, China made the pragmatic decision to prioritise pressurised water reactor (PWR) technology, leading to the commercial launch of the CNP-300 reactor in 1991 (Dai & Liu, 2013).

Despite this pivot, scientific interest in MSRs and Thorium fuel cycles never disappeared. In 2011, CAS formally revived the programme by initiating a RMB 3 billion research initiative dedicated to developing Thorium MSR systems. This project, led by Professor Xu Hongjie through SINAP, was divided into two main branches: one focusing on solid-fuel (SF) designs using TRISO particles, and the other on liquid-fuel (LF) designs inspired by the original United States of America’s MSRE (Xu, 2018; Zou, 2019; Smriti, 2021).

Figure 6 Core design of the TMSR-LF1 (2022). Source: TMSR Centre of CAS/SINAP

The most significant milestone of the LF branch is the TMSR-LF1 reactor, located in Minqin County, Gansu Province, within a dedicated low-carbon energy innovation zone (SINAP, 2022). Construction began in 2018, and the project progressed rapidly. A construction permit was granted in 2020 by the National Nuclear Safety Administration (NNSA), and a ten-year operating licence was issued in 2023 (World Nuclear News, 2022; Asian Nuclear Safety Network, 2023). TMSR-LF1 reached criticality on 11 October 2023 and achieved full-power operation using Thorium-based fuel on 8 October 2024. The successful detection of Protactinium-233 confirmed the breeding of Uranium-233, thereby validating the Thorium fuel cycle in a real reactor environment (Krepel, 2025).

As of 2024, China holds the distinction of operating the world’s first Thorium-fuelled nuclear reactor. This achievement is not merely symbolic; it represents a technological and geopolitical breakthrough, particularly as the United States, which initially pioneered molten salt technology, abandoned Thorium research in the 1970s. The American withdrawal was largely due to shifting political priorities, the entrenchment of Uranium-based reactor infrastructure, and the military utility of Plutonium bred in Uranium reactors. Moreover, at the time, Thorium’s fuel cycle presented engineering complexities that were deemed commercially unviable in a fossil fuel-dominant era (Martin, 2016).

In contrast, China has taken a long-term strategic view, identifying Thorium reactors as critical to decarbonisation and energy security, particularly in arid inland regions where conventional reactors requiring water cooling are impractical. The success of TMSR-LF1 has led directly to the development of the world’s first Thorium-fuelled power station. Scheduled to begin construction in 2025 and to commence operations by 2029, this facility is expected to use a 60 MW thermal reactor to generate electricity and produce hydrogen via high-temperature electrolysis (ABC News, 2024). A 100 MW commercial small modular reactor is also planned for 2030, with potential deployment across central and western China, as well as BRI countries (IAEA, 2024).

While China’s Thorium research was initially shrouded in secrecy, the government has become increasingly open. Since 2021, China has released technical specifications, environmental reports, and performance data through platforms such as the International Atomic Energy Agency (IAEA), and the Generation IV International Forum (GIF), marking a significant departure from earlier opacity. This transparency reflects growing confidence in the technology’s maturity and a desire to shape global norms around next-generation nuclear energy.

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Opportunities for Singapore

China’s rapid progress in Thorium-based nuclear energy provides strategic lessons and concrete opportunities for Singapore, which seeks to strengthen energy security, diversify its fuel mix, and meet long-term decarbonisation goals. Singapore’s power system is overwhelmingly gas dependent, with natural gas providing 95% of electricity generation, exposing the country to global price volatility and supply disruptions (Quah & Tan, 2022). Advanced nuclear technologies, particularly SMRs with improved safety characteristics and compact siting requirements, are increasingly discussed by policymakers as a viable complement to renewables in dense city states (Chew, 2025).

China’s molten salt Thorium programme, from the TMSR-LF1 prototype to the planned 60 MW thermal commercial unit in Gansu, offers a living case study of how next generation reactors can simultaneously support energy security and deep decarbonisation (NEI Magazine, 2024).

Singapore could benefit directly in several ways. If China demonstrates commercially deployable 100 MW electric class Thorium reactors in the 2030s, Singapore could evaluate importing the technology, co-developing it with Chinese partners, or integrating it through regional power trade. Thorium MSRs are modular, occupy comparatively little land, and can be sited underground or offshore, characteristics that align well with Singapore’s land constraints and stringent safety expectations (Murakami & Anbumozhi, 2022). A small fleet of such reactors could provide clean, reliable baseload power that complements solar generation and future renewable imports, reducing over reliance on natural gas while supporting Singapore’s commitment to achieve net zero emissions by 2050 under the Singapore Green Plan.

China’s success also opens investment and capability building pathways. Through sovereign wealth investors such as GIC and Temasek Holdings, Singapore could take equity positions in Chinese or international Thorium projects, securing returns, early technical visibility, and structured technology transfer. If institutions such as the SINAP or CNNC invite international partners into scale up phases, Singapore could negotiate participation that includes training for Singaporean engineers, joint research programmes, and access to design data, much as it has done in aerospace and semiconductors (Aziz, n.d.).

The International Atomic Energy Agency’s 2024 SMR compendium further notes that countries can accelerate readiness by partnering early on licensing, supply chain development, and safety case preparation (International Atomic Energy Agency, 2024).

Learning to construct or co-develop reactors would materially improve Singapore’s energy independence profile. While Singapore currently imports almost all primary fuels, the capability to assemble and operate modular reactors domestically would create a secure, zero carbon baseload within its borders. A handful of 100 MW electric class Thorium units, comparable in electrical scale to the post TMSR-LF1 roadmap now planned in China, could meet a meaningful fraction of Singapore’s round the clock demand, while avoiding greenhouse gas emissions during operation (World Energy Council, 2019). Singapore’s established offshore and marine engineering ecosystem, including firms such as Keppel Offshore and Marine and Sembcorp Marine, could be adapted to assemble floating or near shore modular reactors, echoing China’s own exploration of modular and air cooled advanced systems for remote or arid sites.

Industrial applications strengthen the case further. High temperature advanced reactors can co produce electricity, process heat, and hydrogen through high temperature steam electrolysis, enabling deep decarbonisation of petrochemicals, refining, and semiconductor manufacturing. Singapore could pilot a nuclear ready industrial cluster on Jurong Island that integrates small modular reactor heat and power, following the Chinese plan to pair its Gansu Thorium project with hydrogen production and Brayton cycle systems (IAEA, 2024; NEI Magazine, 2024). Academic and policy literature on ASEAN SMR deployment consistently highlights co-location with industry, hydrogen, and desalination as core value propositions for SMRs in dense or archipelagic settings (Seah, Len, & Chew, 2025).

Finally, regional cooperation can allow Singapore to benefit even without siting reactors domestically. ASEAN neighbours, including Indonesia, Malaysia, Vietnam, and the Philippines, are actively studying or re-opening the nuclear option, with Indonesia in particular assessing SMRs for islands and industrial parks (Nuclear Business Platform, 2024) . If Chinese built Thorium SMRs are deployed in the region, Singapore could import carbon free electricity through enhanced regional grids, while positioning itself as a convenor for nuclear safety governance, emergency planning, regulatory harmonisation, and project finance.

Such a role is consistent with Singapore’s reputation for regulatory excellence, and would ensure that any regional deployment near its borders meets the highest safety and transparency standards.

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Conclusion

China’s evolution from early Thorium experiments in the 1970s to operating the world’s first Thorium-fuelled MSRs marks a pivotal step in global nuclear innovation. Its success with TMSR-LF1, and plans for commercial-scale Thorium power plants, highlight the strategic importance of Thorium in achieving energy security, carbon neutrality, and technological leadership. By leveraging its abundant domestic Thorium reserves, rare earth mining synergies, and advanced reactor design, China is positioning itself as a first mover in next-generation nuclear technologies with significant commercial and geopolitical advantages.

For Singapore, China’s Thorium programme offers both a blueprint and an opportunity. As a city-state heavily dependent on imported natural gas, Singapore can benefit from learning how Thorium-based SMRs deliver safe, reliable baseload power with a low-carbon footprint. Collaborations with Chinese institutions such as SINAP and CNNC could help Singapore build technical expertise, participate in joint research, and explore industrial applications like hydrogen production or nuclear-ready clusters on Jurong Island. Through its sovereign wealth funds, Singapore could also invest in Thorium projects, gaining both financial returns and strategic access to technology.

Regionally, Singapore could play a role as a hub for nuclear governance, safety standards, and project financing, even if it does not deploy reactors domestically. By engaging early and leveraging China’s advancements, Singapore can position itself to diversify its energy mix, strengthen long-term energy security, and benefit from the emerging clean energy supply chains that Thorium reactors are likely to create.

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AI enhancing efficiency, not replacing talent

Credits

Analyst
Mr Issac Wu, YLP Analyst

Research
Mr James Tan

Overview

Small and medium enterprises (SMEs) form the backbone of Asia’s regional economy, accounting for 99% of all operating firms (ISEAS-Yusof Ishak Institute, 2020) and contributing significantly to employment and GDP.

Yet many continue to operate with limited resources, thin margins, and underdeveloped digital systems.

Artificial intelligence (AI) offers a timely and practical solution. While frontier innovation remains essential for pushing boundaries, this report focuses on practical AI tools that SMEs can adopt today to improve operations, reduce inefficiencies, and support growth without added complexity.

By highlighting practical applications across administration, communication, inventory, finance, and marketing, the report shows how SMEs can use AI to enhance productivity without replacing human talent.

AI is no longer an emerging trend to watch, but a practical tool ready to be used today.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

Artificial intelligence holds real promise for the future of work. It is already transforming how businesses operate. For small and medium enterprises, the impact is both practical and immediate.

SMEs do not need large budgets or deep tech teams to benefit. The tools are ready, the use cases are proven, and the gains are measurable. From automating admin tasks to streamlining customer communication, AI helps lean teams deliver more with less.

Early adoption matters. SMEs that start using AI today will be better equipped to scale and compete. Progress begins with small steps, clear execution, and a mindset open to change.

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Defining SMEs and AI in Context

An SME is typically defined by headcount or revenue. In Singapore, firms with fewer than 200 employees or under SGD 100 million in turnover are considered SMEs (Singapore Department of Statistics, 2025). Although there is no regional standard for SMEs in Asia, the core definition is that SMEs are small-scale businesses with limited internal resources.

For this report, AI refers to software systems that perform tasks traditionally requiring human intelligence, such as data analysis, workflow optimization, image or text recognition, natural language processing, and pattern prediction. This report focuses on available, accessible tools that can be deployed without a full tech team, rather than experimental or frontier AI research. Examples include robotic process automation, intelligent document processing, transcription services, and chatbots.

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Challenges Faced by SMEs in Asia

SMEs across Asia face persistent structural constraints. Specialized talent is limited, and most SMEs run lean, with generalist staff covering multiple functions and little formal training. Operational processes are often based on habit rather than systemization, creating friction in daily operations especially in administrative functions. Core tasks like invoicing, scheduling, inventory management, and reporting are frequently handled manually. Many firms rely on spreadsheets, handwritten ledgers, or verbal communication to track operations, resulting in time-consuming, error-prone workflows that are difficult to scale.

Access to digital tools is uneven. In less developed areas of Asia, basic infrastructure such as stable internet, consistent electricity, and modern computing devices is not guaranteed. In Indonesia, connectivity gaps remain a serious issue. In rural areas, only 30% of SMEs effectively use digital technology (Market Research Indonesia, 2025). In rural areas of the Philippines, unreliable or slow internet connectivity makes it difficult to adopt digital platforms (ASEAN+3 Macroeconomic Research Office, 2024). While many SMEs are aware of AI in theory, they are unfamiliar with its practical value. The ability of AI to support functions such as extracting data from receipts, automating customer service responses, or generating operational reports is often under-recognized and underutilized.

Cultural and psychological barriers also hold firms back. Change feels risky when margins are tight. If a process works, it is often left alone. SMEs frequently avoid upgrading workflows, not due to rejection of innovation but because they are unaware of better options or unsure how to implement them. This reluctance is reinforced by low exposure to formal AI education and the perception that technical expertise or significant investment is required. As a result, many firms continue manual processes, believing digital alternatives are either out of reach or unnecessary (The Organisation for Economic Co-operation and Development, 2021).

Ironically, these constraints make AI adoption relevant. AI is not about replacing jobs but about saving time in settings where staff are already stretched thin. Automating repetitive, low-skill tasks like document formatting, basic bookkeeping, customer query routing, or inventory forecasting can unlock capacity and improve consistency. For SMEs running on tight budgets and lean teams, AI can serve as a low-cost digital enhancement. Many tools today are plug-and-play SaaS platforms with guided onboarding, such as Google Workspace integrations, ChatGPT plugins, or Optical Character Recognition (OCR) apps, which can be used without hiring a full-time developer or systems engineer (World Economic Forum, 2024).

Some SMEs in Asia are already demonstrating practical applications of AI. For example, Ahamove, a Vietnamese logistics and delivery platform, uses a generative AI virtual assistant designed for restaurants. This tool automates common operational tasks such as order processing, customer communication, and delivery coordination through a conversational interface. By reducing manual workload for restaurant staff, Ahamove’s AI assistant enables small F&B businesses to serve more customers with fewer resources, particularly during peak hours (VnExpress, 2024).

Basic AI applications improve consistency, cut waste, and save time. In environments where inefficiency is costly, modest AI tools can deliver disproportionate value. For SMEs operating on thin margins with limited staff, automation is not a luxury but a competitive necessity.

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Practical Applications of AI for SMEs

AI is most effective when streamlining everyday operations that are repetitive, manual, and error-prone. While many SMEs lack full tech teams or custom systems, AI tools today are increasingly designed to deliver benefits even without extensive infrastructure. Off-the-shelf tools are now affordable, often browser-based with no integration required. The adoption barrier has dropped. The key is knowing where and how to apply these tools.

Administrative tasks provide an immediate entry point. Many SMEs spend significant time on repetitive back-office functions such as document handling, reporting, or payroll. Robotic Process Automation (RPA) tools like Microsoft Power Automate, UiPath and PythonRPA automate these workflows by replicating routine human interactions with digital systems such as copying data between spreadsheets, logging into platforms, and triggering email updates. These tools are low-code and come with guided workflows that make them practical even for non-technical teams. Intelligent Document Processing (IDP) solutions add another layer by using OCR and natural language processing to scan and extract information from receipts, forms, and contracts. This reduces manual data entry and minimizes errors in records (IBM, 2021). In Singapore, professional services firms are using AI chatbots and document automation to reduce repetitive paperwork, allowing their teams to redirect time toward advisory services and client work (UOB FinLab, 2025). While human review remains necessary, these tools significantly cut time spent on low-value admin work.

Customer communication is another function where AI delivers immediate impact. Many SMEs handle large volumes of queries but lack the support teams to respond quickly. AI chatbots, powered by natural language processing, are increasingly used to automate replies across platforms like WhatsApp, Shopee, Facebook Messenger, and business websites. These bots manage FAQs, order tracking, appointment scheduling, and basic troubleshooting without human intervention. Platforms like Kata.ai offer multilingual, locally trained chatbot solutions designed to meet the needs of non-technical users. In Indonesia, SMEs have adopted Kata.ai’s platform to automate high-volume customer interactions across channels, enabling faster response times and more efficient communication without expanding headcount (The Asian Banker, 2025).

Inventory and scheduling workflows also benefit from AI, particularly in retail. Managing stock levels and staff rosters manually is time-consuming and prone to oversight. AI-enabled inventory systems use sales trends, seasonal data, and purchasing patterns to forecast demand, flag slow-moving items, and recommend price changes. These insights help SMEs avoid overstocking and reduce waste. Scheduling tools, powered by predictive analytics, optimize employee shifts based on foot traffic and expected volume. These systems often integrate with existing POS and e-commerce platforms. In Malaysia, fashion e-commerce sellers are applying AI to monitor product performance in real time, manage replenishment, and automatically adjust product visibility. This supports more responsive inventory management while helping maintain healthy margins (Retail Asia, 2025).

Accounting and compliance are increasingly being streamlined with AI. Manual bookkeeping processes often consume a disproportionate amount of time and are vulnerable to human error. AI accounting tools can reconcile transactions, flag anomalies, and support financial reporting with greater speed and accuracy. These tools, such as MindBridge and Xero, use machine learning to identify irregular spending patterns or missing entries, while some platforms incorporate natural language search to simplify audit trails. In the Philippines, firms like CloudCFO enhance financial review processes by integrating these AI-powered tools into their outsourced accounting services, improving reporting accuracy without expanding finance teams. By embedding AI and automation into the accounting workflow, these businesses improve oversight and reduce turnaround time for compliance tasks (Manila Bulletin, 2024).

Marketing and sales optimization are being reshaped by accessible AI tools. Platforms like Mailchimp and HubSpot offer AI-driven features for audience segmentation, campaign drafting, and subject line testing, enabling businesses to run professional-grade email marketing without hiring dedicated teams. Visual and content-generation tools such as Predis.ai and Copy.ai help SMEs quickly create localized ads, product descriptions, and branded social posts. In Thailand, small businesses are using AI-powered tools to automate social media scheduling, generate dynamic product creatives, and analyze performance in real time. This has allowed firms to achieve greater personalization and measurable improvements in campaign outcomes while reducing manual workload. By lowering the creative burden and optimizing campaigns continuously, AI enables lean teams to reach wider audiences more effectively (Techsauce, 2024).

The most valuable AI use cases for SMEs are functional rather than flashy. These applications of AI save time, reduce errors, and unlock capacity. In regions with labor scarcity, uneven digital literacy, and tight margins, this is crucial. AI is not a silver bullet but a multiplier. The challenge is not access to tools but recognizing that the best starting point is the most basic part of workflows.

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Human-AI Collaboration, Not Replacement

AI should be regarded as an enhancement rather than a substitute. It excels in narrow, repetitive, administrative tasks like transcribing meetings, scheduling, sorting documents, or flagging basic inconsistencies. These tasks require consistency more than creativity, and speed more than intuition. Human work adds value through judgment, strategy, nuance, and adaptability, which AI lacks. A chatbot can triage inquiries but cannot manage frustrated customers or close complex deals. AI can draft emails, but only humans understand how to position messages, timing, and tone.

Public discourse often exaggerates AI’s capabilities or dismisses it due to limitations. This framing is unproductive. People continue to use Google despite occasional errors. Similarly, AI tools like text generation, transcription, and summarization do not need to be perfect to be useful. Handling 80% of a repetitive task already saves time, a scarce resource for SMEs. The ability to move faster without sacrificing quality is a competitive advantage.

As AI becomes increasingly integrated into workplace tools, the skills that matter will evolve. Humans will stand out by applying knowledge with foresight, reading situations, weighing trade-offs, interpreting context, and making decisions beyond raw data. Managing AI-driven workflows will become a fundamental skill, knowing what to ask, when to intervene, how to verify, and when to override. AI is more likely to transform tasks than eliminate jobs, especially in roles requiring decision-making, customer interaction, and real-time adaptation (The Organisation for Economic Co-operation and Development, 2025).

The current priority is training people to work intelligently with AI, especially in small teams where individuals take on multiple roles. When AI handles routine tasks, humans can focus on critical thinking, judgment, and adaptability, which are qualities data alone cannot predict.

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Reframing Expectations

Many SMEs hesitate to adopt AI due to misaligned expectations. The obsession with flawlessness is misplaced. AI should be viewed as a tool to accelerate workflows, not a wizardry. AI is fundamentally software, not magic, and its value diminishes when people expect it to perform beyond its designed capabilities (MIT Technology Review, 2025). As AI becomes embedded into everyday platforms, its role will shift from novelty to infrastructure, quietly powering the background of modern work.

Smartphones did not replace computers, cameras, or maps but made each more accessible and portable. Similarly, AI will not replace skilled workers but will enable many more people to perform competent work without years of specialized training. With AI tools becoming easier to use, even those with minimal technical backgrounds can create results that once required expert skills. Looking ahead, the democratization of advanced capabilities may give rise to a broader and more inclusive wave of digital productivity (World Economic Forum, 2023).

A better perspective is that, at present, AI is here to assist, not to dazzle. Judging AI by its imperfections undermines its true value. AI is most effective when it enhances existing workflows rather than attempting to replace them entirely (The Organisation for Economic Co-operation and Development, 2023). The emphasis should be on how AI improves work processes, not on achieving flawless performance. As AI matures, the conversation may evolve from asking whether it can do the task to considering how we should shape the task around it.

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Conclusion

AI should be embraced by SMEs in Asia as a routine tool like email, Excel, or Google once were. Its value lies in handling repetitive, low-skill tasks that drain time and introduce inefficiencies. For under-resourced, stretched firms, even modest automation unlocks capacity and consistency.

The question is not whether AI is flawless but whether it improves work processes. Most tools do not need to be perfect to be useful; they should be reliable, simple to adopt, and cost-effective. SMEs should neither fear AI nor expect it to solve everything. AI is not a replacement for skill but an amplifier.

In a region with deep digital gaps, AI offers a practical way forward by helping small teams operate smarter, faster, and with fewer errors. The future of work for SMEs involves combining people and technology to do more with less.

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References

1. ISEAS-Yusof Ishak Institute. (2020). The Missing (Small) Businesses of Southeast Asia. https://www.iseas.edu.sg/wp-content/uploads/2020/06/ISEAS_Perspective_2020_79.pdf
2. Singapore Department of Statistics. (2025). Enterprise Landscape By SMEs And Non-SMEs. https://tablebuilder.singstat.gov.sg/table/TS/M600981
3. Market Research Indonesia. (2025). Indonesia Rural Digital Inclusion: A Quiet Revolution. https://marketresearchindonesia.com/insights/articles/indonesia-rural-digital-inclusion-revolution
4. ASEAN+3 Macroeconomic Research Office. (2024). The Challenges and Opportunities of the Philippines’ Economic Digitalization. https://amro-asia.org/the-challenges-and-opportunities-of-the-philippines-economic-digitalization
5. The Organisation for Economic Co-operation and Development. (2021). The Digital Transformation of SMEs. https://www.oecd.org/en/publications/the-digital-transformation-of-smes_bdb9256a-en.html
6. World Economic Forum. (2024). Unlocking Value from Generative AI: Guidance for Responsible Transformation. https://www3.weforum.org/docs/WEF_Unlocking_Value_from_Generative_AI_2024.pdf
7. VnExpress. (2024). Ahamove launches GenAI virtual assistant for restaurants. https://e.vnexpress.net/news/business/ahamove-launches-genai-virtual-assistant-for-restaurants-4745943.html
8. IBM. (2021). The Art of Automation: Chapter 3 – Intelligent Document Processing. https://www.ibm.com/think/topics/intelligent-document-processing
9. UOB FinLab. (2025). AI in Singapore: Big Vision, Bigger Opportunities for SMEs. https://thefinlab.com/articles/ai-in-singapore-big-vision-bigger-opportunities-for-smes/
10. The Asian Banker. (2025). Kata.ai expands conversational AI for financial services and beyond. https://www.theasianbanker.com/updates-and-articles/kata-ai-expands-conversational-ai-for-financial-services-and-beyond
11. Retail Asia. (2025). AI slashes inventory waste in fashion e-commerce. https://retailasia.com/videos/ai-slashes-inventory-waste-in-fashion-e-commerce
12. Manila Bulletin. (2024). Cloud-based accounting firm leverages AI to streamline operations. https://mb.com.ph/2024/9/25/cloud-cfo-leverages-ai-to-streamline-operations
13. Techsauce. (2024). How AI and Impact Technologies are Reinventing MarTech. https://techsauce.co/en/tech-and-biz/how-ai-and-impact-technologies-are-reinventing-martech
14. The Organisation for Economic Co-operation and Development. (2025). The Future of Work. https://oecd.ai/en/working-group-future-of-work
15. MIT Technology Review. (2025). Adapting for AI’s reasoning era. https://www.technologyreview.com/2025/04/16/1115033/adapting-for-ais-reasoning-era/
16. World Economic Forum. (2023). Future of Jobs Report 2023. https://www3.weforum.org/docs/WEF_Future_of_Jobs_2023.pdf
17. The Organisation for Economic Co-operation and Development. (2023). The impact of AI on the workplace: Main findings from the OECD AI surveys of employers and workers. https://www.oecd.org/en/publications/the-impact-of-ai-on-the-workplace-main-findings-from-the-oecd-ai-surveys-of-employers-and-workers_ea0a0fe1-en.html

The Strategic Case For Thorium

Abstract

This report assesses Thorium-based nuclear energy as a viable and transformative alternative for the future of energy in Emerging Asia.

As the region faces accelerating urbanisation, industrial growth, and an urgent push towards decarbonisation, traditional energy sources for both fossil and renewable. They are increasingly strained by scalability, intermittency, and long-term sustainability challenges.

This report argues that Thorium, with its inherent safety, compact reactor design, fuel abundance, and waste efficiency, may provide a superior alternative suited to the region’s unique constraints.

*Acknowledgements: The author thanks Mr Terrence Tay, Summer Analyst; Ms Anna Macinnes, Summer Analyst; and Mr Paul Lim, Analyst for significant contributions, editorial recommendations, and research assistance to this paper. All errors and omissions are the author’s alone.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

Thorium-based Small Modular Reactors (SMRs) present a fundamentally differentiated value proposition for the future of Asia’s energy systems. Unlike traditional legacy nuclear megaprojects, Thorium SMRs are modular, scalable, and deployable in diverse geographies including land-constrained urban centres and fragmented island territories common in Emerging Asia. They can be manufactured off-site, transported as pre-assembled units, and installed incrementally in alignment with real-world energy needs. This modular approach ensures capital investment is matched to demand, minimising risks of overcapacity while delivering steady and reliable baseload power.

When compared to other energy options, Thorium’s structural advantages become clearer. Solar and wind power, while essential to a diversified mix, suffer from inherent intermittency, high land requirements, and extended investment payback periods, often exceeding 25 to 30 years in Asian markets. These limitations reduce their effectiveness as primary baseload solutions in dense and rapidly urbanising environments. By contrast, Thorium reactors offer high energy density, safer operation through passive safety mechanisms, and dramatically lower long-lived waste production compared to conventional Uranium-fuelled reactors. These attributes make Thorium not just an alternative but a replacement candidate for legacy baseload systems reliant on fossil fuels or ageing nuclear assets.

For governments, policymakers, and institutional investors across Asia, this shift carries significant commercial and strategic implications. Thorium SMRs support national energy security objectives by leveraging local Thorium resources and reducing dependency on imported fuels. As this report outlines, Thorium is not a theoretical solution confined to academic research. With active pilot projects underway in countries such as China, Indonesia, and India. Thorium-based SMRs stand as a commercially viable, scalable, and sustainable solution. They are positioned to become a central pillar of Asia’s energy transition strategy in the decades ahead, offering not just an energy solution but a replacement for outdated legacy energy systems.

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Introduction

Thorium-based nuclear energy has re-emerged as a topic of global interest amid the urgent search for clean, scalable power solutions. Thorium (Th-232) is a slightly radioactive metal and fertile nuclear fuel (not itself fissile) that can breed fissile Uranium-233 when irradiated (IAEA, 2023).

Thorium-232 is a well-recognised fertile radioactive substance capable of generating nuclear energy. When exposed to neutrons in a reactor, it converts into Uranium-233, which then undergoes fission to produce electricity. Like other fertile materials, Thorium-232 needs an external neutron source either from fissile materials such as Uranium-235 or Plutonium-239, or from spallation neutrons. A key advantage of Thorium-232 is its natural purity, eliminating the need for isotopic enrichment and simplifying its preparation for fuel through basic chemical separation (Schaffer, 2013). Although the concept of Thorium reactors dates back to the 1960s, only in recent years has Thorium started to gain traction as a potential alternative to conventional Uranium-fuelled nuclear power (Popular Mechanics, 2025).

This renewed interest is driven by a confluence of factors: the growing energy demand in emerging economies, the need to reduce carbon emissions under climate commitments, and advances in reactor technologies that promise improved safety and economics. In particular, emerging Asian nations face a dual challenge of expanding electricity access and capacity for development, while transitioning to cleaner energy in line with climate goals.

Emerging Asia countries include large developing countries such as India and Indonesia, and other fast-growing Southeast Asian nations. These countries are witnessing rapid urbanisation and industrialisation, leading to surging electricity consumption that often outpaces current supply. Many still rely heavily on imported fossil fuels, which exposes them to price volatility and accounted for over 50% of global CO2 emissions in 2021 (NBP, 2024). Nuclear energy is being revisited as a viable solution especially in Asia, with 145 operable nuclear power reactors, 45 under construction, and firm plans to build about an additional 60 (WNA, 2025).

This report explores Thorium’s potential as a practical and forward-looking solution to the region’s energy challenges. It outlines Thorium’s fuel characteristics, examines how Thorium reactors differ from conventional models, and presents a regional view of nuclear development in Emerging Asia. Importantly, it frames Thorium not just as a technical alternative but as a strategic asset for long-term energy security, resilience, and sustainability. For governments, utilities, and investors alike, Thorium represents a unique opportunity to reshape energy systems in a way that is cleaner, more secure, and better suited to the needs of rapidly developing economies.

Figure 1 Energy Production vs Consumption in the Asia-Pacific (1984 – 2023). Source: Statista

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Industry Overview

Asia is experiencing a dramatic rise in energy demand, driven by rapid economic growth, urbanisation, and rising living standards. Electricity demand in Southeast Asia alone is projected to grow by 4% annually until 2035, surpassing 2,000 TWh, which is more than double Japan’s current electricity consumption. This regional trend aligns with broader patterns across developing Asia, where total energy demand is expected to increase by more than 40% by 2050 (IEA, 2024).

Despite the growth of renewables, fossil fuels still dominate the energy mix. As of 2023, coal and gas account for nearly 80% of power generation in Southeast Asia, and their absolute use continues to increase. However, this reliance raises sustainability concerns, as these sources are highly carbon-intensive and subject to global price volatility and geopolitical disruptions (Asia News Monitor, 2024). In parallel, regional energy production has not kept pace with demand, contributing to widening supply-demand gaps in many fast-growing economies.

Figure 2 Electricity Generation & Capacity Additions in SEA (2003 – 2023). Source: IEA

To address these challenges, many Asian nations are strengthening their climate commitments. Countries such as Vietnam and Indonesia have announced commitments to achieve net-zero emissions and are aligning their energy strategies, including exploring or building nuclear power, in line with the Paris Agreement.

Nuclear energy is gaining renewed interest as part of this transition, particularly through scalable, low-carbon technologies such as SMRs. Thorium-fuelled SMRs, in particular, offer advantages including improved safety, reduced radioactive waste, and modular scalability suitable for decentralised grids (Hussein, 2020).

Globally, Thorium-based SMR research has gained traction in countries such as India and China. India’s three-stage nuclear programme has identified Thorium as a long-term solution due to its abundance and fuel efficiency (Vijayan et al., 2016). China, meanwhile, has initiated the operation of experimental Thorium reactors (Xu, 2016). In Southeast Asia, Indonesia is preparing for SMR deployment by 2030 with floating reactor applications to supply remote islands (IEA, 2024).

In summary, the convergence of rising energy demand, unmet production capacity, climate policy shifts, and growing global interest in advanced nuclear technology positions Thorium as a promising candidate for clean baseload energy.

Figure 3 Electricity Generation by Country & Energy Source in SEA (2002 – 2022). Source: IEA

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Thorium’s Strategic Advantage

Thorium is gaining renewed global interest as a next-generation nuclear fuel due to its abundance, safety profile, reduced waste, and compatibility with SMR technologies. These characteristics align especially well with the needs of Emerging Asian economies, countries grappling with rising energy demand, reliance on imported fossil fuels, and increasing pressure to decarbonise. Thorium is approximately three times more abundant than Uranium in the Earth’s crust and is particularly plentiful in countries such as India and China.

Critically, Thorium is often a by-product of rare earth element mining, which reduces both procurement costs and environmental impact (Lainetti, 2015). This positions Thorium as a strategic domestic resource for Asian nations aiming to enhance energy security and reduce reliance on external suppliers.

Unlike Uranium-fuelled reactors, Thorium systems produce significantly less long-lived radioactive waste and avoid generating Plutonium, which is a major proliferation concern (Lung & Gremm, 1999). The key fissile isotope produced from Thorium-232, Uranium-233, can be burned in situ, reducing the risk of diversion for weapons development (Selvam et al., 2025). Additionally, Thorium dioxide has a higher melting point than Uranium dioxide, offering improved thermal stability and a lower risk of meltdown (Schaffer, 2013).

When paired with molten salt or fast breeder designs, Thorium reactors achieve higher fuel efficiency and extended fuel cycles, translating to longer periods between refuelling and less maintenance, which is an essential feature for countries with developing technical capabilities (Moir & Teller, 2005). Thorium’s integration with SMRs is especially promising for geographically dispersed and infrastructure-constrained regions. SMRs offer scalable, compact, and cost-effective alternatives to traditional gigawatt-scale nuclear plants, which often require USD 6 to 9 billion in upfront capital and over a decade to construct (World Nuclear Association, 2024). In contrast, Thorium SMRs are factory-built, deployable within 2 to 4 years, and can be installed incrementally which is often at a capital cost of USD 500 million to USD 1.5 billion, depending on scale (IAEA, 2022). This model aligns well with the needs of Southeast Asian markets such as Vietnam, Indonesia, and The Philippines, where infrastructure bottlenecks and constrained fiscal space hamper energy transition efforts (IEA, 2023).

Among these, Indonesia stands out as a regional leader in Thorium deployment. ThorCon International, a Singapore-based firm, is spearheading development of the TMSR-500, a 500 MWe Molten Salt Reactor (MSR) composed of two sealed 250 MWe modules, each designed for eight years of continuous operation before off-site refurbishment. In March 2025, ThorCon’s Indonesian subsidiary made history by submitting the first-ever nuclear reactor licence application in the country (ThorCon International, 2025; NucNet, 2025a). The plant is slated for Kelasa Island, chosen in part for its Thorium-rich monazite residues from historical tin mining. With an estimated capital cost of just USD 1.1 billion (NeutronBytes, 2022).

Moreover, ThorCon’s plans to establish a domestic reactor module manufacturing facility promise to create local jobs, accelerate technology transfer, and reduce costs through mass production (NucNet, 2025b). The initiative sets a strong precedent for how Thorium can deliver not just clean energy, but also industrial development and economic multipliers across Emerging Asia.

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Competitive Positioning

Thorium vs. Conventional Nuclear and Other SMRs

Thorium-fuelled reactors offer distinct competitive advantages over both traditional large Uranium reactors and Uranium-fuelled SMRs. Conventional reactors typically generate 1 to 1.5 GW, requiring massive upfront capital and long lead times. In contrast, Thorium SMRs are modular and mid-sized (10 to 300 MWe per unit), enabling phased deployment, lower per-project investment, and suitability for smaller grids (IAEA, 2022). ThorCon’s initiative in Indonesia is a strong validation of this model.

In safety and siting, Thorium Gen-IV designs such as MSRs offer inherent advantages. They operate at atmospheric pressure and include passive safety systems, reducing exclusion zones and enabling installation close to cities, industrial hubs, or even floating platforms which gives the flexibility that traditional Pressurised Water Reactor (PWR) / Boiling Water Reactor (BWR) plants lack (Reuters, 2025). Such adaptability shortens deployment timelines, improves public acceptance, and provides versatility across varied geographic contexts.

Thorium also outperforms in fuel cycle sustainability. Unlike conventional Uranium reactors, which use less than 1% of mined Uranium and generate long-lived transuranic waste, Thorium cycles breed U-233 more efficiently and dramatically reduce minor actinide production (Lung & Gremm, 1999). Some Thorium MSR configurations can even consume legacy Plutonium stockpiles, positioning them as not only effective means of power generation but also tools for responsible nuclear waste management (Schaffer, 2013).

Finally, Thorium’s proliferation resistance enhances public and regulatory trust. While U‑233 can be weaponised, its typical contamination with U‑232, which emits intense gamma radiation makes diversion extremely difficult (Kang & von Hippel, 2001). This “clean slate” narrative can help countries overcome dual-use concerns and ease international partnerships and financing, setting Thorium apart from Uranium-based programmes.

Thorium vs. Renewable and Fossil Alternatives

Thorium reactors provide firm baseload power with high capacity factors (80% to 90%), unlike solar and wind, which require costly and space-intensive storage to manage intermittency (IEA & OECD NEA, 2020). In densely populated regions such as Singapore or Manila, where land is scarce, SMRs can generate significant electricity on a compact footprint. For instance, a 500 MW SMR may require just 4 to 10 hectares of land, while an equivalent solar PV installation could need 400 to 4,000 hectares, making SMRs a compelling option when paired with renewables in land-constrained cities (Bryce, 2022; ITIF, 2025).

Moreover, the Levelised Cost of Electricity (LCOE), which represents the average total cost of building and operating a power plant over its entire lifetime, for newly built nuclear plants is projected to range between USD 40 to 80/MWh, depending on technology maturity and financing structures (IEA, 2020). Advanced reactor designs, including Thorium-based MSRs, are estimated to achieve LCOEs as low as USD 45/MWh, due to passive safety features and simplified fuel cycles (World Nuclear Association, 2023). In comparison, combined-cycle gas turbines (CCGTs) typically incur capital costs of USD 1,000 to 2,000 per kW, but their competitiveness is sensitive to volatile fuel prices (IEA, 2020). Meanwhile, renewables coupled with battery storage often result in higher system-level costs due to intermittency and backup requirements, with storage-inclusive LCOEs frequently exceeding USD 90 to 120/MWh (Lazard, 2023).

Thorium thus joins the elite club of clean, dispatchable, and cost-effective energy solutions – uniquely targeting markets where large nuclear plants fail, and where renewables alone cannot guarantee reliability.

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High Energy Density, Small Footprint for Urban Areas

Thorium SMRs offer a uniquely powerful combination of exceptional energy density and compact deployment, making them ideal for densely populated, space-constrained regions in Emerging Asia. A 100 to 200 MWe SMR can deliver continuous baseload power from just a few acres, dramatically less land than utility-scale solar or wind farms that produce equivalent output (Idaho National Laboratory, 2024).

For instance, meeting even 10% of Singapore’s approximately 600 MWe demand via solar would require rooftops and offshore installations across nearly the entire island. In contrast, just two to three Thorium SMRs could supply the same energy footprint from a fraction of the land and be sited near demand centres, reducing grid expansion needs.

SMRs often achieve high capacity factors typically between 90 to 95%, substantially higher than most solar PV and wind farms (EIA, 2020; DOE, 2021). This reliability is critical for powering energy-intensive urban infrastructure such as cooling systems, transit networks, and data centres. In contrast, solar and wind capacity factors generally stay under 40%, necessitating extensive battery storage or backup generation to maintain grid stability (ITIF, 2025).

In ASEAN nations, where infrastructure is varied and islands remain underserved, the modular, deployable nature of SMRs offers a strategic solution to expand electricity access while adhering to climate goals. This aligns with studies in Energies, which conclude SMRs can match renewables on cost while offering the reliability demanded by urban grids in developing countries (Vinoya et al., 2023).

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Inherent Safety and Public Acceptance

One of the most compelling attributes of modern Thorium MSRs is their inherent safety, directly addressing the primary barrier to nuclear deployment: public fear. MSRs operate at ambient pressure and utilise passive safety systems, notably freeze plugs that automatically drain molten fuel into a containment safe basin if temperatures rise or power is lost, eliminating core-meltdown risk and reliance on external systems (Hargraves & Moir, 2010). This design simplicity reduces emergency planning requirements, lowers insurance costs, and accelerates regulatory approval, especially important in high-density or island settings across Emerging Asia (Ho et al., 2023).

Fail-safe designs significantly lower project risk premiums by minimising the potential for accidents, public opposition, and costly regulatory delays. By emphasising transparent safety narratives that highlight the reactor’s inability to explode, its automatic shutdown, and its production of significantly less long-lived waste, developers foster social license more effectively than conventional uranium plants. This rising public sentiment in favour of safer nuclear options is well-documented in stakeholder studies and public opinion analysis (Bisconti Research, Inc., 2023).

MSRs also excel in waste reduction and sustainability. Compared to traditional Uranium-fuelled systems, Thorium cycles generate much lower volumes of high-level, long-lived radioactive waste and avoid Plutonium production entirely (Wadjdi et al., 2021). Some designs enable in situ burning of existing actinides, effectively converting nuclear waste into usable fuel.

In combination, these features such as passive safety, public trust, and minimal waste position Thorium MSRs as not just technically advanced but as politically and socially viable. In contexts where regulatory environments are sensitive to public concerns, and where climate goals and circular economy principles are increasingly central, Thorium presents a credible opportunity especially for dense, rapidly growing urban regions in Emerging Asia.

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Energy Security for Emerging Economies

Thorium presents a strategic path toward energy independence for countries endowed with significant domestic Thorium reserves. Nations such as India, Indonesia, and Malaysia, particularly regions such as Kerala and Odisha in India, and the Bangka-Belitung Islands in Indonesia, hold some of the world’s most extensive Thorium deposits, embedded in monazite beach sands and tin mining by-products. India alone possesses a total of over one million tonnes of Thorium within an estimated 11.9 million tonnes of monazite resources, accounting for 25% to 30% of global Thorium reserves (Cosmos Magazine, 2024). Similarly, Indonesia’s National Nuclear Energy Agency (BATAN) reports approximately 137,000 tonnes of recoverable Thorium, mainly in Bangka–Belitung, Kalimantan, and Sulawesi (KAI Putri et al., 2022).

Harnessing these resources could dramatically reduce reliance on imported fuels such as coal, LNG, or Uranium, which are subject to global price volatility and geopolitical constraints. For India, with limited domestic Uranium, Thorium has long been seen as a cornerstone of its three-stage nuclear programme to underpin long-term energy security (Cosmos Magazine, 2024). In Indonesia, Bangka–Belitung tailings, currently seen as environmental liabilities could be converted into valuable fuel assets, with pilot Thorium power plant studies already underway to support local electrification and energy autonomy.

Investments in Thorium-based energy are expected to attract strong government support via streamlined licensing and financial incentives aligned with national energy independence goals. Indonesia, for example, is planning a domestic Thorium reactor project on Kelasa Island as part of its decentralised energy strategy (Invest Indonesia, 2024; Indonesia Business Post, 2024). Similarly, international partnerships highlighted by the Thorium Energy Alliance’s memorandum with El Salvador demonstrate rising global recognition of Thorium’s potential role in energy self-reliance (ANS Nuclear News, 2025; Thorium Energy Alliance, 2023).

Early engagement in Thorium development signifies participation in a national energy transformation, bearing reduced political risk, alignment with climate and energy security objectives, and co-benefits in local industrial supply chains. This positions Thorium not merely as a fuel source, but as a strategic lever for resource-rich countries to achieve autonomous, low-carbon, and politically resilient power systems.

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Modular Deployment and Scalable Economics

A core strength of Thorium-based SMRs lies in their modular design, which enables standardised manufacturing, serial deployment, and scalable capacity expansion all while addressing the cost, schedule, and financing risks that have historically burdened conventional nuclear megaprojects (Locatelli et al., 2014; Ingersoll, 2009). Unlike traditional gigawatt-scale nuclear power plants, which often require USD 6 to 9 billion in upfront capital and over a decade to build, modular SMRs can be prefabricated in factories, transported to sites, and installed within 2 to 4 years, significantly accelerating time-to-revenue and reducing interest during construction (Zheng et al., 2020).

This approach offers clear advantages for emerging economies, particularly those with constrained fiscal space and fragmented demand growth. Rather than committing to a large-scale installation from the outset, policymakers and developers can begin with a single 50 to 100 MWe Thorium reactor to meet baseline energy needs and incrementally expand capacity by adding modules as demand grows. This phased deployment model mirrors successful practices from other industries such as aerospace and semiconductor manufacturing where unit costs fall along predictable learning curves due to design repetition and volume economies (Vinoya et al., 2023; Locatelli et al., 2014).

For instance, Southeast Asian nations such as Indonesia and the Philippines are especially well-positioned to adopt modular SMRs due to their archipelagic geographies, moderate demand centres, and logistical limitations that hinder centralised grid solutions (Nian, 2017). The ThorCon TMSR-500 model exemplifies this strategy: each 500 MWe plant comprises two 250 MWe molten salt modules, designed for factory production and sealed eight-year operation cycles. Plans to establish a manufacturing hub in Indonesia reflect the vision of regional self-sufficiency through mass production and local assembly, potentially lowering costs through domestic supply chains and repeatable construction workflows (NeutronBytes, 2022; ITIF, 2025).

Moreover, modularity directly improves investment viability. Shorter project cycles reduce financing risk and exposure to policy shifts, while incremental expansion allows capital to be deployed in stages, which improves capital efficiency and enables positive cash flows early in the asset life. This “deliberately small” reactor philosophy enables reactors to match regional load profiles more flexibly than traditional baseload plants, thus minimising the risk of stranded capacity and improving project internal rate of return (Ingersoll, 2009).

In summary, the modular deployment paradigm shifts nuclear from a bespoke, government-led undertaking to an infrastructure product that is standardised, financeable, and scalable. Thorium-fuelled SMRs stand out in this context, offering high safety, simplified fuel cycles, and a lower entry cost for emerging markets. As manufacturing processes mature and policy frameworks adapt, the modular Thorium SMR may form the backbone of a decentralised, low-carbon energy architecture across Asia.

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Risks and Mitigations

Thorium-based nuclear systems, particularly MSRs and SMRs, offer compelling benefits, yet several risks remain when considering their deployment in Emerging Asian markets. Two central concerns are technological uncertainty and regulatory barriers, both of which must be addressed through structured mitigation strategies.

Technology Risk

Although Thorium MSRs promise higher efficiency and inherent safety, many designs remain at the experimental or pre-commercial stage. Material corrosion, especially the interaction between Fluoride-based molten salts and structural alloys is a major technical challenge (Wu et al., 2022). The Molten Salt Reactor Experiment (MSRE), for instance, encountered over 200 operational interruptions due to corrosion and control system instability (Lyman, 2022). Furthermore, the fabrication of Uranium-233 from Thorium and its reprocessing pose logistical and technical hurdles not yet industrially resolved (Daigle, DeCarlo, & Lotze, 2024).

These risks can be mitigated through phased demonstration projects, especially in collaboration with experienced nuclear research institutions (e.g., China’s TMSR pilot in Wuwei). Recent developments in materials science, including high-throughput screening of corrosion-resistant nickel-chromium alloys using atomistic modelling, have shown promise in identifying stable reactor materials. Exposure can also be reduced by linking capital deployment to technical milestones, diversifying across Thorium SMR developers, and supporting shared R&D infrastructure.

Regulatory

Most countries lack dedicated frameworks for licensing advanced nuclear technologies. The absence of streamlined, SMR-specific licensing pathways could lead to multi-year delays and regulatory ambiguity (Caballero-Anthony & Trajano, 2017). As demonstrated by the lengthy regulatory review faced by SMRs in advanced economies such as The United Kingdom, emerging markets may face even longer timelines without targeted reforms.

Mitigating regulatory risk requires early and active engagement with national regulators and regional policy platforms such as the ASEAN Network of Regulatory Bodies on Atomic Energy (ASEANATOM), which was established to foster regional cooperation in nuclear safety, security, and safeguards. Proposals for “graded approaches” and safeguards-by-design have gained traction and are being evaluated by the International Atomic Energy Agency (IAEA, 2022). Aligning projects with national decarbonisation goals, such as Indonesia’s commitment to net-zero and nuclear inclusion in its 2030 roadmap, can secure greater political backing (Murakami & Anbumozhi, 2022). Developers can also invest in public education and community engagement, as public sentiment has a demonstrable influence on nuclear policy in democracies (Vinoya et al., 2023).

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Conclusion

Thorium represents a transformative energy opportunity for Emerging Asia, combining abundant local resources with high energy density, superior safety, reduced waste, and modular deployment capability. Unlike conventional nuclear or renewable solutions, Thorium-fuelled SMRs can be factory-produced, installed incrementally, and scaled according to actual demand, reducing upfront capital outlays and aligning investment with growth. Thorium offers a cleaner, more secure alternative to fossil fuels and a more reliable, land-efficient complement to solar and wind, particularly in densely populated urban centres and island geographies.

Countries such as India and Indonesia possess significant Thorium reserves, positioning them for long-term energy independence and reduced reliance on volatile fuel imports. Thorium’s inherent safety features address public acceptance barriers, while its waste reduction profile aligns with environmental and ESG priorities. While regulatory and technology risks exist, they are increasingly manageable through phased deployment, international partnerships, and emerging policy support. In short, Thorium is not merely a technical alternative; it is a commercially viable, scalable, and strategically essential solution capable of reshaping Asia’s energy systems and investment landscape for decades to come.

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A Case of TIMO Digital Bank

Credits

Analysts
Ms Ellie Nguyen, Analyst
Ms Avryl Tan, Analyst
Mr Xander Ho, Analyst

Research
Mr James Tan

Preface

This report explores the expedition of Timo, one of Vietnam’s trailblazers in digital banking, and its role in revolutionizing the country’s banking landscape. Founded with a mission to transform traditional banking, Timo set out to offer a digital, fee-free and user-centric financial experience that resonates with Vietnam’s growing mobile-first population. Its rapid rise in the competitive fintech market is a compelling case study of innovation and strategic partnerships in action.

Timo’s collaboration with BVBank combined the agility of a startup and the operational strength and regulatory expertise of an established institution. This partnership between a nimble startup and an established bank exemplifies the power of corporate-startup alliances in driving growth and disruption within the fintech ecosystem.

With a focus on customer-first values, Timo redefined user expectations in Vietnam’s banking sector, offering a hybrid engagement model and cutting-edge technological solutions that cater to the evolving needs of customers. The bank’s ability to maintain a competitive advantage in a rapidly changing market, while fostering continuous innovation and learning, has made it a key player in the country’s digital transformation.

There has been a perception that corporate companies in Vietnam are rarely involved in innovation for startups. This perception is aged, and the collaboration between Vietnam’s Timo and BVBank highlights the presence of corporate and startup partnerships, in a journey for innovation.

As Vietnam continues to undergo rapid digital transformation, Timo’s journey offers important insights into how fintechs can thrive in a developing market by leveraging technology, fostering collaboration, and maintaining an unwavering focus on customer experience. Through Timo’s story, we gain valuable perspectives on the evolving future of banking in Southeast Asia and beyond.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

Timo Digital Bank’s corporation innovation journey with BVBank offers valuable lessons for other corporations and startups in Vietnam. Timo’s collaboration with BVBank combined the agility of a startup and the operational strength and regulatory expertise of an established institution. This partnership between a nimble startup and an established bank exemplifies the power of corporate-startup alliances in driving growth and disruption within the fintech ecosystem, and the startup and innovation ecosystem at large.

There has been a perception that corporate companies in Vietnam are rarely involved in innovation for startups. This perception is aged, and the collaboration between Vietnam’s Timo and BVBank highlights the presence of corporate and startup partnerships, in a journey for innovation.

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Introduction

It was early 2022, at the tail-end of the Covid-19 pandemic, when Jonas Eichhorst first walked into Timo’s new, modern, two-level office on bustling Nguyen Thi Minh Khai Street in Ho Chi Minh City. Outside, the street buzzed with the sounds of Vietnam’s rapid economic transformation—motorbikes weaving through traffic, vendors calling out, and construction cranes lifting the skyline higher by the day. Inside Timo’s office, the energy was different. It was more focused, more deliberate, yet brimming with a quiet urgency.

The space was open, designed intentionally without cubicles or glass-enclosed corner offices that signal hierarchy in more traditional setups. Here, the atmosphere was about collaboration, not rank. The few walls that existed were whiteboards scribbled with ideas, flowcharts, and product mockups.

At any given moment, groups huddled together, discussing user feedback or brainstorming new features for the bank’s ever-evolving digital platform. Coders tapped furiously at their keyboards, while designers sketched out product ideas that would later be debated, refined, and turned into reality. The sound of spontaneous conversations echoed across the office as people exchanged quick ideas or sought advice, blurring the lines between departments. This was not just a workplace—it was a living, breathing ecosystem of innovation, where agility and user-centric design were the lifeblood of everything they did.

Founded with a vision to transform traditional banking, Timo set out to offer customers a financial experience that was not only digital-first, but also fee-free and designed to simplify everyday banking. In a country where banking traditionally meant long queues, paperwork, and hidden fees, Timo broke away from convention by putting technology and user experience at the core of its offering. Positioned at the forefront of Vietnam’s fintech revolution, Timo leveraged its partnership with BVBank to challenge the long-standing norms of the financial industry. Together, they combined the agility and customer-centric design of a startup with the regulatory expertise and operational strength of an established bank.

As Timo expanded its user base and offerings, one critical question remained: How could it sustain its competitive edge in an increasingly crowded digital banking market? With new players constantly emerging, maintaining leadership in innovation, customer trust, and operational excellence became key to Timo’s growth strategy.

Eichhorst, the newly appointed CEO, quickly grasped the pulse of this dynamic environment. He knew that as one of Vietnam’s leading digital banks, Timo had been at the forefront of the country’s fintech revolution. But his vision went beyond simply riding that wave. His approach was about nurturing a culture that not only responded to change but actively drove it. Leading by example, Eichhorst sits at an unassuming desk among his team, blending seamlessly into the creativity of the young talent around him. He fostered an ethos of ownership, encouraging everyone—regardless of their role or title—to think like entrepreneurs and constantly challenge the status quo.

This report explores how Timo leveraged a strategic partnership with BVBank to disrupt Vietnam’s traditional banking landscape. By combining Timo’s innovative, digital-first approach with BVBank’s regulatory expertise and operational strength, this collaboration highlights the powerful role of corporate-startup partnerships in driving financial innovation. The report delves into Timo’s market strategy, customer-focused product development, and operational challenges, demonstrating how this unique synergy redefined customer expectations and positioned Timo for future growth in Southeast Asia’s dynamic fintech ecosystem.

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Vietnam’s Digital Banking Sector

Vietnam’s digital banking sector has experienced rapid growth in recent years, driven by a young and tech-savvy population, increased smartphone penetration, and growing internet access. The country has one of the highest smartphone adoption rates in the region, with over 84% of the population owning a smartphone as of early 2024, making it an ideal market for digital banking solutions (EdTech Agency, 2024). A significant portion of the adult population is increasingly utilizing digital financial services, signaling a major shift in consumer behavior toward digital and mobile-first solutions.

This shift can also be observed in the increasing number of domestic transactions conducted via internet banking. As shown in Figure 1, the quarterly number of internet banking transactions in Vietnam has steadily risen from Q1 2020 to Q1 2023, highlighting the growing adoption of online banking services in the country. This trend aligns with Vietnam’s broader digital transformation and the rising demand for faster, more flexible financial solutions.

Despite this digital readiness, Vietnam’s traditional banking system struggled to keep pace with the rapid technological changes. Conventional banks were characterized by physical branches, long queues, paperwork, and restrictive banking hours. These factors contributed to a significant segment of the population remaining unbanked or underbanked. Only 31% of Vietnam’s population had access to formal financial services as of 2017, highlighting a critical gap in the market (World Bank, 2017).

The rise of fintechs and digital banks presented an opportunity to address these inefficiencies. Digital banking was not just a convenience, but a necessary evolution to meet the growing demand for faster, more flexible, and accessible banking solutions. This dynamic landscape created a fertile ground for new entrants to disrupt traditional banking models and redefine how financial services were delivered.

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Timo’s Market Entry and Strategic Positioning

Timo entered the market to address these inefficiencies, aiming to revolutionize the banking experience by going fully digital—no physical branches, no paperwork, and minimal fees. The mobile-first strategy aligned perfectly with Vietnam’s booming mobile internet usage, enabling Timo to cater to a middle-class that was increasingly demanding user-friendly financial services.

Timo’s approach has resulted in impressive growth. The total number of customer accounts is approaching a million, supported by a compound annual growth rate (CAGR) of over 60% since 2020. This rapid growth underscores the effectiveness of Timo’s innovative and user-focused strategy.

Inspired by successful models like Monzo in the UK and N26 in Germany, Timo recognized the potential to introduce similar innovations to Vietnam’s underserved banking market. Eichhorst reflected, “Timo was one of the first to offer fee-free banking in Vietnam. This pushed the broader banking sector to adopt similar models, revolutionizing customer expectations. We saw the inefficiencies in traditional banking, and we moved fast to provide a better solution.” This proactive approach allowed Timo to set itself apart, challenging traditional norms and prompting other banks to rethink their strategies.

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Timo Hangouts

In Vietnam, trust in financial services has traditionally been tied to physical bank branches, particularly among the older population. Although the rise of digital banking is gaining momentum, there remains a cultural inclination toward the security offered by traditional banking methods. A significant portion of the population, particularly older generations, associates physical bank presence with reliability and trustworthiness. However, the younger, tech-savvy generation has shown more openness to digital banking, driven by the convenience and efficiency these platforms provide.

While Timo Hangouts were initially established for KYC (Know Your Customer) verification, it evolved into customer engagement hubs, offering a unique blend of digital convenience and personal interaction. This approach mirrored successful retail models like Apple Stores, which thrive on combining online efficiency with offline customer experiences. Partnerships with 7-Eleven and McDonald’s further scaled this model, enhancing Timo’s visibility across Vietnam and providing convenient touchpoints for users.

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Partnership with BVBank

In Southeast Asia, corporate-startup partnerships have become increasingly important as legacy financial institutions struggle to innovate. 65% of banks and 76% of credit unions in the region view fintech partnerships as key to their growth strategies (Cornerstone Advisors, 2020). These collaborations allow banks to leverage the agility of startups while providing access to infrastructure, regulatory expertise, and capital.

Timo’s relationship with BVBank is a case study in how corporations and startups can collaborate to drive innovation. While BVBank provided the regulatory framework and financial backing, the partnership thrived on Timo’s ability to remain agile in a rapidly evolving industry. As noted by Eichhorst, “because of how fast things are changing, you need innovative players to keep pushing forward”. This dynamic allowed Timo to innovate swiftly within the constraints of a highly regulated sector. The collaboration enabled Timo to tap into BVBank’s extensive knowledge of compliance and its established customer base, while Timo focused on designing user-friendly products and services.

This collaboration underscores a broader trend in the fintech world: the growing importance of partnerships between legacy financial institutions and digital startups. Traditional banks, often constrained by regulatory and operational hurdles, struggle to keep pace with the rapid innovation seen in the fintech space. Startups like Timo bring the agility and customer-centric design that these institutions need to remain competitive. As Eichhorst noted, “Corporate innovation is not always about grandiose ideas but about recognizing opportunities. BVBank understood that by supporting Timo, they could tap into a rapidly growing customer base while we focused on what we do best—innovating.”

Leveraging BVBank’s infrastructure, Timo was able to launch new products and scale operations swiftly, bypassing the lengthy and costly process of obtaining a full banking license while still offering a comprehensive suite of services to its customers. “The stuff we do isn’t always sexy,” Eichhorst added, “but it’s the compounding micro-innovation that drives the macro-output.”

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Product-Market Fit and Standing Out

One of Timo’s key success factors was its commitment to achieving a strong product-market fit. Built on customer feedback, Timo’s offering of zero-fee transactions, easy savings options, and a clean, intuitive app interface quickly gained traction among Vietnam’s digitally savvy consumers. Timo distinguished itself from competitors through strategic decisions and innovative approaches, such as its fee-free model, which challenged traditional fee-based banking structures and set new market standards while doubling down on personal financial management offerings.

Unlike traditional banks encumbered by legacy systems, Timo’s modern, cloud-based infrastructure enabled rapid updates and improvements. This agility allowed Timo to respond swiftly to customer feedback, maintaining a dynamic platform that kept users engaged. “Our early adopters helped us understand what worked and what didn’t,” noted Eichhorst. “We knew that we couldn’t sacrifice simplicity for features, and every decision we made came from understanding our users’ needs.” Additionally, Timo’s hybrid engagement model—blending digital and physical interactions—addressed the trust concerns prevalent in a market still attached to traditional banking.

Timo’s commitment to customer satisfaction is reflected in its churn rate, which has remained below 5% annually for activated customers. Additionally, the current life-time value (LTV) to customer acquisition cost (CAC) ratio is greater than 10x, highlighting the significant value generated per customer. These metrics underscore Timo’s effective user retention strategies and cost-efficient customer acquisition model.

Through these strategic initiatives, Timo not only stood out from its competitors but also set a new benchmark for what digital banking could achieve in Vietnam. Its focus on transparency, rapid innovation, hybrid customer engagement, and strategic partnerships has solidified Timo’s position as a trailblazer in the digital baking sector.

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Scaling Operations and Infrastructure

Scaling fintech operations in Vietnam has historically been a complex and challenging endeavor. The country’s diverse geography and regulatory landscape, along with its limited infrastructure have long posed significant barriers to growth for financial service providers. Only 39% of Vietnam’s population lives in urban areas (World Bank, 2023), making it difficult for digital banks to reach rural and remote communities, where traditional banks have historically held a strong foothold due to their physical presence. This geographical divide, coupled with a deeply ingrained trust in conventional banking systems, has created a challenging environment for fintechs seeking to expand their footprint.

Timo’s tech-driven approach, leveraging AI, big data, and machine learning, helped optimize operations and handle growing transaction volumes efficiently. Its partnership with BVBank was instrumental in navigating regulatory complexities, allowing Timo to expand its services while maintaining compliance. Despite these efforts, scaling remains a constant challenge due to logistical realities and the existing trust gap in rural areas.

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Driving Innovation Through Collaboration

Timo’s success is grounded in strong leadership, a collaborative culture, and the efforts of its dedicated team. While Eichhorst provided strategic vision, the leadership team and workforce were critical in driving innovation and navigating the challenges of scaling in Vietnam’s evolving fintech landscape.

The leadership team, with diverse expertise in finance, technology, and customer experience, fostered a sense of shared responsibility and decision-making. This empowered team members to take ownership of their work, promoting agility and customer-focused strategies. Timo’s culture minimizes bureaucracy, encourages rapid decision-making, and cultivates creativity, enabling the bank to quickly adapt its products in response to market shifts.

The partnership with BVBank further enhanced this collaboration. Timo’s agility and BVBank’s regulatory infrastructure combined to overcome compliance and operational challenges, allowing Timo to focus on growth and innovation.

Recognizing talent gaps in Vietnam’s startup ecosystem, Timo invested heavily in employee training and development. This focus on continuous learning has strengthened the team’s capabilities and sustained Timo’s competitive edge. BVBank’s resources further enriched talent development, by providing access to broader expertise.

Timo’s work environment, driven by a shared mission to empower customers through technology, has helped attract top fintech talent. “For those looking for an accelerated learning journey and a sense of ownership, Timo is the best place in Vietnam,” said Eichhorst.

Ultimately, Timo’s leadership and team dynamics, alongside its partnership with BVBank, have been key to overcoming challenges and driving innovation in Vietnam’s financial sector.

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Conclusion

Over the years, Timo has achieved impressive milestones, growing to almost a million users and positioning itself as one of the most cost-effective digital banking platforms in Vietnam. Looking ahead, Timo is well-positioned to expand beyond Vietnam, leveraging its scalable infrastructure and strong corporate partnerships to become a regional fintech leader.

Timo’s journey with BVBank offers valuable lessons for other corporations and startups. By recognizing each partners’ strengths and focusing on complementary capabilities, corporations can drive innovation and capture new market opportunities. As Timo continues to grow, its story exemplifies how fintech innovation, supported by strategic partnerships, can transform the financial landscape.

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Citations

1. Edtech Agency. (2024). Vietnam aiming for 100% smartphone use by the end of 2024. https://edtechagency.net/vietnam-aiming-for-100-smartphone-used-by-the-end-of-2024/#:~:text=Among%20the%207.3%20billion%20people,by%20the%20end%20of%202024
2. World Bank. (2017). Overview of financial inclusion.
   https://www.worldbank.org/en/topic/financialinclusion/overview
3. Cornerstone Advisors. (2020). Banks and Credit Unions View Fintech Partnerships a Key Growth Strategy for 2020. Gonzobanker.
   https://gonzobanker.com/2020/02/banks-and-credit-unions-view-fintech-partnerships-a-key-growth-strategy-for-2020/
4. World Bank. (2023). Urban population (% of total population) – Vietnam.
   https://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS?locations=VN

Practices, achievements, and future objectives

Credits

Analysts
Ms April Ong Vano, Head of ESG
Ms Linh Ha, Senior Analyst
Ms Amanda Chan, Analyst

Research
Mr James Tan

Overview

Quest Ventures’ Communication on ESG Progress is a showcase of the firm’s current practices, achievements, and future objectives in enhancing its ESG policy. Environmental stewardship is a core component of Quest Ventures’ investment strategy. The firm actively seeks out and supports startups that prioritise sustainability and address critical environmental challenges. Its social responsibility efforts are centred around creating inclusive and equitable opportunities for all while adhering to global human rights and labour practices. Quest Ventures upholds the highest standards of accountability, transparency, and ethical conduct through its governance framework.

Quest Ventures has engaged with a select number of its portfolio companies to establish a baseline understanding of current practices and intentions to integrate ESG policies. This approach allows the firm to align its strategy and build capacity and knowledge exchange on sustainability. This report includes a showcase of startups that are at the forefront of innovation and impact, addressing critical environmental and social issues. Their successes not only reflect their commitment to sustainability but also demonstrate the potential for positive impact through responsible entrepreneurship.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

As a venture capital firm, we have the unique opportunity and responsibility to influence the next generation of businesses. At Quest Ventures, we recognize that our investment decisions and the guidance we provide to our portfolio companies can have profound and lasting impacts. This ESG Report reflects our dedication to integrating environmental stewardship, social responsibility, and good governance practices across our organisation, as well as aligning our portfolio companies to embrace ESG initiatives.

Since establishing our Logical Framework Approach in 2019, we have gained a better understanding of practical approaches to measuring our ESG progress. By sharing our ESG journey, challenges, and successes, we aim to foster a culture of openness and continuous improvement. We hope this will inspire and inform our stakeholders, partners, and peers in the industry, encouraging a collective movement towards more responsible and impactful investing. We remain steadfast in our pursuit of excellence in ESG and look forward to continuing this journey together, striving to make a meaningful difference in the world.

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Overview of the firm

Corporate Purpose Statement

Quest Ventures is committed to driving positive change and fostering sustainable development across Asia. The firm’s multi-dimensional ESG strategy pioneers a new standard in venture firms, emphasising support for various social good initiatives. From promoting financial inclusion and gender equality to advancing healthcare and education for all, Quest Ventures strives to create a more equitable society.

The firm’s impact acceleration initiatives encompass advocacy, strategic investments, and partnerships with leading organisations, amplifying the reach and effectiveness of its efforts. By collaborating closely with its venture portfolio and offering world-class benefits to its partners, Quest Ventures catalyses meaningful progress towards shared goals.

Quest Ventures firmly believes that responsible investment goes beyond financial returns, encompassing broader objectives such as environmental sustainability and social responsibility. Through selective participation in global initiatives and proactive measures to address challenges like greenhouse gas emissions, the firm aims to contribute to a more resilient and prosperous future.

Recognising the invaluable contributions of non-profit organisations and charities, Quest Ventures actively supports their endeavours to address pressing social issues. Whether through sponsorship, pro bono board directorships, or in-kind assistance, the firm stands alongside these organisations in their missions to create a better world for all. Quest Ventures’ focus areas include empowering youth, supporting the elderly, and fostering entrepreneurship, reflecting its commitment to driving positive change across generations and communities.

Diversified Portfolio

Quest Ventures manages a diverse portfolio of more than 100 companies across various funds. Its portfolio companies operate in over 150 cities across Asia, and its investments have been instrumental in creating more than 4,400 jobs. The firm’s strategic investments cover a broad range of industries, with a high concentration of companies operating in E-commerce, Software/AI, and FinTech. Quest Ventures’ investment strategy emphasises backing early-stage companies, often providing the first significant investment to help them disrupt their respective industries.

Importance of ESG in Venture Capital

As an investor in early-stage startups, Quest Ventures has an opportunity to integrate ESG policies and practices as portfolio companies begin to shape their businesses. This allows for sustainable business practices to become part of the foundation of positive values, leadership culture, and a mission-driven approach for the startup companies. From the startup industry, technology companies will emerge that scale to have global reach and impact across their value chain, from building their products to widespread use by customers and society at large. Providing capital with a responsible investment approach can significantly contribute to sustainability, solving pressing challenges, and improving lives through innovation and technology. By building a portfolio with ESG factors, a sustainability-themed investing strategy is implemented.

Asia’s potential is ultimately realised in its people. By the end of 2023, Quest Ventures’ portfolio of over 100 venture-backed companies operated in more than 150 cities across Asia, creating employment and advancement opportunities for more than 4,400 employees, while their Enterprise and ESG efforts directly impacted thousands more.

Responsible Investment: Policy and Principles

As signatory to the Principles of Responsible Investment (PRI) supported by the United Nations, Quest Ventures commit to the following where consistent with our fiduciary responsibilities:

Principle 1: Incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: Incorporate ESG issues into our ownership policies and practices.
Principle 3: Seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: Promote acceptance and implementation of the Principles within the investment industry.
Principle 5: Work together to enhance our effectiveness in implementing the Principles.
Principle 6: Report on activities and progress towards implementing the Principles.

On top of the PRI Principles, Quest Ventures adopt a pragmatist philosophy to Responsible Investment, integrating Environmental, Social and Governance (ESG) factors into investment decisions and ownership with the objective of providing better risk-adjusted returns, particularly over the long term. Moreover, the firm upholds the Ten Principles of the UN Global Compact and supports the principles of the Carbon Pricing Leadership Coalition.

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Environmental Impact & Stewardship

Current Practices and Goals

Quest Ventures integrates investment criteria, improving operational policies, and engaging portfolio companies to adopt sustainability practices. Recognising the increasing importance of ESG considerations in venture capital investments, Quest Ventures develops its capacity to enhance and advocate integration, including training, education, and collaboration with ESG experts and networks.

By adhering to the UN Global Compact and UN Principles for Responsible Investment, Quest Ventures incorporates exclusion and ESG criteria into its decision-making process. The firm will not invest in companies deemed to be in breach of the Principles on human rights, labour, environment, and corruption. It ensures that investments across its portfolio remain responsible and consistent with these Principles, and continues to support entrepreneurs in adopting best practices for ESG integration. Quest Ventures is dedicated to continuous improvement in its environmental practices, regularly reviewing and updating policies to reflect emerging best practices, technological advancements, and evolving stakeholder expectations.

Exclusion List

• Activities or materials deemed illegal under host country laws or regulations or international conventions and agreements
• Cross-border trade in waste and waste products, unless compliant to the Basel Convention and the underlying regulations
• Destruction of High Conservation Value areas
• Forced Labour or Child Labour
• Pornography or Prostitution-related activities
• Production or trade of illegal drugs or narcotics
• Unsustainable agriculture practices, farming and fishing methods
• The development, production or trade of Weapons

Portfolio Engagement

The majority of Quest portfolio companies surveyed for the report do take into consideration environmental implications of their business operations to a certain extent or have expressed interest to learn more about it. However, the degree to which each implements environmental responsibilities varies from company to company. While the actions taken are generally limited to date due to the lack of resources as the nature of early stage startups, there are signs of efforts to enact environmental factors in their operations.

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Social Responsibility & Impact

Social Responsibility Policy

Human Rights and Labor Practices

• Respect for Human Rights: Ensure that all portfolio companies adhere to international human rights standards, such as the UN Guiding Principles on Business and Human Rights.
• Fair Labor Practices: Promote fair labour practices, including fair wages, reasonable working hours, and the right to collective bargaining.
• No Forced or Child Labour: Prohibit the use of forced labour, child labour, and any other forms of modern slavery in the operations of portfolio companies.

Health and Safety

• Safe Working Conditions: Ensure that all portfolio companies provide safe and healthy working conditions for their employees, adhering to relevant health and safety regulations and standards.
• Employee Well-being: Promote employee well-being through wellness programs, mental health support, and work-life balance initiatives.

Diversity, Equity, and Inclusion (DEI) initiatives

Inclusive Workplace: Foster inclusive workplace by promoting diversity in terms of gender, race, ethnicity, age, disability, and sexual orientation.

Equal Opportunity: Ensure equal opportunity in hiring, promotion, and compensation practices across all portfolio companies.

DEI Training: Provide diversity, equity, and inclusion training for employees and portfolio companies.

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Community Engagement & Partnerships

Local Community Support: Encourage employees and portfolio companies to engage with and support local communities through initiatives such as job creation, local sourcing, and community development projects.

Philanthropy and Volunteering: Promote corporate philanthropy and employee volunteering programs to support social causes and community initiatives.

Social Impact Accelerator: Quest Ventures, in partnership with the Singapore Centre for Social Enterprise (raiSE), launched the Social Impact Accelerator which aimed to support budding impactful startups by providing financial and non-financial support to help them improve their competencies and gain access to regional and global markets. Through the acceleration program, startups companies have collectively pitched to over 200 investors, corporates, government organisations, and other stakeholders across Asia. Some companies have also successfully raised their next funding round within a few months and gained footholds in markets such as Australia, Malaysia, Indonesia, and Vietnam.

Social Impact Catalyst: Quest Ventures supports the Social Impact Catalyst, a non-profit organisation, across Southeast Asia. The firm believes in the value of developing the skills and mindsets of Asia’s youth. Through practical projects and experiences, youths are empowered to use their talent and skills for the community. The young men and women are ready to be catalysts for positive change in the future.

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Portfolio Engagement

Quest Ventures portfolio companies have made significant progress with their social responsibility efforts, implementing internal practices and policies that reflect their commitment to social responsibility and fostering an inclusive workplace.

Internal practices

• Benchmarking with industry remuneration, implementing flexible working hours and hybrid remote work arrangement.
• Complying with the Singapore’s Ministry of Manpower employment requirements and pro-hiring of seniors.
• Introducing permanent hybrid work arrangements, bizSafe best practices and well-being program.
• Having company policies and HR guidelines in place to ensure fair wages, benefits to employees in accordance with the law.
• Providing fair remuneration and fostering an inclusive and empowering work environment.
• Implementing a hiring process that promotes diversity and inclusion.
• Conducting an annual employee satisfaction survey to gather feedback and making adjustments based on the input received.

Community initiatives

• Donating usable devices to the B40 community regularly.
• Donating food when natural disasters hit within the local region.
• Working with beneficiaries and NGOs, hosting groups for educational activities.
• Tree planting, building capacity/capability for non-profits.

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Governance Principles and Practices

Current Practices

Quest Ventures believes that strong governance is the foundation of sustainable success. Its governance principles and practices are designed to promote accountability, transparency, and ethical behaviour across all levels of the organisation. Quest Ventures is committed to upholding the highest standards of governance to ensure that its operations align with its values and the interests of its stakeholders.

At Quest Ventures, the Compliance Manual serves as the cornerstone of its governance practices, outlining the ethical standards and expectations for all employees. It provides clear guidelines for decision-making and behaviour, ensuring that all actions align with the company’s core values. Some of its key components include the Code of Ethics and Professional Conduct, Confidentiality, Data Privacy and Protection, Prohibited Market Conduct and Insider Trading, Anti-Bribery and Corruption, Anti-Money Laundering and Countering the Financing of Terrorism, Whistleblower Policy, and Complaints Handling.

By adhering to these guidelines, Quest Ventures ensures that all employees operate within a robust governance framework that promotes ethical behaviour, compliance with laws and regulations, and a culture of integrity and accountability.

Portfolio Engagement

Almost 90% of the respondents from the Quest portfolio conduct regular reporting to their Boards, highlighting their commitment to maintaining transparency and strong governance practices. However, the integration of specific ESG-related commitments into these reports remains limited at this stage of startup development. Most companies have yet to incorporate commitments related to sustainable development, human rights, or climate change into their regular reporting frameworks. While there is awareness of these critical issues, the formalisation and systematic integration into business practices are still evolving.

This ongoing effort reflects the dynamic nature of ESG practices within the portfolio, underscoring both the progress made and the potential for further development. As these companies continue to mature, greater integration of sustainable development, human rights, and climate-related commitments is anticipated, reinforcing their dedication to long-term sustainability and ethical business practices.

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Startups Showcase

Carousell

• Carousell is the leading multi-category, multi-brand platform for secondhand e-commerce in Greater Southeast Asia. Their online marketplace simplifies the process of buying and selling preloved items.
• Carousell published their own Circular Economy Impact Report in 2023.
• Carousell’s users avoided 116,577 tonnes of carbon emissions in 2022, the equivalent to 5.3 million trees absorbing CO2 per year.

ERTH

• ERTH is a provider of e-waste recycling services. They collect and recycle electronic waste from households and businesses through freelance gig economy workers, providing clients with convenient, fast, and good value for recyclable electronics.
• Through ERTH’s e-waste recycling initiatives, 1,500,000 kg of e-waste was successfully diverted away from landfills and the informal sector.

PackAge+

• PackAge+ creates sustainable packaging from recycled plastic bottles and glass, enabling businesses to ship products with lower CO2 emissions. This waterproof packaging can be reused over 50 times, saving at least 1.25kg of CO2 per use.
• “We track every step in the manufacturing process of recyclable packaging. We actively develop relevant software products and collaborate with related institutions to ensure that the reduced carbon emissions comply with the 14067 standards.”

Ion Mobility

• Ion Mobility designs, engineers and manufactures next-generation smart electric motorcycles and charging and energy storage solutions.
• Their vision is to lead the region’s transition towards a low-carbon economy across Southeast Asia.
• Ion Mobility’s flagship ION M1-S electric motorbike features:
  • 150 km range
  • 4.3 kWh capacity
  • Charge up to 100% in 3.5 hours
  • Top speed of 105 km/h
  • 26 litres of under the seat storage

GajiGesa

• Gajigesa is a financial wellness application intended to improve the financial security of employees. The application encourages employees to participate in economic activities which enable them to become financially independent.
• GajiGesa’s Earned Wage Access (EWA) allows employees to access funds during emergencies, providing them with peace of mind and increased financial security.

Cerebra AI

• Cerebra AI is an early stroke detection software. The company uses generative AI to detect acute ischemic stroke within 5 minutes using non-contrast CT, enabling hospitals to quickly diagnose and treat stroke patients in the critical time window.
• CerebraAI Heatmap uses Generative AI to quickly analyse Non-contrast CT (NCCT) cases, identifying areas and potential abnormalities within brain tissues.

Dolbom Dream

• Dolbom Dream is the manufacturer of a smart vest intended for people with developmental disabilities. The vest utilises deep touch pressure therapy to help them alleviate stress and anxiety through artificial intelligence-controlled air pressure.
• Ergonomically designed with Deep Touch Pressure effect, the smart vest provides psychological comfort through the feeling of being hugged by automatically inflating air when the wearer feels anxious or in a stressful situation.

Vulcan Augmetics

• Vulcan Augmetics delivers AI-powered and affordable prosthetics solutions for emerging markets. They developed the world’s first multi-grip myoelectric hand for amputees.
• The Vulcan Myoelectric Multi-Grip Hand offers 3 adjustable thumb positions, 06 practical grip options, and 360-degree wrist rotation. With its intuitive control through EMG technology, the Vulcan hand adapts to the user’s unique muscle signals in just 1 minute.
• Vulcan Augmetics actively takes action to reduce their carbon emissions by lowering the number of clinic visits per user, which cuts carbon through travel costs.

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Journey Forward

Looking ahead, Quest Ventures is committed to further advancing its ESG initiatives and taking steps forward to reach its sustainability goals. The firm will continue to collaborate with leading organisations and experts to leverage their knowledge and best practices. Quest Ventures will advocate for responsible investment and aspire to be leaders and partners for the investment community to follow. The firm strives to create value and positive change for its investors, entrepreneurs, and the broader startup community. Together, Quest Ventures aims to build a more sustainable and equitable future.

An approach to solving Hunger

Credits

Analysts
Mr Melvin Liam, YLP Analyst

Research
Mr James Tan

Overview

With almost 8 billion hungry customers with a constant appetite for consumption, there is no larger market than the market for food1. With USD$39.3 billion2 invested by venture capitalists globally in 2021, food tech startups are quickly gaining traction.

As food security continues to be a problem in many regions of the world and the consequences of our environmentally damaging behavior catch up with us, entrepreneurs are finding ways to improve the sustainability, accessibility and ethicality of the ways we produce, store and transport food. Given the urgency of world hunger and that most innovative food companies aim specifically to become scalable and replicable, venture capital is well poised to accelerate the development of foodtech.

The problem of hunger is a multifaceted one. In the current period, it is of utmost importance that we feed the 820 million3 who go hungry every day. In the impending future, the consequences of human activities are catching up to us, with increased extreme weather events, loss of arable land, water scarcity and political instability causing food insecurity in areas once lush with food.

This report seeks to survey promising new fields and technologies that private sector investment can support in order to seek the dual goals of alleviating world hunger and achieving profitable returns.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

History has a way of repeating itself. Having avoided (and failed to avoid) famines several times in key junctures in the history of the world, scientists and investors are now at yet another inflection point. With massive amounts of investment capital going into all parts of the value chain for food, there is never a better time for the world to guarantee its food security.

Challenges exist. From taste to nutrition, from supply chain to markets, there are innovators and policy makers looking and testing for new efficiencies.

There will be many failures along the way, but if history is any guide, humanity will finance, create, and consume new sources of food.

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Reducing Hunger

Reducing Hunger Now

Lack of sufficient food causes 25,000 deaths a day4 and the undernourishment of 690 million people5, the stunting of growth in 21.3% of children6 and costs the world at least hundreds of billions of dollars yearly in healthcare costs (USD160B in just the USA alone7).

While an obvious solution seems to be improving how we produce food, the fact is that the world has long been able to produce more than sufficient food for everyone, with this 2012 paper from the Journal of Sustainable Agriculture titled “We Already Grow Enough Food for 10 Billion People … and Still Can’t End Hunger”8. In it, the authors state that “Hunger is caused by poverty and inequality, not scarcity.”

Unfortunately, poverty is not an issue solvable by the private sector alone. First because the scale of poverty is immense relative to the possible impact of job creation and lending that can be done. Second because the poor are by necessity not ideal customers, even for goods and services that can help them out of poverty. One cannot expect profit-driven corporations to act without the promise of profitability. Lastly, some of the issues that plague the poor are due to a lack of public goods, known by economists as goods that are non-excludable and nondepletable. Essentially, to ask a firm to provide such goods is to ask it to suffer all the costs and share the benefits, a tough ask for profit-driven organisations.

To illustrate this, let us return to the premise that we already produce sufficient food for everyone indicates two possible solutions. First, the improvement of supply chains and logistics so that food can reach those who need it the most. Second, to increase production of food where people are starving.

When considering the issue of transporting food to poor rural areas, the issue is classically “chicken-and-egg” in nature. There is a lack of transport infrastructure, such as roads and ports, in these areas. The difficulty of transporting food to these areas drives up costs, which are unaffordable for the hungry and the poor. But any company that would stand to gain from building roads there (e.g. food logistics companies) is unlikely to build a road that its competitors can also use. Simultaneously, the lack of accessibility means reduced trade, job opportunities, and access to education and healthcare, all factors which keep individuals mired in poverty. Low incomes lead to low purchasing power, meaning that companies are unlikely to want to invest in these areas anyways.

However, this is not to say that the private sector cannot alleviate the problem of hunger and act in a way that is aligned with its profit motives.

One solution is to help the 500 million small farm households9 in the world that make up a large portion of both the world’s poor and the hungry. By providing them with goods and services that improve their businesses, corporations can play an active role in alleviating both poverty and hunger. These farms are of such small scale that they are mostly subsistence in nature, unable to provide sufficient food for the families let alone enough for sale. Helping these small farmers is crucial because the food they would produce helps not just their families, but also the world. Small farmers operate just 12% of all farmland, but produce 35% of the world’s food10.

By directly increasing food production in the exact areas which experience poverty and hunger, we can bypass the need for expensive infrastructure and supply chains, thereby reducing food wastage in transit and emissions created from feeding our hungry.

Reducing Hunger in the Future – Importance of Food Innovation

Since the invention of agriculture, humanity has never stopped improving upon the methods by which we produce, store and transport food; from irrigation and the wheel, to factories and preservatives and more recently, lab-grown meat. Alas, recent phenomena have reminded even the developed world that we are still far from a post-scarcity economy.

Climate change has caused changes in global temperatures11 and precipitation patterns12, increased frequency of extreme weather events13, and even encouraged the spread of once less common crop diseases14. To make matters worse, our methods of food production themselves contribute significantly to climate change15.

Political instability has caused countless price fluctuations and food shortages, with the worst cases resulting in famine, whether they be trade disputes16 or armed conflict17,18,19.

We have also long been aware that the Earth contains only finite resources; the precious land, labour and capital with which we produce food. Thomas Robert Malthus’ in An Essay on the Principle of Population, famously describes what is now known as the Malthusian trap: humanity’s exponentially growing population needs far outpacing our linearly increasing capacity for food production20. With current production capabilities and population growth data, it is estimated that we will need to increase our amount of farmland by twice the landmass of India, or on the whole, a total land usage of 70% of the Earth’s habitable land21 by 2050.

On the other end of the wealth spectrum, there is also rising demand for environmentally friendly or ethically produced food from the increasingly affluent population. The current size of the global ethical food market is USD542B and is expected to reach USD742B by 202522. Examples of such lifestyle practices, widely known as environmentally sustainable food consumption (ESFC), include increasing consumption of plant-based23, insect-based foods24, seasonal products25 and in some cases, buying locally produced26 and/or organically produced food27, as well as a conscious decision to reduce meat consumption28.

The cumulative effect of the supply shocks, a rising demand backed by a steadily growing population, as well as to a smaller but non-negligible extent: the rising appetite for high-carbon footprint meat due to rising incomes in developing nations29, places humanity between a rock and a hard place.

And yet, humanity has managed to overcome these issues before. Malthus’ prediction did not account for the invention of pesticides, machines, refrigeration, and other technical advances that have improved how we produce, store and transport food. Crucially, he overlooked a factor of production which modern economists have recognised: Entrepreneurship.

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Survey of Existing Frameworks

Frameworks to solve the world hunger crisis and other sustainability issues with our current food production, storage and transportation systems offer a hint of the gaps which startups can turn into market opportunities, and in turn such information can be used as an evaluation tool for VCs. If a new technology or business model aligns itself well to promising solutions to long-standing global problems, its potential to scale, reach untapped markets or underserved communities will be immense.

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Investing in Nutrition – World Bank

This investment framework was created by the World Bank30 in collaboration with Results for Development Institute, and 1,000 Days, with support from the Bill & Melinda Gates Foundation. It aims to be a guide for investment needed to help the world reach the global 2030 nutrition targets, of which we are not on track to achieve any of the six.

The six nutrition targets are:
Reduce Stunting
Reduce Anaemia
Reduce Low Birth Weight
Reduce Overweight
Increase Exclusive Breastfeeding
Reduce Wasting

This paper lays out an investment framework to reach these global nutrition targets:

1. Global action is urgently needed to tackle the pervasive problem of malnutrition.
2. Reaching the targets to reduce stunting among children and anaemia in women, increase exclusive breastfeeding rates, and mitigate the impact of wasting will require an average annual investment of $7 billion over the next 10 years. This is in addition to the $3.9 billion the world currently spends on nutrition annually.
3. To catalyse progress toward the global nutrition targets, priority should be given to a set of the most cost-effective actions which can be scaled up immediately. Financing this more limited set of actions will require an additional annual investment of just over $2 billion for the next 10 years. The majority of this annual investment would come from country governments and donors, $1.4 billion and $650 million, respectively, while innovative financing mechanisms and households fund the remaining gap.
4. When combined with other health and poverty reduction efforts, this priority investment can yield significant returns: an estimated 2.2 million lives can be saved and there will be 50 million fewer cases of stunting in 2025 compared to in 2015. 
5. Achieving the targets is within reach if all partners work together to immediately step up in investments in nutrition.

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Investing in Nutrition – Evaluation

Though this report is targeted to public investment, and aimed at saving lives and improving health outcomes rather than financial return or potential exit of a company, there are overlapping important criteria to consider. 

1. Cost-effectiveness: considering poverty is a large cause of lack of access to food, solutions cannot be inaccessible to low income households. Additionally, the food manufacturing industry tends to be a price-competitive arena where keeping cost low is vital.
2. Scalability: solutions that cannot be implemented in the magnitude of millions should be considered dead on arrival, as they have both low impact on solving malnutrition and hunger, as well as lack financial viability in the food industry.

The framework also recommends that “financing is front-loaded in… low-income and lower middle-income countries to help catalyse greater domestic investment and scale … quickly”. 

This recommendation is applicable to startups and VCs looking for opportunities in the foodtech or agritech sector as well. A focus on affordable food solutions in low-income regions are attractive for public sector investment, contracts as well as grants. 

For example, Nigerian agritech startup Releaf raised 4.2m in its seed round last year, of which 1.5m was in grants from The Challenge Fund for Youth Employment (CFYE) and the United States Agency for International Development31. Demand for such solutions in lower income nations is great, to the extent that Tolaram, a conglomerate with majority of its operations in Africa, invested in Singapore-based Shandi, an alt-protein startup, last year32. 

However, as Tolaram’s own New Business Development Manager, Avinash Aswandi, said, operating in such regions requires “overcoming challenges with setting up robust supply chain, manufacturing and distribution models for scale, and navigating political and economic risks” and that “more work is needed to ensure the cost-effectiveness of existing spending on nutrition, address implementation bottlenecks and knowledge gaps”33, indicating some common issues with operating in low-income countries. Many lack infrastructure for supply chains, such as ports and roads, causing bottlenecks in distribution. Many are embroiled in domestic or regional political instability, causing significant risk to both the possible operations and the customer base. Thus, the benefits and costs of the location of market entry must be carefully considered for foodtech and agritech startups. 

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FAST – JP Morgan

FAST or the Food and Agriculture Sustainability Transition34 is a framework for a global strategy that advises corporations on the opportunities available in the ESG space, and specifically the food and agriculture sector. Section 2 however, directly addresses the role VCs can play.

The Private Sector Has a Critical Role In Establishing a FAST Standard

This section of the FAST framework underlines the growing importance of sustainability to the private sector. It focuses on the fact that stakeholders, like institutional shareholders, investor activists, and consumers are beginning to prioritise ESG factors in their decision making. As a result, companies are committing to net-zero promises, ESG reporting is becoming standardised, and those that can demonstrate sustainable growth are receiving a premium in their valuation. The latter is due to such companies being “viewed as inherently having attractive long-term fundamentals supporting the business, comparable to how the market used to view value investing” (Pg 11). 

It also suggests “Venture Investments in Emerging Technologies”, saying that transition-focused businesses provide diversification and a “robust pipeline of M&A opportunities and learning synergies”. They can also help the corporation achieve its own ESG goals, such as reducing emissions or repurposing by-products.

Driving a Realignment of Capital Flows and Stakeholder Priorities

Here JP Morgan outlines the current lack of private investment into food and agriculture. In 2021, almost 50% of all VC investment into “Climate tech” categories went to electric vehicle (EVs) startups. For the food sector specifically, 2020 was the first year that upstream technologies raised more VC money than downstream technologies. Upstream technologies are more critical in addressing food demand and sustainability issues, but remain underfunded, with their estimate of the food and agriculture space being 5-7 years behind the EV market in both total transaction value and average deal size. 

They highlight the importance of sovereign wealth funds as well as public policy to support food and agriculture startups, and their assistance and investment tends to be “consistent with underlying food security concerns in their home markets”. 

Finally, it emphasises the importance of realising “all climate solutions are interconnected as a system and, combined together, have the greatest impact” (Pg 16). More substantially, combining sustainable energy production with sustainable food production will greatly reduce the quantum of emissions.

Promising Strategies and Solutions

JP Morgan highlights the solutions that it finds promising. These strategies can be classified into 4 categories:

1. Alternative proteins
   • Plant-based
   • Cultivated
   • Precision fermentation
   • Biomass fermentation
2. Enhanced Farming Practices
   • Controlled environment 
   • Agricultural biotech 
   • Precision agriculture technologies (PAT)
   • Boosting pasture productivity (fertilisation of pasture, rotational grazing, feed quality and veterinary care)
   • Reduce Enteric fermentation (reduce gaseous emissions from ruminant livestock)
   • Improve crop breeding 
   • Improve rice cultivation
3. Decreasing Food Waste
   • Packing innovation and coatings
   • Upcycled food
4. Accelerated Development of Carbon Markets
   • Carbon offsets
   • Can encourage carbon sequestration through regenerative agriculture practices

Making Food and Agriculture Environmental Sustainability a Foreign and Domestic Policy Priority

This section pertains entirely to their recommendations to the US government, and are thus not suited to either a private sector or a global approach.

FAST by JP Morgan – Evaluation

This report reaffirms that the importance of sustainability is beginning to achieve mainstream status amongst various stakeholders in industry and finance. As we align to new standards of measuring sustainability and emissions, there will also be a clearer premium paid for companies and services that excel in those standards. Additionally, by recommending that corporations engage the services of or acquire ‘transition-based’ companies, there is an implied opportunity for startups to exit via strategic acquisitions that bestow upon the new parent company a competitive advantage, particularly as carbon credits become more common.

Its mention of vested interest by sovereign wealth funds and governments means that VCs and startups can possibly base market entry decisions on the public policy environment. Notably, “Europe is already ahead of the global curve on transitioning businesses to sustainable practices and Asia has a significant incentive to reduce reliance on the rest of the world for food supply”. Countries that face food security issues are inherently more likely to support companies that solve those issues for them, providing not just a welcoming customer base, but also possibilities for government cooperation in the form of grants, investment and even favourable tax policy.

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World Resources Institute 

This framework aims to feed 10 billion people by 2050 sustainably. This means closing three gaps:

1. A 56 percent food gap between crop calories produced in 2010 and those needed in 2050 under “business as usual” growth;
2. A 593 million-hectare land gap (an area nearly twice the size of India) between global agricultural land area in 2010 and expected agricultural expansion by 2050; and
3. An 11-gigaton GHG mitigation gap between expected agricultural emissions in 2050 and the target level needed to hold global warming below 2oC (3.6°F), the level necessary for preventing the worst climate impacts.

World Resources Institute35

It utilises 3 pathways, in which there are 22 solutions

1. Reduce Growth In Demand for Food and Other Agricultural Products (Demand-side solutions)
   • Reduce food loss and waste
   • Shift to healthier, more sustainable diets
   • Avoid competition from bioenergy for food crops and land
   • Achieve replacement-level fertility rates
2. Increase Food Production Without Expanding Agricultural Land (Supply-side solutions)
   • Increase livestock and pasture productivity
   • Improve crop breeding
   • Improve soil and water management
   • Plant existing cropland more frequently
   • Adapt to climate change (breeding crops to cope, establishing water conservation systems, changing production systems)
3. Protect and Restore Natural Ecosystems and Limit Agricultural Land-Shifting
   • Link productivity gains with protection of natural ecosystems (as a measure of /KPI for financial incentives like low interest rate credit)
   • Limit inevitable cropland expansion to lands with low environmental opportunity costs
   • Reforest agricultural lands with little intensification potential
   • Conserve and restore peatlands
4. Increase Fish Supply
   • Improve wild fisheries management
   • Improve productivity and environmental performance of aquaculture
5. Reduce Greenhouse Gas Emissions from Agricultural Production
   • Reduce enteric fermentation through new technologies
   • Reduce emissions through improved manure management
   • Reduce emissions from manure left on pasture
   • Reduce emissions from fertilisers by increasing nitrogen use efficiency
   • Adopt emissions-reducing rice management and varieties
   • Increase agricultural energy efficiency and shift to non-fossil energy sources
   • Implement realistic options to sequester carbon in soils

The report also references the FAO or Food and Agriculture Organisation of the United Nations, stating the 4 main pillars of food security.

And that in addition to these four, experts have long argued for a fifth: sustainability, “which is ensured only if food production and consumption patterns do not deplete natural resources or the ability of the agricultural system to provide sufficient food for future generations”.

World Resources Institute – Evaluation

This report extensively covers solutions from multiple aspects, and is focussed on utilising existing proven solutions due to its practical and comprehensive call to action. It outlines the bare minimum that must be done for humanity to survive past 2050.

But from a venture capital perspective, one must believe in the possibility of technological advancement, and the ability of entrepreneurs to do more. For example, the report does not mention alternative proteins, though that would resolve issues 2.1 (Livestock productivity) and 5.1 (enteric fermentation), remove the need for animal feed in 5.6 (agricultural energy efficiency), and can be achieved in tandem with 1.2 (Shift to healthier, more sustainable diets).

This framework can thus be used to evaluate companies by categorising the impacts of their proposed solutions, thereby giving us a metric of the possible breadth of their impact. The five pillars approach can become a tool for VCs or other investors to target specific pillars.

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Food and Agriculture ROSI Framework – NYU Stern

Food and Agriculture ROSI  (Return on Sustainable Investment) is NYU’s framework to identify “sustainability strategies and their related agricultural practices” and “develops monetization frameworks to demonstrate the financial benefits of those sustainability investments in the industry”. It focuses on possible practices that incumbent players can incorporate in order to become more sustainable, and outlines the sustainability strategies below.

Its principle framework is Mapping, or the categorising of strategies on two axes:

1. Stage of supply chain it can be implemented in
2. Aspect of strategy it targets

e.g. Food Waste Management and Circularity

NYU ROSI Framework – Evaluation

Such a categorisation method is useful in identifying both corporations’ possible usage of a solution provided by a startup and how comprehensively a startup targets a specific problem.

By exploring where a startup’s solution could be utilised in an existing supply chain, we gain a better understanding of its product-market fit, possible serviceable addressable market, customer acquisition routes, LTV, and potential exit strategies.

While the scope of a startup is not an indicator of its success, that information combined with knowledge of the entire supply chain could indicate potential expansion opportunities and augment competition analysis, since if other existing companies provide solutions that are in a different space, they can be complementary rather than substitutional.

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Categorisation of Foodtech/Agritech

The foodtech and agritech sectors are not a homogeneous space. Companies exist across different verticals and at different stages of the food supply chain. For the purposes of VC investments, the categorisation used by the World Resources Institute is not appropriate as its goal is not profitability, and a majority of scalable monetizable solutions are supply-side where a solution can be sold, as opposed to the demand-side solutions such as reduction of consumption. Instead, the JP Morgan FAST framework’s categorisation of Food Production, Decreasing Food Waste, and Accelerated Development of Carbon Markets (or carbon offsets) is more applicable to a private investment context.

The categorisation used must also inform the analysis of a company’s product or service. NYU’s ROSI framework is then also unsuitable, as foodtech and agritech companies frequently provide goods and services that cover multiple strategies to solve food sustainability issues. But its use of categorising by stage of food production is informative, as Foodtech companies tend to vary by stage of food production they target, with some focusing on just production or retail and others providing end-to-end services. As mentioned in the evaluation of the ROSI framework, this would provide information on possible competition and expansion of product offerings in adjacent spaces. 

Startups should be categorised by 

• Stage of supply chain
• Vertical

Stages of Food Supply Chain

Utilising the ROSI framework from NYU Stern, we begin with 5 stages: On-farm, manufacturing/processing, distribution and retail/food service

However, given the rise in scientific advancement in improving the inputs to agriculture, such as GMO crops, bioengineered pesticides, and feed that reduces enteric fermentation, we feel the need to add a pre-farm or “pre-production” stage37.  This category would also include any firms providing inputs to farms or manufacturing plants, to distinguish it from firms that use their technological or business model advantages to operate their own farms.

1. Pre-Production
2. On-farm
3. Manufacturing/Processing
4. Distribution
5. Retail/Food Service

Foodtech/ Agritech Vertical

Adopting the categorisation used in the FAST framework by JP Morgan, we decide to combine the alternative proteins and enhanced farming practices verticals into one: Food Production. This is because many analyses apply to technologies under both the alternative protein/farming practices groups due to the fact that they intend to create a more sustainable, scalable way to feed humanity, and both are clearly different from methods which focus on the reduction of food waste. The accelerated development of carbon markets which the FAST framework mentions is a key global strategy to create a more sustainable world, but they are not of interest in this report.

First, the field of agricultural finance and marketplaces has been rife with activity in the past few years, with Indonesia’s Tanihub, a B2C produce marketplace securing their $65.5 million Series B, and Kenyan Agri-finance startup, Apollo Agriculture raising $40 million for their series B. These companies enable small independent farmers to lower customer acquisition costs and obtain cheaper financing or insurance respectively. These will be added under a new category titled “Helping small farmers”.

As for alternative proteins, insect-based protein has been overlooked in favour of plant-based or cultivated protein, but present a possible alternative as they require simpler processes to obtain and can offer a more protein (most legumes and cereals are sources of incomplete proteins). 

In the Enhanced Farming practices category, we have also removed improved crop breeding and rice cultivation as these are not monetizable endeavours or at least ones easily adopted as a business model by startups.

Under the category of reduction of food waste, we have also added the goal of increasing awareness of food waste as a vertical, where companies such as Goodr, a B2B that helps businesses get tax deductions for donation of surplus food38. Additionally, food logistics has many areas of improvement with regards to wastage, which many startups are attempting to solve.

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Food Supply Chain Considerations

Farm

Firms in the food pre-production stage are B2B, selling products and services that augment the farming process to farms or manufacturers. These can be farm inputs such as feed and fertiliser, as well as bioengineered seeds or livestock. They can also be selling hardware such as IoT harvesting or livestock health monitoring, or providing physical spaces for farming live hydroponic or vertical farming lots, or marketplaces for farming inputs. 

Some firms in this stage can also be farmers themselves utilising the technologically advanced methods or innovative business models they develop.

With full-scale in-lab protein production still a ways to go and plant crops still being necessary, farms are here to stay. Firms that offer innovative farming solutions are B2B, while firms that do the farming themselves can also be DTC if they choose to provide an end-to-end service, though many farmers choose to work with wholesalers 

In this stage, it is important to consider the applicability and replicability of solutions to a wide variety of crops. Research into the unit economics of their customers (i.e.food producers) is also crucial to consider what businesses can afford their solutions. Both these factors provide a better understanding of the firms’ TAM, SAM and SOM.

Confirming a realistic SOM is important, as farmers or food manufacturers have different priorities in their business and different levels of profitability and scales of production. For example, until sustainability goals are fully aligned with profit incentives via carbon taxes and credits, most farmers would be unlikely to spend more to reduce enteric fermentation, meaning the true addressable market is perhaps limited to farmers who market their meat as environmentally friendly, or live in jurisdictions where carbon taxes are enforced, such that their unit economics is improved by the introduction of the presumably more expensive feed. Similarly, farming equipment startups can represent high CAPEX which might only be accessible to large farms39, which limits their potential customers as five of every six farms in the world are smaller than two hectares and they collectively produce a third of the world’s food40.

Interviewing prospective as well as existing customers is one way of confirming these assertions, though it is likely that many early stage startups are pre-revenue and lack LOIs from potential customers.  

When considering firms that sell equipment to farms, low LTV is still a concern due to these products mostly being capital for production rather than a direct input and could have low purchase frequency. Many technology hardware companies get around this by implementing Hardware as a Service models adapted from software companies’ SaaS models, by providing long-term payment plans in exchange for frequent maintenance and software upgrades. 

However, this may prove untenable. Deere & Company, the world’s largest agriculture machinery manufacturer and the creator of the first commercially successful mechanised steel plough in 1837, has been embroiled in lawsuits regarding farmers’ right to repair41 . Companies that seek to increase customer LTV via high margins basic ancillary services like maintenance and repairs might see pushback from farmers who are accustomed to fixing their own machinery42, though more software-based technology might be more immune to this. 

In the case that the firm operates the farm, a large concern is the low value density of products produced and low LTV of individual customers. DTC models might circumvent this by giving the firm the ability to sell produce in season, in varieties of their choosing, at a scale they prefer, and with greater control over pricing and production practices43 , thus improving unit economics by allowing farmers to capture a larger proportion of the final consumer dollars, thereby increasing revenues. However, the firm then takes on the associated risks and costs of marketing and sales. 

In guiding the growth of the firm, funds have to monitor competing firms and their metrics, such as retention rate of customers in comparison to that of their competitors as the firm matures. While B2B customers tend to have a higher long-term retention rate (especially if product is a key input such as fertiliser or feed), foodtech and agritech are fast moving fields where competitors can gain a technical advantage quickly. As such, the firm must be focussed on both customer acquisition and R&D. If the firm is still pre-revenue and R&D focussed, it should begin talks with potential customers, seeking LOIs or even trials to secure a pipeline of business. 

Manufacturing/Processing

In this stage, companies either utilise raw ingredients to create finished products, whether they be plant or meat produce from farms or biochemical serums and cells from labs. Foodtech companies that are in this stage are namely alternative protein manufacturers, using plants, fungi, cells or bacteria and yeast for their products. There are also firms trying to reduce the waste at this stage, from reducing the amount of non-biodegradable packaging to utilising or repurposing food waste. Companies can be both B2B and B2C, as they decide between being able to capture a larger revenue share with a D2C model, or the cost-savings and stability associated with selling ingredients to other manufacturers, or both.

Funds should take a close look at the cost basis (COGS) of products by firms in this stage of the food production supply chain. While plant-based alternative proteins utilise relatively low-cost raw ingredients, the production processes required to make plant matter taste and look like meat are by no means cheap. Beyond Meat, the world’s largest meat-like plant based burger reportedly managed to reduce their cost basis of a pound of alternative meat from USD4.50 in 2019 to USD3.50 in 202044 using both intense cost-cutting measures and economies of scale, giving them a price of USD7.79 in 2022. Meanwhile, the price of a pound of beef in the average US grocery store is USD4.91645. The costs associated with other meat alternative production methods will be discussed in greater detail in section 6.2.1.2.

Firms that utilise waste from other food manufacturers should logically have a low cost of raw materials, and while some could have complex processes to turn inedible food waste (such as seeds or husks) into edible products such as Regrained which turns beer byproducts into pasta, snacks and baking mixes, others have simpler methods, such as Wtrmln Wtr turning aesthetically undesirable watermelons from farms into juice. While simpler production methods are less costly, they also do not provide the defensible revenue and barriers to entry that a patented, technically advanced process would. A more complex process is also typically necessary for the conversion of inedible (not just unattractive, and thus cheaper) “waste” into edible food. 

Additionally, while such waste products might be widely available and cheap at the moment, the upcycled food space is becoming increasingly crowded. Increased demand for such waste products might steadily erode the cost advantage, crowding out smaller startups in the long run. Firms must have access to a sustainable and secure supply of their inputs.

In direct food manufacturing and processing, the crucial metric to observe is scale and unit economics. Most companies using novel technologies have incurred significant costs in R&D that have to be recouped. But using high prices to do so, as is done in the pharmaceutical industry, is untenable in a price sensitive market like food. Regardless of the supposed health or environmental benefits, consumers will not be willing to pay significant premiums on a commonly consumed product, barring a marketing shift, such as what Starbucks did to coffee. 

If the majority of cost is fixed, their proof of concept must incorporate future expected maintenance or capital replacement costs, unless cost of capital machinery is low. If the  majority of cost is variable, they must have plans to reduce cost of inputs, whether via R&D or bulk purchasing and renegotiating purchasing contracts.

There are also companies who intend to focus solely on the research of food manufacturing technologies, and then to licence their technology to existing food manufacturing companies. This strategy takes advantage of larger firm’s existing scale and possibly overlapping machinery. Nevertheless, they must have an idea of the costs involved in order to pitch their production methods or products to possible licensees.  

A company must have an understanding of how many returning customers they must retain to support a scale of production that would be profitable in the long run. Are their customers wholesalers, distributors or direct consumers? Wholesalers and distributors have minimum order requirements, and upcharge their bulk purchases to retailers. Selling products to them allows you to gain access to multiple retail revenue streams, from supermarkets to restaurants. Direct to consumer models require significantly more marketing and knowledge of the industry, but allow for higher selling prices. Considering that the latter will be covered in the retail segment, we will discuss the former here.

Wholesalers and distributors generally use two pricing strategies46. The first is absorption pricing, where all costs, including their own profit margins are included into the final price. This means that manufacturers should discuss the final prices that end consumers will see, and not just the price at which the product is sold to the middle man. The second is differentiated pricing, which is calculated in response to demand. This is preferable as the wholesaler will do their own research, and possibly provide feedback on demand and willingness to pay to the manufacturer, allowing the company to get a better understanding of what scale and thus cost level they must achieve. 

Distribution

In the distribution stage, startups are generally not attempting to get into the distribution or wholesale businesses themselves. However, they need to have an understanding of the business in order to offer themselves as service providers to these companies. They have to comprehend what factors drive the distributor’s bottom line and top line. For VCs, it is crucial that such startups are at least in talks to sign PoC agreements with distributors or wholesalers to prove their product-market fit. 

For example, in countries where supply chains are unsophisticated and for example, have warehouses that lack cold chain facilities, it would seem hasty to incorporate IoT trackers and sensors to ensure produce is being kept at a suitable temperature. Meanwhile, startups creating warehouse robots could target food distributors in areas seeing rising labour costs threaten their bottom line.   

Most startups involved in this stage of the food supply chain are logistics innovators: involved in packing, processing, storage, tracking or delivery of food from producers to retailers or consumers. Many are attempting to reduce waste and spoilage in the supply chain, thus improving food safety, efficiency and profitability of distribution. Therefore, the issues plaguing distributors and wholesalers will be discussed in further detail in section 6.3.1 and especially 6.3.2.

Retail/Food Service 

In this stage we have startups that are involved only with retail, such as innovative marketplace solutions, as well as those that are DTC farmers, manufacturers or distributors. The former is discussed in further detail in sections 6.1.1 for small farmers in rural areas, and 6.3.4 for marketplaces that attempt to sell food “rescued” from waste. 

Retail is a business heavily dependent on public image and marketing, especially in a price sensitive market. With the rise of different technologies in foodtech, food is becoming less of a commodity and more of a brand. If a customer is interested in a specific product, such as alternative proteins, the question is not just of location of production, as it is with traditional food items, or that of technology, whether it be plant or cell based, but that of which brand. Impossible Foods or Beyond Meat?

To a certain extent, the choice is based on the variety of offerings. After all, product proliferation has been a successful market strategy for consumer goods, and especially food, for a long time. Think of Coca Cola and beverages, or Kellogg’s and cereal. If someone is seeking a specific product, say alternative pork, then they would have to go to Impossible Foods rather than Beyond Meat. And if the product is satisfactory, then when the consumer is about to purchase a more widely available product offered by multiple companies, they would be more likely to go to Impossible again. Formally, this means that a firm with larger variety saturates the product space and minimises unmet demand47. Additionally, having a wide variety of offerings makes it difficult for new startups to compete48.

However, the key thing to note here is that the “brandification” of the consumer packaged foods vertical is a double-edged sword. If a farmer produced a bad batch of produce, no consumer would be able to identify and avoid their produce again because supermarkets or restaurants do not display their sources. But a brand with the same issue can find it difficult to shed their bad reputation. Nevertheless, to manufacturers, a brand offers an opportunity to capture loyalty and a price premium, and to customers, it represents a level of quality that saves them a great deal of search time49. A strong brand can become the key to obtaining customer retention that will support the scaling of a company. 

Another benefit of being directly consumer facing is the possible collection of data. This is particularly viable as many direct to consumer food manufacturers and distributors have online platforms. Providing the option to create an account with them allows companies to profile customers and personalise their experiences. Data collected can then be used to forecast future demand, resulting in more accurate ordering of inventory, reduction of waste and spoilage, and a more appropriate scale of production that can be varied according to the forecasts. 

When working with consumers directly, companies have to be certain that their products will be a hit. Even with the commercial success of Impossible Foods and Beyond Meat, there are already staunch critics who took their opinions online, casting further doubt and distaste towards alternative proteins. Their collaborations with food giants such as Burger King and KFC mean little if consumers do not have favourable views of them. The difficulty of selling direct to consumer means that there are no PoC or prototype agreements. Startups must work with those in industry, such as chefs and commercial food providers, to ensure that their products are satisfactory before launch. 

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Solutions by Industry Vertical

As elaborated in Section 2, there are two main food issues the world has to contend with. The first is hunger now, and the second is hunger in the future. Hunger today can only be reduced if we assist small farmers, many of whom are exactly those that suffer from lack of food security due to their small scale of farming providing only subsistence-levels of food production. Preventing humanity from going hungry in the future can only be done if we stop producing food now at the expense of our environment, and the future generations.

Assisting Small Farmers

Conventionally, larger corporations are viewed as more productive and efficient, able to reap the benefits of economies of scale to reduce or eliminate redundancies. However, the opposite seems to be true in farming. “Smallholdings” or farms mostly of size smaller than 2 hectares, represent 84% of all farms worldwide and only operate about 12% of all agricultural land. Yet, these small farms are accountable for 35% of the world’s food supply50 , and still have considerable catch-up growth to capture in terms of farming knowledge and technology usage. 

While it is untenable for private sector investment to directly tackle poverty, it is possible for companies to find mutually beneficial, sustainable opportunities in developing areas by providing ways to break out of the poverty cycle to underserved communities. Many farmers are stuck in poverty due to living hand to mouth relying on subsistence farming. Without any surplus production, their lives and livelihoods are entirely vulnerable to climate variability and the appearance of pests, and they are unable to utilise profit gained from sale of surplus goods to improve their production processes or to tide over bad harvests. The FAO states that in 2015, over 2 billion people live on subsistence farming51 on farms known as “smallholdings”, farms mostly of size smaller than 2 hectares. 

What companies have to understand is that these millions to billions of smallholder farms are essentially small businesses, and as the FAO states “smallholders operate their farms as entrepreneurs operate their firms, or at least they try”52. They raise capital and try to invest in equipment like a bicycle or a spade, decide what to plant and what inputs to use and how. However, these small businesses face a multitude of issues.

First, they mostly operate in economic environments with dysfunctional informal markets. Second, there are considerable physical limitations with the average smallholder family taking more than 11 mins to reach a paved road, and those in countries like Nicaragua having an average distance of 48km away from a paved road. Third, their lack of starting capital means their farms are not as productive as they can be; the typical European farm uses 130kg of fertiliser per hectare, while the average Ethiopian farmer uses just 20kg53 . This can be very harmful to smallholders, especially in Sub-Saharan Africa where soil fertility is declining due to the cultivation of cereals without the addition of fertilisers, leading to a collapse of their basis for food production.

Startups have begun to realise the myriad of opportunities this presents. Many have begun microfinance operations, allowing farmers to have the capital to purchase transportation, fertiliser and other equipment, or to tide over bad seasons. Others have started marketplaces, increasing access for farmers to both purchase inputs and sell outputs, formalising markets and streamlining their decision-making processes.

Marketplaces

According to BlueWeave Consulting, the total value of the global digital farming market is expected to reach $10.2 billion by 202554. These platforms, known as agribusiness marketplaces or agriculture trading platforms. They typically provide not just a marketplace but also other software tools.

Marketplaces allow for several benefits.

On the supply side, farmers can more easily source inputs and equipment that make their land more productive. A formal online marketplace increases visibility, meaning suppliers of such inputs now have to compete on price, possibly reducing cost of inputs for the farmer. They gain access to a wider range of possible inputs, from fertilisers to pesticides, and with contractual agreements, can be more certain of future costs and be protected from temporary market fluctuations. 

On the demand side, farmers can use online marketplaces to study demand and make better production decisions, connect with buyers, arrange deliveries and finalise transactions. A centralised marketplace can reap economies of scale to utilise more secure payment systems and engage lawyers to create legally binding contracts, thereby reducing legal and transactional risks, increasing certainty of revenue for farmers. Marketplaces can go even further, adding logistics and fulfilment services, creating one stop shops for farmers, reducing barriers to market entry and complication, as well as increasing supply chain transparency for end consumers.

Examples of such startups are Africa’s Maano – Virtual Farmers Market that connects farmers to buyers while providing real-time commodity prices, France’s Agriconomie that sells farming supplies from tractor parts to seed varieties, and India’s Agrostar that has fulfilment centres and last-mile delivery networks, as well as recently raised USD70M in its Series D round55. 

However, such solutions face 2 critical barriers.

Firstly, the countries where farmers suffer from a lack of a formal, well-functioning marketplace tend to also be countries with low levels of digital penetration and literacy, let alone digital literacy. In 2022, around 4 out of 10 people in Africa had internet access with only 3 countries having over 70% internet penetration56, while Southeast Asian countries generally had over 70% internet penetration rate, except for Myanmar, Laos and Timor-Leste57.  In regions where computers and internet connection are scarce, it is difficult to implement platform based solutions like marketplaces which rely on both buyers and sellers having access to the internet. The lack of digital penetration unfortunately suffers the same problems as poor physical infrastructure: local governments do not have the resources to improve the situation and individuals in the area lack the purchasing power for the private sector to justify investment. 

Second, farming is a traditional industry with long hours and lots of work, meaning adding technology that they have to learn how to use is unsurprisingly viewed as a hassle or a risky endeavour. A study interviewing 100 farmers in Vietnam, Indonesia and Myanmar found that it consistently took at least 3 years for a farmer who is already using online chat groups to begin “active discovery”, to venture outside their existing social group to find new transaction partners, new technologies, production methods, etc58. We can thus foresee that the time to develop such digital competencies would require an even longer runway in regions that still lack internet access. 

Nevertheless, as internet access widens and mobile phone usage increases, online marketplaces offer farmers a democratised platform for sales and sourcing of goods, increasing the stability of their businesses and helping to move the food from where it is produced to where people need it the most. In the meantime, agribusiness marketplaces can sink their roots into areas where farmers are already comfortable using such social technology in their daily lives, building the necessary logistical expertise to scale once the opportunity presents itself. 

Loans and Financing 

As the International Fund for Agricultural Development (IFAD) states “What characterises the poorest is not only their very small income but also the irregularity of this income.” Smallholders are the most vulnerable to sudden supply shocks (weather and pestilence), and would only see income during harvests or not at all (in cases of absolute subsistence farming). Microfinance for less wealthy individuals in developing countries have shown concrete evidence that having access to credit substantially increases their quality of life, smoothing over difficult times, helping them build assets to afford school fees, improve homes and afford medical care. The same can be done and has been done for agriculture.

While such microloans were initially unpopular due to the preconceived notion that the poor would not be creditworthy, most studies have shown they display higher rates of repayment than conventional borrowers, with repayment rates as high as 98% in some institutions59. This makes such business models win-win solutions, allowing lenders to invest in a reliable debt product that is highly diversified away from financial markets and borrowers to have access to funds that let them plan for the long term.

The microfinance sphere has been around for decades since Muhammed Yunus from Grameen Bank founded the industry, and it has matured considerably, expanding into savings deposits, remittances, money transfers and microloans outside working capital loans, such as housing finance and education loans60.  While initially, many loans had to be supported by donations, a few MFIs (Micro-Finance Institutions) began charging low fees and interest rates that could be afforded by borrowers, allowing such loans to be self-sufficient. By the mid-1990s, MFIs were commercialised and profitable61. 

Now, with the growth of fintech, technology enabled microfinance has become even more capable of being self-sufficient. On a simpler level, digital banking and the proliferation of mobile phones have allowed MFIs to access a much larger group of people, without requiring physical banks or agents on the ground, reduced application and processing times, and increased visibility for the borrowers62. On a more complex level, developments such as credit scoring algorithms are circumventing the lack of formal borrowing history that most unbanked adults have in order to provide them with credit63. 

Companies that utilise such AI-powered algorithms rely on alternative sources of data. Mumbai-based CASHe uses social behaviour and data points like smartphone metadata, social media footprint and career. Bengaluru’s SmartCoin Financials uses AI to digitalise processes such as delinquency prediction, fraud detection, and KYC, as well as using smartphone data and digital footprint for customer onboarding and verification64. In Latin America, Quipu Market is a marketplace that allows entrepreneurs to publish product catalogues and record transactions, then using that data to assess credit worthiness. 

However, similar to online marketplace solutions, such companies are heavily reliant on digital penetration to grow, meaning that no method of short of buying phones and internet plans for rural farmers will allow startups to inorganically acquire new customers in rural areas (which will likely exceed any VCs’ allowable CAC – customer acquisition cost). Fintech startups can perhaps develop capabilities in traditional methods of financing where potential customers are more averse to utilising technology, or conduct trials with select farmers and then use their feedback to convince other farmers. 

Insurance

According to the Asian Development Bank, “Agricultural incomes are subject to substantial covariate shocks”, relating to how most risks faced by farms are also correlated with the weather, and are thus undiversifiable. This means that farmers are likely to “rationally underinvest in inputs and thus slow down the Agricultural Transformation”65. In order to encourage smallholders to invest more into the long-term productivity of their farms, risk ownership in this field must be restructured. However, if the risk moves to agricultural banks, “ it will lead to an under-provision of credit due to the difficulty of hedging this large covariate shock for any but the largest and best diversified banks”.

Consider an agricultural insurance policy for a certain region that pays out in the event of crop destruction. As a singular disastrous weather event would mean paying out every insured party in the region, this policy is not diversified and thus untenable, and undermines the basis of insurance, which is that idiosyncratic, non-covariate risks can be diversified over a large population. 

As improvements in measuring global environmental conditions improved, index insurance emerged as an innovative way to provide insurance policies. It is a policy that pays out for loss of typically working capital on the basis of a predetermined index hitting certain levels (e.g. rainfall levels).  The index measures deviations from the normal level of parameters such as rainfall, temperature, earthquake magnitude, wind speed, crop yield, or livestock mortality rates66. The cost of administering such policies are low, typically not requiring insurance claims assessors as the basis of the payout is entirely objective and based on data67, making it worthwhile for insurance companies to cover such a large number of farms with low margins. The insurance company also would not suffer from moral hazard or adverse selection, as “the object against which insurance is written is beyond the control of the insured party”68. 

The largest issue faced by insurtech companies in the microinsurance space is lack of demand. A report from the Society of Actuaries states “ It is not uncommon to hear of microinsurance programs spending over a year building a back-end technological platform, only to realise in the first month of sales that there is no customer demand”. In Vietnam, both the government and private insurers have offered agricultural insurance for the past 30 years, and yet very few of their 8.6 million farmers are insured70. Their National Agriculture Insurance Pilot Program (NAIPP) found that lack of farmer awareness and trust were the main reasons for the low take-up of insurance options, despite the substantial government subsidies. 

Insurtech companies thus suffer the double whammy of being pushed away due to lack of familiarity with technology as well as general distrust towards insurance.  One possible strategy to combat this is for insurtech companies to partner with existing MFIs that already have an existing customer base, thus leveraging the existing goodwill and customer relationships to acquire customers. 

For example, one company in this space is Kenya’s Pula, which has more than 5m farmers insured in over 16 countries and raised $6m in 2021. It works with states and multilateral organisations such as the World Food Programme, the Central Bank of Nigeria and the Zambian and Kenyan governments, as well as development agencies, financial providers, commodity buyers, aggregators and mobile network operators, showing that partnerships with existing, trusted service providers allows for wider customer outreach. US’ Stable, which raised $46.5m in 2021, utilises AI to reference agricultural price indices across 70 countries to accurately price insurance premiums, and works with the Agricultural Commodity Exchange for Africa, as well as food businesses in the US71. Luxembourg based IBISA, which raised about $1.7m in their 2021 seed round, provides weather-index based insurance to smallholder farmers in the Philippines and India72. 

Insurtech companies are continuing to develop innovative methods to price premiums at scale, making products that would otherwise be unprofitable viable for sale to smallholder farmers at affordable prices, whether it be index based insurance policies, picture-based insurance (PBI)73 , or inserting RFID microchips into livestock74. Agricultural insurance is a field that offers tremendous opportunities due to having a large unserved market – less than 20% of smallholder farmers have insurance75,  and technological improvements allowing greater scale and lower premiums and screening costs.

Sustainable Food Production

At its core, food production startups seek to solve one issue: inefficient production of calories. The FCR or Feed Conversion Ratio measures the ratio of the calories an animal eats to the calories it provides when eaten. 

• Chickens – 2x-5x
• Pigs – 4x-9x
• Cows – 6x-25x76

This calculation also does not account for the large quantities of land usage that is required for livestock, let alone humane livestock conditions (free-range/cage-free).

Nor does it account for water usage.

Many startups are involved in the creation or application of novel methods that increase the productivity of these inputs, whether they be feed, land or water, or circumvent the issue of livestock all together. These methods are without a doubt more efficient than traditional farming methods, but they still face many issues in implementation.

Alternative Proteins

Several barriers stand in the way of alternative protein being the default option. 

1. Nutrition
2. Cost
3. Taste

Barriers 

Nutrition

Protein alternatives are not a new concept, and was first implemented by the Chinese Han Dynasty (206 BC–220 AD) with soybeans, giving us tofu. Its use as a meat substitute was recorded in the 10th century, when the spread of Buddhism gave rise to vegetarianism in China. But as more people began to move away from meat for health reasons and into plant-based proteins, many products lacked the necessary amino acids to be considered “complete” proteins such as the seed proteins of common commodity crops like rice, wheat and corn (though soy is considered “almost” complete). Additionally, to make such products more palatable, many meat alternatives have unhealthy levels of salt79 and higher levels of carbohydrates and sugars than meat80. Fortunately, as will be elaborated in the later section, most cutting-edge alternative protein solutions have managed to create realistic meat alternatives with complete proteins, at the cost of having to use additives to improve its taste.

Cost

Studies have shown that consumers tend to be price sensitive when purchasing meat81 and with meat alternatives commanding a hefty price premium over meat in most areas, the barrier to customer acquisition is very much related to price.

Alternative protein companies know this, and in 2021, Impossible Foods announced its second price reduction within a year to $9.32/lb, a 20% drop83, while Beyond Meat is aiming to achieve price parity in at least one category by 2024. 

On an industry level, Blue Horizon and BCG released a report estimating the time of price parity for different alternative protein types in 2021.

As of 2022, global food prices have risen, causing the price gap to narrow. Whether this is a boon or bane for meat alternatives is yet to be determined, as higher prices for everything else could also tighten overall expenditure on food, as well as make consumers more price sensitive. Regardless, companies must have a clear avenue to price parity with conventional meat products in order to truly have any sustainable impact, since its value is in replacing existing products rather than having any environmental benefit in and of itself. Additionally, it would be difficult to envision a solution to world hunger supported by alternative protein with costs that consumers in the developed world cannot stomach.

Taste

According to a study conducted by the Good Food Institute with Mindlab, they found that taste was the main primary motivator among consumers for purchasing decisions, beating out price85. Achieving taste parity is the ultimate goal of meat alternative companies. Getting a consumer to try their product is comparatively easy due to the low initial price barrier, but achieving retention is harder. This is further exacerbated by the brandification of the vertical, in stark contrast to the commodity-based traditional meat industry which typically uses private labels or unbranded products86. As a result, brand image and reputation is crucial. A customer becomes much less likely to make a repeat purchase if their first taste is unappetising. 

However, there is more to consumer tastes than just flavour and texture. Many of the innovative products in this space are creating foods that simply have never existed, meaning they do not satisfy a current consumer need (aside from those who care about sustainability or ethics). While it is true that the world has a large-scale hunger crisis that requires a less environmentally-taxing method of food production, the initial cost of these experimental foods are too high to bear by the individuals who need it the most. This means that successful companies must be attractive to the developed world first in order to develop an acceptable level of economies of scale. With that in mind, products that are attempting to take the place of existing ingredients in existing food products, such as burgers or flour, are easier sells than convincing the world to embrace new and strange food products.

Vertical-specific Developments

Plant-based Protein

Plant-based protein is currently the most popular alternative protein on the market, with options like the aforementioned tofu or tempeh having existed for centuries. However, such products have traditionally failed to convert consumers away from meat, and instead achieved popularity as complementary ingredients in many regions. Entrepreneurs began to realise that a true alternative protein would have to take the place of meat in existing dishes, and thus replicate the taste and texture of meat, rather than simply being a nutritional substitute.

In order to achieve taste parity, companies have experimented with various methods, the most popular of which being extrusion, where a mixture of plant protein pulses (e.g. lentils, soy, chickpea) are fed into a metal barrel where it is sheared and mixed by two rotating screws while being heated by steam surrounding the cylinder. This is what allows newer products like that of Beyond Meat and Impossible Foods to achieve the desired muscle fibre-like texture87. Each company alters the multiple process variables to produce their own proprietary product, requiring considerable R&D, not to mention the high capital cost of purchasing or even building extruders. 

In 2020, the Good Foods Institute estimated the size of the plant-based protein market to be USD1.4B. With USD466M and USD230M in revenue for Beyond Meat88 and Impossible Foods89 respectively, these 2 companies occupy 49.7% of the market. However, this does not mean that there is no room for competition, as the current plant-based protein market is only 1.4% of the total retail meat market, meaning that startups have the opportunity to expand the overall market by capturing new customers.

Investment into plant-based food companies skyrocketed after 2019, when Beyond Meat IPO’ed at a 1.5 billion dollar valuation. The slight drop from 2020 to 2021 cannot be attributed to global headwinds, as funding for both cultivated and fermented meat alternatives rose significantly from 2020 to 2021, indicating possible crowding of the alternative protein sector. 

Plant-based protein has been deemed by many to have overcome both barriers in nutrition as well as taste. However, as many studies have pointed out, most products have high levels of sodium, which can cause health implications such as heart disease91. The addition of salt is unfortunately necessary to mimic the taste of meat. While flavour and texture are subjective, many products have become the subject of media scrutiny due to their realistic qualities. Notably, in 2019, Burger King Sweden created a menu item where customers would have a 50-50 chance of getting a meat burger or a plant-based one, and 44% of customers could not correctly identify if they were consuming real meat. Its largest barrier is therefore cost. Unless governments begin to halt traditional meat farming subsidies – which could mean a true price of USD30 per pound of beef92 – or force producers to internalise the environmental costs of agriculture via taxes, companies have to conduct further R&D or reap the benefits of economies of scale to continue pushing prices down to that of conventional meat.  

Insect-based Protein

Insects have been part of many human diets for a while, most notably that of the Thais, whose country has more than 20,000 large-scale and small backyard insect farms operating across the country93. The main issue is that individuals find eating whole insects difficult to stomach, as food consumer researcher Giovanni Sagari says “We associate insects with everything but food. I mean with dirt, danger, with something disgusting, with something that makes us feel sick”. According to the European Consumer Association, only 10% of Europeans would be willing to replace meat with insects94. As a solution, most insect-based protein startups are grinding insects into powder to be used as ingredients.

The reason why insects are an attractive source of protein is that they are more efficient at converting their food into protein. According to the Food and Agriculture Organisation of the United Nations, crickets need six times less feed than cattle, four times less than sheep and two times less than pigs95. They also require an eighth of the land94, and 95% less water96. This is due to the fact they reach maturity quicker, and are cold-blooded, not requiring energy to maintain body temperatures. 

Nutritionally, crickets, the most popular edible insect, are almost 70% protein by dry volume97. Additionally, farming them does not require antibiotics, and because insects are so genetically dissimilar from humans, there is no risk of viral outbreak – in contrast to consuming mammals98. 

The insect-based protein market is small, with estimates of USD153M99 to USD303M100 in 2021. The key players are mainly selling insects as animal feed (fish) rather than consumer products. Aspire Food Group is one company expanding towards the market for human food, building a $90m production facility that will produce 10,000 tons of crickets a year, utilising IoT from Telus for precise farming conditions.

Because insects can be eaten whole with minimal processing, or in powdered form, they do not require complex machinery or processes, greatly saving on capital expenditure. Costs are thus mostly concentrated at the farming stage rather than at food manufacturing or retail. While it seems financially expensive to set up cricket farms, this is mainly due to the need for R&D. There are very few cricket feed suppliers, and little is publicly known about their ideal conditions for growth. There is lack of scale as it is a nascent industry, indicating available gains in economies of scale. Larger companies like Aspire are using IoT, but startups like Sens101 also have full-time R&D teams and are attempting to innovate using new farming methods like vertical farming. 

The largest barrier to scale is taste. Even with insect powder that lacks discernible taste, it is difficult to imagine consumers would purchase powder just to sprinkle into existing foods, and that such a use case would create sufficient demand for insect-based protein. Companies are trying to create replacement products such as flour, protein bars and protein shakes, but it remains to be seen whether this will catch on.

Cultivated Protein

Cultivated protein, also known as animal cell based proteins, are the result of growing animal cells in a nutrient-rich media in bioreactors102. Until recently, the media utilised foetal bovine serum (FBS),  a byproduct of harvesting cattle for the meatpacking industry. Until the recent boom in the search for alternative proteins, its use has been limited to academic research due to its prohibitive cost. However, the harvesting of FBS is deemed by many to be incredibly unethical, typically by way of cardiac puncture of foetuses without anaesthetic harvested from slaughtered pregnant cows. As a result, many are deeply invested in the search for a media without the use of animal products. 

In 2019, Mosa Meats succeeded in producing cultivated meat without the use of FBS, and published this paper103 in 2022 in Nature Food, creating a patented cell feed formulation. Given the exorbitant cost of FBS (USD400-900 a litre and a single burger patty took 50 L of serum), this new process managed to reduce the cost of media by 80x (cost of a single patty dropped from 330k for their first burger in 2013 to a projected USD10 in 2021)104,105. 

The cultured meat vertical has exploded in recent years, with over USD1.4B secured in 2021106 according to GFI, showing significant growth from past years as can be seen in the chart below. 

The fast rise in funding for alternative protein is reflective of the advantages that it provides if it is viable. A product with cultivated meat and fat is likely to be the most faithful reproduction of its unsustainable alternative in both taste and texture. If the final product can be done without FBS, it is also entirely ethical. In terms of nutrition, it would have the exact benefits of meat, without the risk of viruses, antibiotics or microplastic accumulation. It would also have no environmental requirements or be dependent on specific vegetable crops, and thus could be produced anywhere as long as the media and cells were available. 

In order to become a possible solution to world hunger, or a commercially viable product, 99 companies in 2022108 are racing to lower costs of production via further R&D and scale-up efforts. In addition to companies trying to directly produce meat, there are also those which are focussed solely on producing cheaper and more ethical media, such as biftek109.

Fermentation

Fermentation refers to a specific metabolic pathway used to generate energy in the absence of oxygen. In the alternative protein industry, fermentation is largely utilised in 3 ways110. 

1. Traditional fermentation utilises intact live microorganisms, creating products such as yoghurt, cheese and tempeh. 
2. Biomass fermentation uses the microbes to efficiently produce large quantities of protein, with the biomass itself becoming the consumable product. Examples of this are Quorn’s and Meati’s use of filamentous fungi. 
3. Lastly, precision fermentation uses microbial hosts as “cell factories” for producing specific ingredients, and are thus used at much lower levels than biomass fermentation. The microbes help improve the taste, texture and/or nutritional qualities of plant-based or cultivated meat. Examples include Perfect Day’s dairy proteins, Clara Foods’ egg proteins, and Impossible Foods’ heme protein.

The reason for using microbes is the same as insects in that they are more efficient at converting calories into protein than mammals or birds. Microbial proteins also benefit from being far-removed from humans genetically, and thus there is less risk of viral transmission. There are less ethical concerns, as most individuals are not particularly worried about the breeding, living conditions and death of bacteria or fungi. Finally, it is much more environmentally friendly, with one estimate from Nature stating that replacing 20% of beef consumption with microbial protein by 2050 would result in a 56% reduction in annual deforestation and associated carbon dioxide emissions111.

A significant advantage of using fermentation is that like cultivated proteins, there is virtually unlimited potential for variety, especially when coupled with biological synthesis capabilities in precision fermentation applications. There are a myriad of existing microbial species, meaning immense opportunities for novel alternative protein solutions, as well as ingredients that would augment existing or other protein products, such as creating specialised types of fat to enhance the taste of cultivated meat. This also means that fermentation is not necessarily a direct competitor to cell cultivation, and can be a complementary product should cultivated protein become the dominant choice in the future. 

Microbial Fermentation also experienced a large rise in funding in 2021, showing a similar growing interest in the field. GFI also conducted a state of the industry report, finding that in 2020, 51 companies focussed primarily on fermentation for alternative proteins, 21 of which use biomass fermentation and 23 use precision fermentation.

Similar to cultivated meat, a large barrier faced by fermented protein is cost, with few companies having publicly available products that they can already produce at scale. Its major cost driver is feedstock, which provides the nutrients to support these microorganisms’ growth. At present, the majority of fermentation relies on refined sugar114, as it has a long validated use in multiple uses of fermentation. 

However, the issue of feedstock is not as severe as that of cultivated meat’s issue with FBS, as sugar feedstock is sufficiently cheap and relatively abundant. The problem comes only with potential future scale-up, which would probably require diversification away from sugar. Companies are experimenting with waste products or agro-industrial byproducts, with GFI noting 3F Bio and Mycorena in Sweden using sustainable feedstock. Other startups, including Air Protein, leverage gaseous feedstocks, deriving energy from chemical reactions involving hydrogen, methane, or carbon dioxide gas. In addition, because there are such a variety of microorganisms, companies are also able to tap into a diverse range of unconventional feedstock.

There are also challenges in scalability, as increasing production when dealing with microbes is not straightforward. “Very large scale systems tend to be highly heterogeneous with several gradients (oxygen, food, shear,…) and, thus, require robust and tolerating cells”115.

Lastly, companies face issues with branding and product image, as consumers do not yet have a good understanding of modern fermentation processes. Perfect Day’s cofounder Ryan Pandya says “Because this is the first time in the history of dairy that actual cow’s milk proteins have been produced in something other than a cow, there’s understandable confusion”116. This confusion acts as a barrier to public acceptance, especially as microbes and fungi are not particularly enticing words when it comes to food. It remains to be seen how both brands and the industry vertical as a whole will be viewed, but a marketing push must occur to improve public perception of fermented protein117. 

Enhanced Farming Practices

Regardless of which alternative sustainable source of protein is used in the future, it is also clear that we have to improve the ways we produce food crops, as they are still instrumental inputs in plant-based, insect-based, cultivated and fermented proteins. In this sense, reducing the carbon footprint, water usage or land usage of traditional farming provides the dual effects of creating more environmentally friendly food as well as reducing the environmental cost of secondary protein production. 

Additionally, enhanced farming practices increases the productivity of its inputs, generating more food per gallon of water and acre of land, hopefully decreasing food costs by way of increasing supply, providing more inclusive access to food.

The last crucial need for enhanced farming practices is food security. By making crops and livestock more resilient to extreme weather events and pestilence, or in some cases even completely immune to environmental conditions, we enable the replicability of such food production systems anywhere in the world. Food supply chains will no longer be tied down by geographical restrictions, reducing the need for long distance shipments of food that can only be grown in certain locations. Decreasing reliance on foreign sources of food means that access to food will no longer be subject to geopolitical tensions and strife, as well as extreme climate conditions.

Agricultural Biotechnology

The field of agricultural biotechnology is not a new one, with the cultivation of high-yielding varieties (HYV) starting in classical plant breeding where early farmers simply selected plants with particular desirable characteristics and “employed these as progenitors for subsequent generations, resulting in an accumulation of valuable traits over time”118. 

In the modern era, agricultural biotechnology has grown in both breadth and depth, utilising gene editing techniques to precisely add desirable traits and remove undesirable ones, creating vaccines for crop and livestock diseases and harnessing the power of microbes to rehabilitate soil and protect crops from pathogens119. 

In the field of gene editing, progress in using CRISPR/Cas molecular scissors allow scientists to modify genetic information to improve yield, increase robustness to pests, disease and extreme climatic conditions. Research is being done to even remove genes that are responsible for the creation of certain parts of the plant, especially parts that are not crucial to agriculture (not edible)120. 

Prominent companies in this field include Caribou Biosciences, whose cofounder Jennifer Doudna received the Nobel Prize in Chemistry in 2020 for her work in CRISPR and is working with animal genetics company Genus to produce virus resistant pigs121.  Cibus is a “seed and trait”company that developed their own patent-protected gene editing platform RTDS or Rapid Trait Development System, which the EU referenced as one of few safe gene editing technologies. The novel seed and trait business model is one where companies develop and commercialise “gene edited Crop Protection Traits”122; traits can then be licensed to seed firms or the company can release these traits through their own varieties123. 

Biotechnology derived vaccines are safer than traditional (live-attenuated or viral-vectored) vaccines, as mRNA is non-infectious and poses no danger for DNA integration124. As widely proven in the SARS-CoV-2 vaccines, it is also effective. mRNA vaccines have been used in animals, with promising results in combating rabies, Zika and influenza125 . What is even more exciting is that RNA vaccines allow the prospect of plant vaccines, as while plants do not have adaptive immune systems like animals, researchers from the Institute of Biochemistry and Biotechnology in Germany found that RNA introduced into plants protected those plants from viruses126. However, these are not technically vaccines, and the RNA will only be effective until it biodegrades. 

Additionally, RNA can be used to improve agriculture in ways other than vaccines. RNA can be used in pesticides, since RNA degrades quickly in the environment and is extremely targeted, meaning that pesticides can be designed towards specific insects without risk of hurting those that are beneficial to the crops and humans. One startup in this field is GreenLight Biosciences, which closed a $102m Series D in 2020 and opened a large scale facility in New York in 2021 to mass produce RNA to kill the Colorado potato beetle and the Varroa destructor mite, which destroys beehives127. 

However, public opinion of genetically modified food or inputs is generally negative. A 2016 study by the Pew Research Centre found that 39% of Americans believe GMO foods are worse for one’s health, compared to only 10% who believe that GMO is good for one’s health128.

As a result, demand for such foods might not be strong unless there is sufficient public awareness and education regarding the health of GM foods.

Issues with costs are up for debate, as one Harvard study claims that developing a new GMO plant costs USD136m on average130. However, this study in the International Journal of Biotechnology estimates costs to be around USD1.4m to 1.6m131, which would make development of GM crops much more affordable by small startups. After development, production of the GM seeds is scalable, though at much higher prices than conventional seeds – BT corn for example costs $114 per acre to plant, as opposed to $65 per acre for conventional corn seeds.

However, a possible issue is that these favourable traits do not necessarily work forever. Infamously, the rootworm that the Bt corn was designed to fight off grew resistant to the gene132. Research found that a way to prevent this was to rotate the usage of Bt corn with other crops, so that the rootworms would not have the sustained exposure that allowed them to evolve. Regardless, such pest or virus related shortfalls have to be considered. Similarly, crops that may be able to survive a greater variability in temperature are still likely to perish in extreme weather conditions, and cannot be considered as the only solution to achieve food resilience.

Precision Agriculture (PA) Technologies 

Precision Agriculture Technology refers to the use of technology that allows for the conditions of agriculture to be varied and measured in such a granular way that data can be collected for the purposes of optimising crop productivity and resource use. It can increase crop yield and decrease wastage of inputs, allowing food production to become more efficient, and for farmers’ businesses to become more profitable. It would also prevent overuse of pesticides or underuse of fertiliser and soil degradation.

The main technologies involved are IoT or internet of things, where multiple sensors allow farmers to monitor a wide range of conditions and metrics, creating a way to study long term patterns and gain better visibility of the possible risks and decisions they need to make. The collection of vast amounts of data also makes the use of AI viable in aiding the decision making process. 

In the PA space, there are companies that produce IoT devices, such as sensors and drones, as well as software companies and those that directly use these technologies to produce food. One example is India’s Fasal, which has raised USD4m in pre-Series A funding, has helped farmers save 9 billion gallons of water, reduced pesticide expenditure by around 60%, and increased yields across 40,000+ acres of farmland133. Another involved in livestock is Bangladesh’s Stellapp, which digitalises the entire dairy supply chain, from IoT monitoring for cows to cold chain logistics. In 2021, it raised USD18m in a Series C to follow its 14m Series B round in 2018. There is also potential for general IoT companies to enter the agritech space. IoT developer platform unicorn Helium, has become a standard for which other company’s sensors can utilise for connectivity, including agriculture, with companies like Lonestar, Infisense and Lark Alert building compatible sensors on their platform. 

The main issue with most such solutions are cost (high initial cost), and farmers’ lack of education and expertise.

The high cost is a barrier for most farmers seeing as how purchasing sufficient sensors for large swathes of land can be prohibitive. Lux Research found that most farmers are very sensitive to changes in price and costs, especially with low commodity prices. For example, for corn, only farmers with over 2500 acres in land could afford to spend capital on sensors. However, when it comes to higher value density items such as premium grapes for wine making, farmers are more willing to make such expensive purchases, with the farm-size threshold sitting at 50 acres134. 

Additionally, there are also PA improvements that are not as costly to implement as sensors. New Zealand’s Biolumic studies plant phenotypes to determine specific “Light Signal Recipe”s that enable crops to grow at increased rates and even reduce pesticide use, just by installing lights in the fields. They recently raised USD13.5m in their Series B in 2022135. Nevertheless, what are considered affordable technologies in most developed nations are still out of reach for most of the smallholder farmers in developing countries.

Due to IoT being a new developing technology, many farmers are unfamiliar with its utility in the agricultural setting. This effect is compounded by the cost, causing risk-averse farmers to be wary of adopting sensor technology in their work. This study on the rationality of decision-making behaviour among US dairy farmers found that the largest barrier to the adoption of sensor technologies “were being unfamiliar with available technologies, expecting an undesirable cost-benefit ratio, and being provided with too much information without clear relevance for management”136. Additionally, studies have found that the majority of benefits from PA technology can be “realized only when the necessary skills and data are available”137. Hence, startups must provide demonstrable improvements in yield in order to convince potential customers, as well as simple, clear information and possibly education and training sessions so that farmers can truly utilise PA to its full potential. 

Controlled Environment 

Controlled Environment Agriculture refers to a system of agriculture where plants are grown in controlled environments to optimise horticultural practices. While not necessarily the case, these are typically used in conjunction with precision agriculture technologies such that the temperature, humidity and other related factors can be monitored and then altered. Similarly, this sector contains both startups that provide specific inputs or services for controlled environment farms, as well as those that aim to own the full tech stack and vertical, from the farming units to retail. 

The first controlled environment farms were greenhouses, providing protection from pests without using pesticides, as well as wind and frost. However, greenhouses still relied on natural sunlight, and are typically using only soil instead of hydroponics or aeroponics. 

The next wave of innovation in controlled environment farms are indoor farming techniques, which are completely enclosed, and typically use technologies such as hydroponics, aeroponics and vertical farming (note that the former two technologies can also be used in greenhouses). The key benefit of these controlled environment farms is their ability to be absolutely immune to environmental conditions. Sunlight that is out of human control can be replaced with UV lights that are tuned to specific frequencies that best suit the crops and can be left on 24/7 for faster growth. Not only are wasteful irrigation systems unnecessary, water condensation can be recollected. Even the composition of the air can be monitored and controlled138. 

Additionally, vertical farms are particularly promising because they offer 2 additional benefits. 

First, it solves the problem of land scarcity by stacking several rows of plants to save horizontal space, making agriculture possible even in dense urban areas. Vertical farming companies have managed to achieve the soil-agriculture yield of 360,000 square metres in just 5500 square metres139, resulting in an almost 99% reduction in land use. This would greatly reduce the amount of land needed to feed our growing population. 

Second, it also reduces the need for transport, as such centres can be built very close to cities that rely heavily on imported food from far flung rural areas or other parts of the world. Food transport currently accounts for 5% of the carbon emissions associated with food consumption140, and the need for complex and long supply chains.

The greatest downside to controlled agriculture is its high costs, both in CapEx and operating costs. Building a sealed environment and then changing the atmosphere requires a significant amount of equipment and energy. According to iFarm, LED lamps (65%), air conditioners (20%) and dehumidifiers (10%) account for 95% of electricity usage, while the remaining devices – pumps, controllers, water purification units – use less than 5%141. This report by an agriculture consultant, ex-CFO of a CPG and investment banker finds the following cost table.

With almost five times the cost of current conventional methods, and no material benefit to the consumer, only those who place a significant importance on sustainability would choose to purchase goods grown with controlled environment methods. What’s more is that the above costs are already accounting for economies of scale, as the vertical farm in question is a 70,000 square foot facility operated by one of the largest vertical farm companies worldwide, Aerofarm of the United States of America, and the hydroponic greenhouse is a 280,000 square foot greenhouse operated by Brightfarms. Both facilities produce in the range of 2 million pounds of produce a year.

In this vertical, the above-mentioned Aerofarm has raised USD100m in their Series E in 2019 and 40m and 35m in their Series D and C rounds prior143. They are an aeroponics-based vertical farmer that has received investment from New Jersey’s Economic Development Authority and the Abu Dhabi Investment Office. BrightFarms is a hydroponics greenhouse farmer that has also raised USD100m in their Series E in 2020, and 55m in their Series D143. 

One new development in this space is growing vegetables in retail spaces. Aerofarm has hinted at the possibility of expanding into this business model, but this is currently being done by Infarm, a company that provides small vertical indoor hydroponics units that can be placed virtually anywhere so that produce can be harvested fresh where the consumers are, further reducing the need to transport food. Infarm has raised USD200m in their Series D, after USD170m and USD100m in their Series C and B rounds respectively, with the Qatar Investment Authority being one of their investors144.

While companies that grow their own produce and sell them to retail like Aerofarm, BrightFarms and Infarm tend to have the higher valuations, there are startups who specialise in a specific part of the techstack or supply chain. Artemis, regarded as the “leading enterprise Cultivation Management Platform (CMP)”, focuses on the software behind indoor farming and the data collection and analysis that helps such farms improve their processes. It was acquired by iUNU, an Agtech company that provides consultancy services, computer vision technology as well as crop insurance and offering financing to controlled environment farms, for an undisclosed amount in 2021145.

As we can see, the controlled environment vertical is one with many opportunities for technological innovation. With its replicability and scalability, it is prime for venture capital investment, especially considering its attractiveness to vested interests such as sovereign wealth funds and governments. While its unit costs might be high due to CapEx, as the cultivation process becomes optimised with data and inputs become cheaper with scale, the benefits of controlled environment agriculture cannot be ignored as land becomes scarcer and climates become less predictable, leading many to believe it is poised to be the farming medium of the future.

Boosting Pasture Productivity

Boosting pasture productivity involves activities such as fertilisation of pastures, rotational grazing, feed quality and veterinary care. Pasture fertilisation results in both greater yield and prevention of soil degradation over time. Rotational grazing prevents overgrazing, which leads to soil erosion and land degradation as well as improperly fed livestock. Livestock require nutrition to grow, and insufficient nutrition or improper feed can cause health issues or sub-optimal growth. Veterinary care is crucial to allow early detection of health issues and quick medical attention in order to prevent livestock mortality, which is both a waste of resources and immoral should disease cause unnecessary suffering to the animal. Animal health is also reportedly the number 1 cause for low milk production in the dairy industry. 

While these may seem like more in line with traditional farming methods that are not suited to monetisation and further innovation, there are in fact startups that are digitising such processes and even integrating them with precision farming devices. 

In the field of rotational grazing, True North Technologies’ Grasshopper146 system utilises a sensor unit, a plate meter and a data visualisation mobile app to allow farmers to determine the readiness of a paddock for grazing, as well as identify poorly performing paddocks for future . Vence is a company that utilises GPS and IoT devices to control livestock movement with audio cues, allowing the farmers to save costs on physical fences and labour for having to move the fences when grazing is to be rotated. 

In the field of feed quality, Pure Cultures is a BioTech company that is developing prebiotics and probiotics using natural supplementation as agricultural laws begin to crack down on chemical use. Insect protein is also gaining popularity as livestock feed, particularly for aquaculture with companies such as InnovaFeed (backed by Temasek in a $140m round)147, Nasekomo and Hexafly using more sustainable methods to increase protein intake for livestock. As a bonus, insects can also be fed food that would otherwise go to waste, making this a circular economy play as well. 

In the field of livestock healthcare, the Netherlands’ Connecterra’s IoT motion sensor and AI algorithm helps dairy farmers monitor the health and well-being of their herds. It allowed farmers to detect issues reportedly 2 days earlier than any symptoms visible to the human eye would appear, resulting in a 50% decrease in antibiotic use148. Connecterra has raised USD8.8m in their 2020 Series B. The US’ Farrpro specialises in creating products for the perfect environment for pigs, with heating and cleaning solutions, activity trackers and a data dashboard to ensure healthy growth and reduce disease. 

As synthetic fertilisers contribute to greenhouse gases, many startups are also innovating to create natural, sustainable fertilisers that can accelerate crop growth and prevent soil degradation.  Pivot Bio uses microbes to create nitrogen, and their fertilisers are already cost competitive with existing products, earning them a US430m Series D round  led by DCVC and Temasek149. 

Clearly, there is still room for productivity and sustainability improvements in traditional agricultural practices. While some may say that the food of the future will no longer be soil-based (and thus require no fertiliser) or no longer use animal meat, it seems that that future is still far from reach. We cannot place all our hopes on a handful of far-off technologies, and such advanced “stop-gap” measures can help us alleviate several pain points in traditional architecture in the meantime. 

Nevertheless, given that certain practices might be overhauled entirely in the future, it is crucial that startups offering such solutions and products be aware that farmers, food producers and investors are also highly cognizant of this. As such, technology that focuses on traditional agriculture cannot be high-cost capital expenditure that would deter forward-looking and risk averse stakeholders. This is a possible reason for the success of Pivot Bio in fundraising and sales despite VCs simultaneously placing faith into vertical farming, hydroponics and aeroponic technologies.

Reduce Enteric Fermentation

Cows are responsible for 40% of the world’s methane emissions150. Considering that methane traps more than 25x more heat than carbon dioxide151, reducing the amount of methane produced is paramount to slowing global warming. However, the world’s demand for beef is only increasing, and the possibility of convincing consumers to stop for the environment is slim. Thus, scientists have found ways to reduce enteric fermentation, the process by which microbes in the digestive tract of ruminants (cows, sheep, goats and buffalo) ferment food and produce methane as a by-product.

There are 2 main technologies that target reduction in enteric fermentation: feed strategies and wearables.

Feed strategies refer to innovative feed ingredients that reduces methane emissions from enteric fermentation. These ingredients range from seaweed to garlic and citrus extract. Additionally, an important part of these feed strategies is having to ensure that the taste of the milk or meat produced is not affected by the novel ingredients introduced in their feed, otherwise farmers would be deterred. Mootral, which has raised USD7.6m in a corporate round after 3m in venture capital and 2.4m in equity crowdfunding, promises that its $50 per cow per year feed supplement causes a 38% reduction in methane and no effects on the taste of the cow. Another startup, Symbrosia raised USD7m in a Series A and states that their seaweed-based feed additive can achieve an 80% methane reduction, while costing more at 80c to $1.50 per animal per day152. 

Wearables are smart electronic devices that go over a cow’s nose to filter the methane released and turn it into carbon dioxide, which is at least a relatively better option. This is effective as as much as 95% of methane created from enteric fermentation is released as burps153. The main advantages of wearables are that they can monitor methane emission, and be used in conjunction with feed strategies to further reduce emissions. Monitoring the eventual emissions is important because farmers can then use these numbers to produce carbon credits that can help offset the additional cost of feed or wearables.

One example design, created and manufactured by Zelp154, is placed above cows’ mouths. Once the wearable is in place, a set of fans powered by solar-charged batteries draws up the burps and traps them in a chamber with a methane-absorbing filter. When the filter is full, a chemical reaction turns the methane into carbon dioxide, which is then released into the air.

The main issue with enteric fermentation reduction solutions is that there is simply no business case for them until countries adopt carbon markets, and specifically agricultural carbon markets. Few farmers would be willing to take additional costs and more importantly, additional risk of getting their livestock unwell or having their meat taste different, for no conceivable commercial benefit. Likewise, few consumers are likely to pay extra to share this additional cost burden with farmers if there are no obvious taste or health benefits. Only when the authorities begin to monitor agricultural carbon output and quantify the reduction in greenhouse gas emissions that can be achieved through these solutions will farmers begin to see the merits of these solutions. 

Nevertheless, feed solutions can actually be quite cost-effective, meaning that while they may not present material benefits in the immediate term, they also do not move the needle in terms of cost, making them viable for the sustainability-inclined farmer. For startups, a possible strategy is to qualify for government subsidies, making them a costless alternative to traditional feed for farmers. This is not an outrageous strategy by any means, considering major agricultural countries have long subsidised the livestock industry, with the most recent headliner being Russia’s approval of a $150m subsidy on cattle feed155. 

Decreasing Food Waste

One-third of the world’s food is wasted globally, accounting for 1.3 billion tonnes and approximately $1 trillion per year. That is a number sufficient to feed 2 billion people, or twice the number of undernourished people in the world156. Food waste represents a social cost when we consider the billions we could feed, and an economic cost when we consider the wasted investment, labour and resources that went into uneaten food, representing lost wages for farmers. But the environmental cost is large as well; the WWF estimates that 6-8% of global GHG emissions could have been avoided without food waste, when we consider the energy and water used to grow it, as well as the transportation of uneaten food and the additional GHG emissions while wasted food rots157. 

While many consider food waste as mainly that which consumers have discarded rather than eaten, there are two categories of food waste, according to the Harvard School of Public Health158. 

1. Food “loss” occurs before the food reaches the consumer as a result of issues in the production, storage, processing, and distribution phases.
2. Food “waste” refers to food that is fit for consumption but consciously discarded at the retail or consumption phases.

In developing countries, over 50% of waste occurs at the handling, processing and distribution stages, while in developed countries, more than 50% of waste occurs at stage 2, consumption.

According to the World Food Programme, lack of skills to handle and store harvested crops is one of the biggest challenges smallholder farmers face160. Even in larger habitations with more capable farms, lack of cold storage means rotting produce and poor roads mean less excess food can make it to those who need it. Notably, India loses 30-40% of its produce because retail and wholesalers lack cold storage161. And according to McKinsey, India is not alone, with 40% of all food loss occurring in the post-harvest agricultural supply chain, with numbers being even higher in developing economies in Africa, Asia and Latin America162.

Food wasted at the post-production stages incur a cost for food distributors, while food wasted at harvest incurs a cost for farmers. As a result, solutions to food wastage pre-consumer are inherently revenue generating, meaning that the crucial factor is the cost of implementation. The following solutions: packaging innovations and coatings, upcycling food and logistics innovations all incur some level of cost, and as a result startups in these verticals must understand the unit economics of their customers – how much waste must a solution prevent in order to make the cost tolerable? 

Food wasted at the consumer level is more difficult. There is no monetary benefit to a consumer who has already spent the money to buy the food, and too late realises that the food has spoilt due to improper storage conditions or gone over the expiry date, or they have simply purchased or prepared too much food. It might be possible for business model innovations to somehow monetize reduction of food wastage, but a more conceivable solution is for food upcycling or recycling services to be as convenient and cost-free to the consumer as possible. Otherwise, proper trash disposal habits have to be inculcated, such as in Korea, where in 2005, dumping food in landfill was banned, and in 2013 the government introduced compulsory food waste recycling using special biodegradable bags163.

Packaging Innovation and Coatings

Packaging Innovation and Coatings typically attempt to reduce food wastage after the 3rd stage: processing and packaging, where such packings are used and coatings are applied. These innovations can protect the food, delay ripening, rotting of produce and spoilage of meat. 

Due to the complex supply chains that facilitate the international movement of food from producer to distribution centre to consumer, freshly harvested food can be exposed to the environment for extended periods of time before being on the plate of the end consumer. Additionally, food can be damaged or wasted due to poor handling, such as spillage, stacking and packing force or storing food at improper temperatures and humidities. Packaging innovations can reduce these problems.

For example, Amcor’s Eco-Tite R164 is a PVDC-free and fully recyclable shrink bag, which is designed to maximise shelf-life, maintain food safety and reduce food waste. Amcor is a publicly listed global packaging company, which illustrates the possible exit opportunities and customers that startups in this space can have.The US’ Hazel Technologies165 raised $70m in their Series C in 2021 with a packaging insert that inhibits ethylene, which plants produce as they age, and recently set up an APAC HQ in Singapore with funding from EDBI. Hazel estimates that by Q4 2022, its products will be used with over 5.7m pounds of fresh produce. 

One additional concern is the use of single-use plastics, which harms the environment directly due to its non-biodegradability, as well as indirectly due to having to remove such packaging from the wasted food if the food is to be disposed of properly. The process of removing food waste at an industrial scale can be expensive in terms of money and energy166. Innovation in the fields of reusable and recyclable food packaging is brewing to reduce the prevalence of single-use plastics in our food system. 

Companies that provide such goods or services include Norway’s government-backed Packoorang167, which provides circular, returnable packaging as a service as well as a reusable pallet wrapper, Singapore’s own BarePack168 which offers silicone or steel food containers for food delivery which consumers do not have to wash and can return to 150+ outlets or use their home pick-up services. The UK’s CLUBZERO169 is similar, providing reusable takeaway boxes that can then be returned or picked up for future use. 

One interesting example is Chile’s Algramo170, which attempts to reduce wastage at the consumer level. It sells reusable, refillable, smart packaging with RFID technology and has refill dispensers that recognise the smart packaging. Working with Unilever and Nestlé, Algramo’s technology can be applied not just to food, but any consumer packaged goods. 

Our current state of food supply chains already implement many innovations to combat food waste, from basic packaging to cold chain storages. However, there is room for improvement. For example, “Intelligent Packaging” is defined by the European Food Safety Authority as “materials and articles that monitor the condition of packaged food or the environment surrounding the food”171. These solutions tend to use a multitude of technologies, from sensors to RFID tags. As the largest hurdle is that devices such as IoT sensors are expensive and usually reserved for high value density items, startups aimed at the food logistics sector have to utilise such technology in a very cost-effective manner. 

Examples of products in this space include Innoscentia’s IoT sensor172 that monitors food status and shelf life in a dynamic way. They have partnered with Ynvisible, a dynamic display label startup, to create dynamic expiry date labels for food products, that are also RFID enabled to connect to smartphones and digital systems. This allows producers and distributors to safely store a large number of products without using a static expiry date that comes with a large safety margin, and consumers to more accurately know the real expiry date at purchase.

In order to eliminate the widely used plastic packaging used to protect produce from the environment, food coatings can be sprayed, dipped or brushed on produced to prevent or slow down gaseous diffusion. These also have the additional benefit of not requiring specialised capital machinery or skilled staff to package goods. 

For example, Nabaco’s Natuwrap uses natural polymers and a natural clay nanoparticle that self-assemble into a structure which acts as a barrier to the exit of water and the ingress of oxygen, while only being 1-3 microns thick and adds no taste, odour or change in colour173. Thailand’s Eden Agritech develops similar products that work not just for fresh fruit but cut fruit as well174. 

Such products are not only cost-effective, they are also easily utilised at multiple stages: harvest, post-harvest, distribution and at retail centres. This means that there is a large possible customer base, depending on the customer’s individual supply chain circumstances. If a farmer finds they lose some produce because they have to wait an extended period before delivery to a distributor/packager/consumer, they can apply the coating. The same applies if a distributor realises that they will have excess inventories for longer than usual or a retail supermarket finds their produce sitting unsold.

Food Logistics

Considering that a majority of food waste occurs in between harvest and consumption, improvements in the supply chain are undoubtedly necessary for the reduction of food waste. After all, it is impossible for all food consumption to be limited to one’s local farmer’s markets, or even just domestic production. Complex, international logistics are and will still be necessary for food.

In 2014, a study was done on the Norwegian food supply chain, which is burdened by long travel times due to the existence of many fjords, intermittent road and bridge transportation halts in winter, and the use of ferries175. The study first categorises food into 2 types: products with fixed shelf life and those with age dependent deterioration rates. For example, canned food would be in the former and fresh vegetables in the latter. They also split the stages into in-warehouse, transportation, pre-store rejection, and in-store food waste.

As we can see, most of the food wastage results from the same reasons. The researchers found that in warehouses, low visibility of inventory leads to high safety stock levels to prevent stock outs. This increases the number of fixed shelf-life goods with low remaining shelf life due simply to being unable to clear stock. For products with age dependent deterioration rates, this issue is compounded by the fact that there are no clear expiration dates to use for planning purposes. 

At the pre-store rejection stage, wholesalers or stores do not consider the eventual remaining shelf life of the goods ordered after the goods are placed at temporary waiting areas. They do this because stores tend to lack automated forecasting or inventory systems, and order goods imprecisely. Food then has a reduced shelf life or has deteriorated due to improper conditions and ageing by the time it reaches the store.

In-store food waste is where information about current stock levels and expiry dates are checked manually and forecasts are done based on experience, resulting in the lack of precision in the pre-store rejection stage. 

Inappropriate handling in transportation, as well as in the warehouse stage, refers mainly to when pallets are organised before loading in temporary areas, and during loading in the trucks. In these periods, temperature sensitive goods are placed against the isolated partition panel between 2 temperature zones or against outer walls, exposing products to inappropriate temperature levels. This issue is exacerbated for longer delivery routes.  

Therefore, the researchers have boiled it down to 4 underlying causes: planning decisions, data utilisation, execution of plan and damaged products. 

Looking at the above table, startups can help reduce human error in planning via improved data collection methods such as using RFID or similar trackers, improved data visibility via ERP systems and data dashboards, improving forecast accuracy via use of AI and other data analytics and prevent handling errors using temperature sensors to monitor the condition of the food pallets. 

In the data collection and tracking vertical, there are startups like China’s Maka RFID, which offers RFID smart labels (that can be embedded in objects like cable-ties) for time-sensitive food products and analytics algorithms to reduce spoilage and misplacement by identifying freshness issues in the transportation process. Germany’s Asynos goes against the grain of reusable packaging, and promises a disposable “1c IoT for trillion dollar supply-chain losses”, and provides a complete tech stack to create a digital twin to reduce food loss. 

In a much more specialised niche is Nanolike, a real-time silo monitoring solution that helps to simplify inventory and order management processes for farmers177. The traditional method of checking silo levels is for a worker to climb to the top of each silo and visually estimate how much was left, and forecast when to order more feed. Such an innovation would save them labour and time, and provide valuable data for the farmer to estimate costs and make better planning decisions  as well as to feed producers who can provide automatic replenishment and vendor-managed inventory. This shows that such solutions are not limited to warehouses and distribution centres, but can be useful to any business that has to monitor inventory levels. 

A company that is improving data visibility in the field of food transportation is publicly traded Samsara, which raised 700M in their Series F before their IPO resulting in a greater than $10B valuation in 2021178. They have created a platform for real-time visibility, cold-chain monitoring as well as compliance and driver safety, providing the sensors as well as the data monitoring dashboard to allow distributors to make better decisions in planning and reduce spoilage.  Another is foodlogiq, now a customer of Whole Foods, Chipotle and Five Guys. that provides a supply chain transparency software focussed on food safety, sustainability and traceability. It has achieved a 90% reduction in time to locate tainted food, thus reducing waste during product withdrawals by 30-50%, and has raised $33m in its Series B179.

In the space of improving forecast accuracy, one company, Wasteless, uses an AI pricing engine to dynamically change prices of perishable goods as they near their due dates180. It tracks inventory data and expiry dates, while learning consumer behaviour for that specific store in order to markdown prices in a principled and rigorous manner, much unlike how store managers eyeball stock levels and reduce prices with guesswork. 

The main advantage of such companies is that at large scale logistical operations, it almost always makes fiscal sense to reduce waste. As network availability increases and IoT devices become even cheaper to implement, the sheer amount of data that can be collected in order to increase visibility and better optimise processes makes such solutions very appealing and viable. 

However, the issue with such solutions is that they are not suitable for regions which lack sophisticated supply chains, distributors or wholesalers. Recall that the issue of food wastage in the logistics chain is particularly bad in developing countries, where there is even a lack of refrigeration and road infrastructure, let alone cold chain transportation. This means that where these solutions are needed the most are also the regions which lack the sophistication needed to implement them. Regardless, these solutions would go a long way to reducing food waste in developed countries. 

Upcycled and Recycled Food

Regardless of how we improve the way we package and transport our food, we cannot reduce food wastage to zero. Food wastage can be recycled, whether in the form of compost or more recently, as feedstock for insect farms. They can also be upcycled, by startups using innovative methods to turn undesirable food waste into other food products, or even into other materials.

Due to its relative novelty, there is no single definition of upcycled foods. The Denver-based Upcycled Food Association defines it as “”Upcycled foods use ingredients that otherwise would not have gone to human consumption, are procured and produced using verifiable supply chains, and have a positive impact on the environment.”181

The advantage of such startups is that obtaining the raw material tends to be cost-effective, especially if they can be collected from large food manufacturers and distributors. Some collect the food waste from retail centres or even direct from consumers, which would be more time consuming and more logistically difficult. Food producers and farmers are able to sell more of their product, not just discard those that are aesthetically lacking, and food businesses will be able to create more products from the same ingredients. 

Many low-hanging fruit with simple processing methods have already been picked. WTRMLN WTR, that raised $3.8m in venture funding before exiting via acquisition by another juice company, simply took misshapen and cosmetically imperfect watermelons and turned them into juice182. Matriark Foods has raised 400k and takes farm surplus and fresh-cut remnants and turns them into vegetable stock concentrate. 

Others utilise more complex methods to extract value from what is otherwise discarded. Austria’s Kern Tec processes fruit pits, a completely unavoidable food waste, and turns them into edible products, such as the seeds themselves, food and cosmetic oils, protein powder and baking flour and many more183 Comet Bio from the US, which has raised $22m in its Series C in 2021, uses a proprietary process to turn agricultural leftovers from farms into many different products such as prebiotic dietary fibre, sugar syrup alternatives and livestock feed supplements.

However, when it comes to food products that utilise upcycled waste, there is the possibility that consumers might not view this as particularly appetising. In fact, this study finds that people have a decreased willingness to pay for upcycled food compared to conventional alternatives184, and that that effect decreased with rational messaging, but not with emotional messaging. This means that startups in this vertical can consider diversifying into products that are not directly consumed by humans, such as feed for animals or as ingredients rather than finished food products, or entirely non-food products, and that startups that do create foods for the consumer have to consider marketing the objective health and environmental benefits. 

For example, Germany’s Wood K Plus is experimenting using corn cobs to create lightweight walls, doors and furniture. A Thai company Kokoboard uses waste material from sunflower crops to produce boards from rice straw, peanut shells and rice husks for floors, ceilings and internal walls. Qwstion, a Swiss brand, has created BANANATEX, a durable fabric made from banana plants185.  

Additionally, it is difficult to imagine that individuals would be willing to pay a higher price for goods made from conventionally undesirable or inedible food waste than for the original good itself. However, obtaining said waste or byproducts, on top of the additional logistics and proprietary processing does not come cheap. This could indicate that the profitable products would be high value items that can command high prices or products created with cost-effective processes. 

Marketplaces

Marketplaces attempt to reduce food waste directly at the retail level, by sourcing produce that grocers or F&B businesses would otherwise reject or be unable to sell due to being misshapen, damaged or close to expiry: what is known as “suboptimal” food. The reason for needing a 3rd party platform for these sales is that retailers do not want to be seen selling produce that is aesthetically lacking, or goods nearing the end of their shelf life, and do not want to risk getting customers sick. By positioning themselves as eco-friendly, food waste reducing companies, their customer bases are specifically individuals who do not mind produce that might be misshapen or ugly, and are willing to take the risk of consuming out-of-date foods. 

Such marketplaces have the distinct advantage of aggregating goods that individual farmers and producers might not otherwise be able to sell, and market them towards the exact customer base that would be willing to take them. They also do not suffer from the same worries as conventional food businesses about loss of reputation. 

From a food waste perspective, this is also a better solution than upcycling for foods that are edible and only suffer from aesthetic defects. Upcycling is then perhaps a better solution for food waste that is unavoidable. Financially, this does not require the same amount of capital machinery that upcycling does, thus reducing cost and logistics, while selling goods that are still familiar to the average consumer, rather than derived powders or oils.

One such startup, Misfits Market has rescued more than 170 million pounds of food in 2020 alone, selling anything from vegetables to meat to pantry staples, and raised $425m in their Series C in 2021186. They work directly with farmers and food producers so as to rescue conventionally undesirable foods at the earliest possible time, and offer them to customers at up to 40% off grocery store prices. Another startup, UK’s Too Good To Go also sources from retailers and restaurants. They saved 52 million meals in 2021 alone, raising $45m in the same year187.  

However, the fact is that these “rescued” foods are rejected by wholesalers or retailers for a reason. Consumers are picky with what they buy, and the sustainability-conscious individuals who would pay for goods that no one else wants are by definition a minority. If the mainstream consumer were accepting of aesthetically damaged or soon expiring goods, then savvy wholesalers or retailers would be selling those goods as well.

According to this study188, the greatest consumer barriers to purchasing suboptimal food are “abnormal appearance” and “approaching expiration date”, both of which are what defines suboptimal food in the first place. What is more damning is that “many consumers even remained reluctant to choose SF after tasting fruits with blemished appearance that were objectively optimal in taste”189. This indicates that consumers are not simply unaware of suboptimal food’s qualities (that they still taste identical and are safe to consume), but that the aesthetic quality of produce is inherently desirable. This serves as yet another barrier to such marketplaces. 

Additionally, as it stands right now, the only barrier to entry or moat for these sustainable surplus or food waste marketplaces are that they target a niche market that is undesirable for mainstream retailers. If their marketing is successful in increasing the number of consumers that are willing to pay for “rescued” food and the market becomes large enough, existing food retailers can easily move into the same space and offer the same products. 

In order to improve their moat, suboptimal food marketplace companies have to create a public image of food safety and reliability. If they can convince consumers that they have a QC process that is perhaps more stringent than what mainstream retailers can provide, or that they have first pick of suboptimal food at the wholesale or even farm level, then they would have a strong competitive advantage that existing competitors would have to surmount.

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Evaluation and Conclusion

This paper aims to elucidate on the current conditions and viability of various innovative technologies and business models that, with private sector support and investment, can scale to solve hunger globally. The analysis done above can be summarised as follows.

Food and agriculture form a key pillar in the support for all human life. As technology advances in all aspects of humanity, entrepreneurship needs to be the guiding force that augments such developments into forces that will benefit mankind at large. This research paper is by no means a definitive rulebook, because the combined potential of human ingenuity and entrepreneurship is boundless.

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Credits

Analysts
Ms Soh Rui Min, Spring Analyst

Research
Mr James Tan

Overview

As of the latest Global Findex Database report published by the World Bank in 2017, a substantial one fourth of the global population remained unbanked amid the advancements in digital financial services. At the same time, nearly 60% of the world’s population enjoy internet access; with 91% of the former utilising their mobile devices to go online.

The emergence of mobile technology and its penetration into developing economies provide an interesting proposition – financial inclusion. The true cost of financial exclusion goes beyond the inability to finance short term consumption. Oftentimes, the lack of access to financial services impedes an individual’s ability to substantially accumulate long-term savings, entrapping them further into the web of poverty. By banking the underbanked; and serving the underserved, technological innovations have the potential to increase the accessibility of those currently financially excluded towards financial services. In turn, greater financial inclusion generates sizable socioeconomic benefits, presenting significant growth opportunities to governments, investors, and businesses alike.

Undoubtedly, financial inclusion is a major step towards promoting inclusive economic growth. With the global fintech market poised to grow at a CAGR of around 20% in the next ten years, fintech solutions have the potential to leverage the increasing rates of mobile usage and internet penetration to develop inclusive solutions for sustainable growth. This report aims to provide an overview of how AI, Blockchain and Cryptocurrency can reimagine the state of financial services by spearheading financially inclusive solutions.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

When traditional banking systems hold back the human capital development of a quarter of the world’s population, a new way of thinking is required.

Financial inclusion, enabled by income, credit history, documentation, and infrastructure, opens opportunities to useful and affordable financial products and services. Financial inclusion has a strong business and governance case.

We envision this inclusion can take place with thoughtful use of artificial intelligence, blockchain and cryptocurrencies.

We further believe its successful implementation will uplift populations and transform economies.

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Defining Financial Inclusion

The World Bank defines financial inclusion as having access to useful and affordable financial products and services that meet the needs of individuals and businesses. These financial services range from banking, credit, equity to loan products. Over the last decade, with the help of mobile money accounts, the global unbanked population fell by 35%. To put things into perspective, this statistic denotes that 1.2 billion formerly unbanked individuals have now gained access to financial services.

Lack of income and poor credit history

Where the 2017 Global Findex Database report approximates that 30% of adults globally do not hold a basic transaction account, a lack of income has been cited as a main roadblock. Unable to meet the requirements of the traditional banking institution, these groups are excluded from the financial sector; preventing them from accessing resources to establish a business, fund their education and improve their quality of life.

The traditional banking system is not always designed in the interests of low income households. To make up for the lack of profitability in checking accounts, major financial institutions such as Wells Fargo and Bank of America impose overdraft fees, debit card swipe fees, ATM withdrawal fees, wire transfer charges on 25% to 40% of their accounts. While the fees may seem insignificant to the average individual, when amassed, they create an insurmountable burden to lower-income workers living from paycheck to paycheck. With such barriers to access traditional financial services, many low income households in America are left with no choice but to turn to alternative financial services providers, comprising check-cashing outlets, payday lenders, pawnshops, rent-to-own stores, and auto title lenders. While the former grants these low income families easy access to cash, these services come with a higher risk and more often than not, carry higher costs in the long run. With the ability to accrue wealth and assets impaired, lower income households are consequently unable to build up a credit history, further limiting themselves from other traditional financial services.

Credit scoring has traditionally been recognised as an essential tool for sound lending through accurately measuring and pricing risk over time. Other than the lack of income, the lower income population face significant challenges accessing credit due to their inability to build a good credit history. Oftentimes, they are imposed exceptionally high interest rates, or are fully denied credit by traditional financial institutions.

Being shut out of the traditional credit system can have imposing consequences on different aspects of their lives. Without creditworthiness, individuals and households are not able to access mortgages, car loans and other debt. More importantly, where more than 30 percent of adults in Cambodia, Guinea, Madagascar, Sudan and the Republic of Yemen have indicated that emergency and health reasons are the most common reason for having an outstanding loan, the lack of access to sufficient credit can limit the access to medical services. Traditional financial institutions have limited appetite to extend credit to vulnerable groups, including the low-income and women because of a lack of customer data and history to assess their creditworthiness. This further puts the at-risk group in a position of exploitation, as they end up turning to unregulated players with predatory interest rates. Unsurprisingly, many remain caught in the bad credit cycle, unable to break free from defaulting on more and more payments.

Furthermore, in other developing regions around the world, Micro, Small and Medium Enterprises (MSMEs) rely on their creditworthiness to tap on lines of credit to allow their businesses to survive. In Southeast Asia, only approximately 33% of businesses have access to proper financing. Without demonstrable creditworthiness and the lack of any deposits and properties as collateral, they are likely to be denied a line of credit. This inaccessibility to tap on a line of credit severely limits their growth potential – MSMEs often have to decline profitable opportunities that come along their way due to their lack of capital, and face disadvantageous payment terms when negotiating with larger debtors.

Without a stable revenue stream amid the surmounting business expenses, cash-strapped MSMEs have no choice but to undertake credit with skyrocketing interest rates – about 10% to 50% of the loan amount in a single transaction. At the same time, the sluggish underwriting processes from traditional financial institutions and the absence of government guidance on compliance paperwork further exacerbates the situation. To financially empower these MSMEs and help them grow organically, there is more to be done to redefine the existing credit scoring system and spearhead responsible economic enablement.

Lack of necessary documentation

The World Bank estimates that an approximate one billion people globally lack an official foundational identification. Without identification in the form of passports and identification cards, they are unable to be accurately authenticated, prohibiting them from accessing basic economic opportunities.

In the 2017 Global Findex Database published by the World Bank, it was stated that the lack of documentation was a critical barrier to accessing financial services. In fact, this barrier was more conspicuous for the marginalised segments of the society, which include women, rural farmers, migrants, refugees and stateless persons.

Consequently, this creates an entry cost friction in the process of obtaining credit. The barring documentation requirements largely comprise of standard Know-Your-Customer (KYC) requirements in compliance with the global Anti Money Laundering and Counter-Financing Terrorism (AML/CFT) guidelines in a bid to reduce improve financial transparency and governance.

Many developing countries have introduced such requirements as a result. For Brazilian banks, basic savings accounts keep KYC requirements at a minimum, which are otherwise known as “simplified accounts”. Halfway across the world in India, the Aadhar program implemented in 2009 introduced a biometrically-verifiable identification number to all citizens. While the Financial Action Task Force has also recognised the unintended consequences brought about by the stringent AML/CFT guidelines, they have reiterated the need to ensure that systemic safeguards are introduced to support overall financial inclusion.

As much as it is encouraging to see various digital identity frameworks being rolled out by government bodies across the world, financial exclusion undoubtedly remains a threat to the economic freedom of one-seventh of the world’s population.

Lack of infrastructure to access financial services

In the same 2017 Global Findex Survey by the World Bank, 20 percent of respondents voiced physical distance as a reason for not having a bank account. This reason was also cited more frequently in developing countries where financial services access points are more remote.

Over the past decade, “branchless banking” has seen successes in increasing financial access in developing economies. In essence, the former include stationary bank agents operating out of nearby retail stores, gas stations and post offices; as well as mobile agents who make rounds among clients. However, there is a limit to how cost-efficient the practice can expand financial access.

Mobile banking developments and the internet have thus opened up new channels for greater accessibility to formal financial services. According to the BIS, greater access to financial services is expected to foster financial inclusivity through greater availability that meets the needs of the population. Technological innovations and fintech advancements are therefore expected to overcome the barrier of geographical distance and increase the share of adults holding a formal bank account by up to 23 percentage points in Sub-Saharan Africa and 14 percentage points in South Asia.

Overall, we observe the unparalleled potential for fintech to increase financial inclusion in rural and hard-to-reach areas.

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Business Case for Financial Inclusion

Financial inclusion creates an interesting business opportunity for many stakeholders in the economy. Oxford Economics estimates that serving the unbanked could potentially add upwards of $250 billion to the global Gross Domestic Product. Indeed, substantial social and business benefits can be unravelled through tapping on this otherwise lucrative market. The accelerating transformation of fintech, digital and mobile banking raises efficiency, lowers transaction costs and expands outreach to lower market segments. Necessitated by the COVID-19 pandemic, this digital transformation of the landscape has disrupted the high costs of customer acquisitions, credit scoring and credit underwriting processes; whilst remodelling the cross selling of products by traditional intermediaries.

Digital Financial Services

Financial service providers stand to gain from the democratisation of financial products. By serving the currently-unbanked businesses and populations around the world, banks stand to bring in an additional $380 billion in annual market revenues – global technology consultancy Accenture and leading humanitarian organisation CARE International finds. Out of the whopping $380 billion tag, closing the MSME credit gap and introducing fee-based services could rake in approximately $270 billion in additional revenue. Separately, $110 billion could be generated in the process of engaging unbanked adults into the existing financial system.

While the economics of financial inclusion show a promising value proposition to large institutional players, the main roadblock lies in the outdated perspective of incumbents. Thus far, the financial inclusion agenda has always been viewed to be a low-end, unprofitable and purely philanthropic segment. The push for creating innovative and inclusive financial products has often been driven through corporate social responsibility incentives and external regulatory pressures.

Despite this, there is cause to remain optimistic about the potential of digital financial services. According to strategy house McKinsey, digital finance is estimated to reach over 1.6 billion retail consumers in several developing economies. At the same time, the global volume of loans is expected to increase by $2.1 trillion when digital financial services are tapped on. Financial services providers are the first in line to benefit from this opportunity as they expand their existing revenue streams and introduce more product offerings aligned with the changing demands in the overarching landscape. Other ecosystem players stand to gain as well – new businesses offering data-based services, microfinancing services, and other novel products will spring up and disrupt the status quo.

Mobile money economics

The proliferation of mobile technology has allowed for the provision of live mobile money services across various regions over the past ten years. In the backdrop of increasing mobile penetration in several developing and fast-growing economies, the ubiquity of mobile phones has been a key enabler for the underbanked to gain a secure and affordable means of transfer and payment. With just a mobile phone application and a SIM card, anyone can register an account with the financial service provider and deposit cash for electronic money. This makes mobile banking an affordable and even more accessible counterpart to the commonplace agent banking model.

Currently, half of the global mobile money transactions are centred in Africa. In fact, mobile money has become so commonplace in the majority of the underbanked and unbanked areas that, in 2020, Africans exchanged a whopping $490 billion through mobile money providers. Taking an example, the implementation of a new mobile banking service has allowed the Zambia National Commercial Bank to now serve 200,000 more customers. The entry-level mobile account introduced, Xapit, offers minimal account fees and the optionality of an accompanying debit card. It is unsurprising that Xapit has been well-received domestically, given that over half of all Zambians own a mobile phone.

Asia takes the second spot as it accounts for over a quarter of the world’s mobile money services. Out of the 547 million mobile money accounts registered in Asia, more than half of these accounts are traced to users in South Asia. With the regional transaction volume more than doubling in the past few years, it is no wonder that tech firms have been disrupting the traditional banking landscape in Southeast Asia. In Indonesia, non-banks have already taken over primary payment providers. Similarly, non-banks have also been experiencing an exponential growth trajectory in the Philippines. With an estimated 290 million market size for the unbanked within the ASEAN region, there has never been a better incentive for new fintech players to ride on the mobile money economy and challenge the existing infrastructure.

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Governance Case for Financial Inclusion

Across the world, inclusive growth has become one of the most prominent policy goals for governments. While financial inclusion is just one of many items on the inclusion agenda, the term has gained significant traction since the early 2000s. Financial inclusion drives seven of the United Nations Sustainable Development Goals (UN SDG), facilitating the universal goal of poverty reduction and global economic prosperity. Since then, governments have since recognised the urgent need to extend access to financial services across all segments of society. Globally, over 60 countries have made commitments to financial inclusion, and more than 50 countries have embarked upon national financial inclusion strategies to prioritise financial inclusion.

From the perspective of a policymaker, financial inclusion is imperative to poverty reduction and reducing socioeconomic costs on existing infrastructure. It is also key to promoting equity and a higher standard of living. To bridge the financial infrastructure gap, governments take on the role to stimulate infrastructural growth, catalyse volume and implement shared rules for adherence.

Regionally, governments have been actively promoting infrastructure through means such as taking on ownership of several retail points of services, introducing national payments and financial switches, and removing overarching barriers to financial access.

The Indonesian government has been active in their efforts to promote financially inclusive infrastructure. A successful example in promoting infrastructure is the Indonesian government’s TabunganKu BCA initiative in 2010. A savings product that targets the lowest denominator of migrant worker groups and societal groups in remote areas, run jointly by several banks in Indonesia, the program only requires Rp 20,000 for a starting balance and removes monthly administration costs charged by a traditional financial institution. However, there is an impediment to widespread usage – any transactions made through the TabunganKu account can only be performed in a bank branch. Yet, there are only 10 bank branches available to 100,000 Indonesians at any time, one of the lowest amongst its neighbouring countries.

Promoting infrastructure can also take the form of introducing national microfinancing schemes. Thailand’s Village Fund has become one of the most prominent microfinance institutions globally, and is the second-largest microcredit scheme in the world. The programme sets up a one million baht loanable fund per village. Ideally with a standard pool of loanable funds per village, entrepreneurs MSMEs can grow and sustain their businesses, contributing to a stronger economy within each precinct. However, effects varied across different segments. While overall agricultural income increased, the overall asset growth in villages declined.

At the same time, governments play a significant role in implementing rules that determine whom, how, and when can undertake initiatives and programmes to promote financial inclusivity. In fact, governments can be said to be the sole regulator in admitting new entrants into the financial services sector – and by proxy, determine how ecosystem changes will unfold.

The capacity of governments in being the payment systems overseer can be observed through the entry of the most notable non-bank e-money platforms in the Filipino market, Gcash. Now the country’s largest mobile e-wallet service, the non-bank payment system takes on market leadership as over 70 percent of Filipino adults have a Gcash account. In 2009, presented with two e-money schemes, the Filipino regulators, the central bank of the Philippines, Bangko Sentralng Pilipinas (BSG) had issued an operating licence to Gcash, in lieu of another bank-issued e-money product, Smart Money, which was introduced by a traditional financial institution. Gcash had an interesting value proposition – to be able to reach the unbanked and underbanked populations in the country and therefore fulfil the gap in e-wallet services. The introduction of Gcash’s frictionless application and overall ease-of-use was a better alternative to traditional financial services which had barriers to entry, with multiple documentation requirements, demonstrable credit records and high minimum balances required. A decade later, this regulatory action had pronounced effects in transforming the financial services landscape. Gcash has set a precedent to fintech companies overtaking banks in capturing the unbanked populations. Regulations had effectively created a level playing field between nonbanks and banks – and therefore a more dynamic ecosystem of different actors and products with an objective of democratising finance.

Undoubtedly, successes globally have been varied. Countries with more advanced and efficient banking systems have seen greater success in their initiatives. Large variations observed in the range and depth of financial services were observed to be attributed to the market frictions that hinder the efficient operations of financial institutions and markets. The existence of market and regulatory constraints constitute country-specific barriers that contribute to market frictions. Naturally, efficient and developed financial sectors allow greater competition to materialise, ensuring that there is a competitive supply of financial services to expand and entrench accessible financial and lending infrastructure.

After all, strong government support and an enabling environment remains key to establishing a financially inclusive society. Governments can seek to achieve financial inclusion by putting in place open regulatory policies that welcome the entry of innovative fintech solutions. For instance, the implementation of regulatory sandboxes ensure that market entrants have a safe space to test their products, services and solutions before going into the market. A positive, enabling environment that balances responsible and well-informed initiatives will be crucial to achieve greater financial inclusion.

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AI

While the definition of artificial intelligence (AI) has been reimagined over the past century, it can simply be explained to be the endeavour to simulate human intelligence in machines through complex mathematical modelling techniques. Machine learning is thus the application of AI to develop models and algorithms to solve problems. Built from data, the performance of machine learning algorithms are largely correlated to the quality of the dataset – and this has implications on its corresponding applications. Today, AI and machine learning applications can be extended to the financial inclusion agenda, and have increasing relevance in the field of credit risk scoring.

In economies where financial mobility of the already vulnerable groups are impeded, artificial intelligence (AI) and machine learning serve as welcome technologies that can improve their access to basic financial services.

Information asymmetry and its barrier to extending credit

The credit market is largely characterised by information asymmetry. Banks, as their capacity as lenders, do not always possess perfect information on the borrower’s risks, as posited by Stiglitz and Weiss (1981). For the financially vulnerable, being excluded from the formal employment economy and the lack of a pre-existing account with traditional financial institutions further contribute to their information opacity. Similarly, MSMEs who do not have audited financial statements and lack any collateral to tag to their loan applications also make their characteristics much harder to capture in quantitative indicators as required by financial institutions. This creates the financial inclusion gap that could be largely resolved through technologies that can bridge the existing information asymmetry.

Redefining credit scoring through the use of AI and alternative data

Where the main barrier for the financially vulnerable to access credit products often lie in their inability to demonstrate creditworthiness as obligated by traditional financial institutions, AI can step in by calculating credit scores through machine learning algorithms that utilises alternative data – enhancing the existing credit scoring mechanisms to include the underserved into the credit system.

Alternative credit scoring utilises artificial intelligence and social media, scraping away traditional metric and paper-based scoring methodologies that depend on individuals having a preexisting account. In many developing economies, consumers tend to prefer one-stop-shops to make their necessary purchases. In Indonesia, e-commerce has become the most prevalent platform for the retail consumer to top up their phone credit, pay bills, and pay for their commute. At the same time, the unbanked in the society also typically are unable to demonstrate a consistent income history or creditworthiness, being traditionally cash intensive users.

This provides AI-based fintech firms an interesting opportunity. By onboarding the unbanked into the e-commerce and online platforms, there are now data points for their algorithm to evaluate their financial and consumption fitness. Similarly, alternative data sources such as public data, registered data from companies and interaction data from social media and messenger services can enrich the alternative credit scoring dataset to enable the AI algorithm to assess consumer behaviour and verify their ability to repay the loans more accurately.

The technology is already in place in some key emerging markets. Branch, a mobile-based digital lending application provides consumers in Kenya, Mexico, Nigeria, India and Tanzania access to instant loans with no physical documentation. Credit is made affordable and accessible to the financially vulnerable, including smallholder farmers which have difficulties accessing credit from traditional financial services providers. The application incorporates machine learning algorithms to assess the creditworthiness of the borrower through data points gathered from the individual borrower as well as those pegged to the accumulated experiences of other existing borrowers. Branch collects mobile data ranging from text messages to call logs and even GPS information to derive its credit decision. The onboarding process is frictionless as well – applicants simply have to download the application, perform standard identification verification processes and indicate their consent for Branch to access their mobile phone data. Furthermore, Branch extends credit in denominations as low as USD $50, breaking down traditional notions of economies of scale as necessitated in traditional financial institutions.

In a way, alternative credit scoring is simply an upgrade from traditional credit evaluation mechanisms to automated credit scoring in the presence of abundant, relevant and quality consumer data; which is otherwise known as alternative data. And yet, alternative credit scoring serves as a more efficient, cost-effective and customised alternative to include the financially vulnerable into the system; overcoming the problem of information asymmetry.

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Blockchain

The blockchain is simply a massive, decentralised ledger of transactions across a peer-to-peer network. The shared and immutable ledger enables the processing of transactions and tracking of assets without the need for a central authority or bank as an intermediary, extending its uses beyond the more commonly known cryptocurrency. Distributed ledger technology is one of such applications that can help to foster financial inclusion.

A case for accessibility and usability

Conventionally, the unbanked and underbanked face significant challenges and hefty costs in opening a bank account. Other than a potentially long travel time and opportunity costs in heading to a bank branch, identification documents and a minimum initial deposit balance are also some of the key barriers.

Blockchain technologies have the potential to make the financial services ecosystem more transparent, frictionless and efficient. Operating on a wholly online presence, individuals do not need to travel to a bank branch to open an account or to deposit cash. Furthermore, in terms of usability, they are also able to deposit money into their accounts through third party agents right on their phone. This makes their access to the financial system seamless. However, this is not the sole value proposition of blockchain technology.

Blockchain-based identities help address the hurdle on identification documents. One billion in the world lack proof of identity and struggle to face challenges in verifying and authenticating their identities. This restricts their access to many basic services and opportunities – financial, health and livelihood. Without legal identification, they are denied access to formal employment, registering self-owned businesses, opening a bank account, accessing healthcare and even obtaining government aid. This makes a strong case for a verifiable digital ID, which can be registered at a lower cost. Blockchain provides an effective proposition to digital identity management.

Without requiring the typical legacy documentation from traditional financial systems, the technology could help the unbanked become more easily verifiable on public blockchains. If the unbanked are able to gain access to the internet, they are surely able to access blockchains. Similarly, if they are able to access blockchains, they now have a digital identity in the form of a decentralised identifier (DID). This allows individuals without proper access to the financial system to gain a higher independence and better chances of government welfare through their digital identity on blockchain. These unique identifiers are generated and controlled by holders, in so-called decentralised self-sovereign identity (SSI) systems – immutable and more secure than traditional identity systems. It allows an individual to have control over the administration of his identity – users can now carry their own tangible digital ID to access services such as transferring money over a domestic and international scale.

As such, self-sovereign identity platforms are easily accessible to any mobile phone holder – the unbanked would just be required to open an account and input the necessary data to create the digital ID. This is well-aligned with the ubiquity of mobile and internet usage across the world.

Blockchain-based identities empower individuals. Individuals remain in sole control of their own identity, and with the immutability of the underlying blockchain technology, their identity cannot be owned by any governmental authority and financial intermediaries. Predictably, decentralised identity solutions will benefit refugees without proper identification documents the most , providing them with a digital verification mechanism to prove and share their identities, enabling them access to basic services. Beyond that, blockchain-based identities serve to include the financially vulnerable on a larger scale, providing them with an economic identity through a public decentralised infrastructure.

Redefining digital credit and capital raising

The global online alternative finance market volume has increased by a whopping 37 percent from 2012 to 2017. In 2017, the total market volume stands at $418.52 billion. Under the umbrella of online alternative finance, peer-to-peer (P2P) lending and crowdfunding has seen a continuous growth trajectory. Unsurprisingly, the push for P2P lending and crowdfunding has been marked by the underlying demand for greater credit accessibility by small businesses.

While still a relatively nascent industry, P2P lending provides significant potential in contributing to the growth of many MSMEs. Globally, P2P lending accounts for 25 percent of MSMEs’ funding mechanism. MSMEs in Indonesia face obstacles and limited access to funding from formal funding, making it challenging for their businesses to expand and survive. At the same time, they are vital to Indonesia’s economy, contributing to job creation, poverty reduction, and solving inequality. Where P2P lending is seen as a more convenient, efficient and flexible alternative to traditional financing, the P2P lending market steps in as one of the most important sources of funding for these businesses.

As the P2P lending market continues to scale up, blockchain technology has the potential to be implemented in P2P lending platforms to help facilitate safer, more transparent and quicker access to funds. The role of the blockchain-based P2P platform is not that of a credit intermediary, but rather as an information intermediary to connect supply and demand resources (i.e. or borrowers and lenders). The platform facilitates transaction initiation, pre-transaction verification, contract signing, transaction processing and risk control.

In transaction initiation, both borrowers and lenders download the blockchain client. Synchronising their devices to the blockchain network, the borrower proceeds to request for financing at the terminal with the amount, maturity, interest rate, collaterals and other relevant information. The lender mobilises the borrower’s credit history in the blockchain platform and proceeds to make the credit decision through direct P2P communication. Verification takes place in the form of fuss-free, quick, real-time authentication and approval without the involvement of a third party. The use of smart contracts comes in to enable contract signing without the need of brokers and intermediaries, enabling greater speed, accuracy and safety in processing. To finish off, the client wallet is then utilised to transfer the money and to synchronise information in real time, without account processing. All transaction information and protocols are publicly recorded on the ledger – information ascribed on each block is available on all nodes and visible throughout the entire network.

Blockchain P2P lending provides substantial cost efficiencies and onboarding time. For instance, by removing intermediaries in loan closing, the technology can help save 1 to 2 percent of the closing costs. This makes P2P lending much more affordable and scalable to the underserved. Furthermore, as the blockchain saves the full credit history of borrowers, future lenders are provided a degree of oversight on their creditworthiness. This is a welcome innovation to the financially vulnerable, as they are often unable to demonstrate creditworthiness in the first place. By slowly building up their credit history, they are able to receive more and higher-value loans as they repay their smaller loans and apply for larger loans in the future.

Smart contracts and transparent financing

Smart contracts also provide significant benefits in providing financially inclusive and sustainable solutions. As programs stored on a blockchain that run when predetermined conditions are met, smart contracts automate the execution of agreements without any intermediaries. In essence, a distributed ledger is used to store contracts. Blockchain-based smart contracts are characterised by their ability to automate, self-execute, remain immutable and allow distributed access and accurate verification. In fact, the design imperatives of a smart contract lies in its observability of either party’s performance of obligations, verifiability to an independent third party that the obligation has been breached or met, privity only to parties of the contract and enforceable through built-in self enforcement protocols through incentives and penalties. As such, they offer a more transparent, efficient and secure way to facilitate contractual processes that are commonplace in capital raising and financing.

One alternative financing mechanism that has compelling benefits to the MSME market in developing economies is through crowdfunding. Crowdfunding allows for a quick way to raise funds with fewer regulatory requirements and provides greater cost efficiencies, allowing MSMEs and underserved individual access to finance, whilst paving the way for innovations in microfinance and mobile financial services. Beyond helping the bottom-of-pyramid (BOP) groups and businesses access, crowdfunding has also been successful in connecting funders in developed economies to low-income entrepreneurs in developing countries. For instance, Kiva remains one of the most prominent crowdfunding loan platforms globally and has since coordinated more than 1 million loans from funders to BoP owners in developed economies.

A lack of transparency remains one of the key concerns of crowdfunders. Trust is integral in the crowdfunding process as both the crowdfunder and fundraiser need to know that the funds are handled appropriately. On one hand, crowdfunders need to ensure that the funding is transmitted to them when project goals are met. On the other hand, fundraisers need to ensure that their funds are channelled correctly to the project when the fundraising goals are met; or if otherwise, refunded to them. As such, an intermediary in the form of a trustworthy crowdfunding platform is required. This is where smart contracts come into play, as they are suited to alleviate process frictions and operational, fraud and legal risks by holding the funding until a fundraising goal is reached. When the project is fully funded, the smart contract automatedly transfers the money to fundraisers. Alternatively, if the project fails to meet fundraising goals, the program executes the refund to the supporters.

Effectively, smart contracts eliminate the dependency on traditional crowdfunding platforms such as Kickstarter, and offers a stronger value proposition to instilling trust between both the fundraiser and crowdfunders. Streamlining and shortening the process, smart contracts provide greater cost efficiencies and operational efficiencies as compared to traditional incumbent platforms. As parameters are already clearly defined in the program, processes are executed automatically. Additionally, a smart contract adds an additional layer of governance and transparency. As it is a distributed ledger, there is no sole ownership of the money until fundraising goals are met. Furthermore, the distributed ledger also enhances verifiability through its auditability. Its immutable characteristic also ensures that once the contract is set, it will be unable to be tampered with, adding an additional layer of security.

In other words, smart contracts provide exceptional benefits that contribute to the overarching objectives of crowdfunding and are key to building trust between stakeholders on either side of the project. Its versatility and interoperability also enables it to be utilised in wider applications than that of capital raising. For instance, smart contracts can also be utilised in insurance and cross border payments,, in the push to enable the financially vulnerable to access basic financial services.

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Cryptocurrency

While blockchain technology has unparalleled potential in allowing the financially vulnerable to spend and exchange money in a cheaper and faster way, one of its most prominent applications is the cryptocurrency. Using blockchain technology, cryptocurrency is a medium of exchange, created and stored electronically in the former through encryption techniques to algorithmically control the creation of monetary units and verify the transfer of funds. As at 2021, cryptocurrencies were valued at over $2 trillion in market capitalisation – and this number is further expected to increase as cryptocurrency-based lending applications and decentralised trading revenues gain more traction. One of the best known examples is Bitcoin.

A transformation in cross-border remittances

The borderless nature of cryptocurrencies has allowed it to be proposed as an alternative medium for international remittances. Globally, remittances cost an average of 6.30 percent of the amount sent. For many salaried workers in developing economies such as Kenya, this can comprise a significant amount of their monthly income – sometimes up to 30% of their gross earnings. For some financially vulnerable groups such as low-wage migrant workers, the hefty fees incurred in cross-border remittances is an even more pressing issue for them to send money back home. International transfers by traditional intermediaries such as Western Union and MoneyGram often impose high costs for their services,. This results in many migrant workers having no choice but to limit the frequencies of their remittances, even when emergency expenditures may be required by their families.

Similar to other blockchain technologies, transaction time and costs can be significantly reduced by the elimination of the middleman. Conventionally, a foreign exchange transaction requires the completion of tedious paperwork and payment of the significant bid-ask spread between the two currencies. Thereafter, the transaction goes through a series of third-party middlemen such as an intermediary and an end-point bank in the receiving country. The SWIFT protocol currently acts as a network to bridge two banks without an established financial relationship by searching the network for correspondent intermediary banks that can settle the transaction and take a cut of the fee. Another cut of the fee is then absorbed by the actual intermediaries that process the funds – the SWIFT protocol only sends the payment orders. The substantial involvement of intermediaries results in a series of commissions being charged, with zero transparency and a lack of immutable records for verifiability.

To counter this, cryptocurrency acts as an asset to remit money with little costs to transfer and allows for currency exchange with no markup. In fact, with cryptocurrency as a medium, transfer fees could be reduced to as little as 0.025%. On the whole, a study by Accenture expects that blockchain technology could bring down the global clearance and settlement costs by $10 billion annually. With an almost instantaneous processing, cryptocurrencies also help to alleviate the issue of an uncertain payment time encountered with traditional intermediaries – allowing users to transfer money swiftly during exigencies. On a macroeconomic level, the cryptocurrency-based blockchain technologies will also allow overall payment processing capacities to expand globally.

While traditional cryptocurrencies such as Bitcoin are already able to provide significant advantages, the payment landscape is also seeing new entrants in the form of cryptocurrency-based blockchain payment systems. To take an example, Ripple is a blockchain technology that bypasses the intermediate tiers of the banks to enable transactions to be confirmed in seconds. The medium used is in the form of a cryptocurrency, XRP, in which its sole objective is to be converted back and forth between currencies. In its design we see its ingenuity – by having both a distributed ledger and cryptocurrency, the transaction data and the actual funds are carried synchronously in real time. This is enabled through the use of its decentralised P2P network that allows for both the bidirectional messaging between the messengers of both the sending and receiving bank, inter-ledger protocols (ILPs) to track debits, credits and liquidity of the transaction, FX ticker, and validator for real-time settlement. As a result, it only takes around four or five seconds to complete transactions.

Safeguarding against financial collapse

In economies where financial systems have collapsed, cryptocurrencies are a good way for people to safeguard their assets and perform remittances. Venezuela serves as a perfect example of how cryptocurrency has transformed the lives of people who are unable to access basic financial services due to the state of their economy. Wrecked by hyperinflation of the national currency, Bolivar, most Venezuelans do not have sufficient US dollars to be able to open a US bank account and thus are barred from accessing international banking services. At the same time, sanctions and compliance regulations resulted in the closure of multiple international bank accounts, restricting their access to the international financial market. The persistent distrust of the traditional banking sector and the sentiment of cryptocurrencies as a hedge to volatile currencies and geopolitical risk has also led a strong push toward cryptocurrencies.

This is where cryptocurrency can step in – it provides a viable solution for populations living in countries with fluctuating and unstable monetary systems as a storage of value or platform for holding their wealth. In fact, Bitcoin has emerged as a more attractive alternative to holding the rapidly depreciating national currencies in Argentina and Venezuela that even the relatively high price volatility of the former imposes less of a barrier.

The nature of cryptocurrency allows it to be a good alternative storage of value and hedge in troubled economies. For instance, despite the fact that new Bitcoins can enter the exchange through mining, there is ultimately a finite number that are allowed to exist. Its algorithmically fixed production schedule helps protect the coins from arbitrary inflation by the central authority through Proof-of-Work. Furthermore, cryptocurrencies like bitcoin are decentralised, shielding it against pitfalls associated with monetary supply, such as macroeconomic supply shocks and asset market inflation.

Where inflationary pressures have a direct correlation to currency devaluation, cryptocurrencies such as Bitcoin also address problems relating to wildly fluctuating exchange rates. Cryptocurrencies also have the ability to insulate against currency wars initiated due to escalating geopolitical tensions. This was observed when Brazil declared a currency war on the United States due to the latter’s expansionary monetary policy which had resulted in the Brazilian Real to appreciate. As the Brazilian government introduced a series of measures that had the intention to depreciate the currency in a controlled manner, it had, in reality, resulted in the severe fluctuation of exchange rates. Faced with the volatility of exchange rates, Brazilians turned to Bitcoin as a store of value and a medium of exchange into other more stable currencies.

While the benefits of cryptocurrencies can be realised by anyone who accesses the financial system, its benefits are felt the most among the financially vulnerable in developing economies with a volatile and unstable monetary system.

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Conclusion

AI, Blockchain and Cryptocurrency present promising new opportunities to revolutionise how things are traditionally done in the existing global financial system. As financial inclusion remains a key social and economic agenda in countries all over the world, fintech companies are likely to take the centre stage in harnessing digital technologies and applications through the former to address institutional inefficiencies and alter public expectations in the process.

At the same time, these technologies will face an enormous hurdle in scaling up and achieving widespread adoption and acceptance; enabling inclusive financial services to the masses. Market entrants offering innovative AI, Blockchain and Cryptocurrency based products will need to navigate through regulatory uncertainty across different geographical and political landscapes. The regulatory direction taken by governments are likely to differ and lead to substantial uncertainty in the short and medium term. While regulatory bodies have since improved in working with the industry to build an ecosystem that balances protection and regulation, regulatory uncertainty will undoubtedly surface as regulators struggle to meet with the rapid advancement and evolvement of AI, Blockchain and Cryptocurrency technologies. With overarching regulatory uncertainty, investors become hesitant and innovation may be dampened.

As posited at the World Economic Forum, technologies alone are insufficient to spearhead the creation of new market infrastructure or lead to the improvement of existing infrastructure. The involvement of all players in the entire ecosystem is necessary to shape the direction of financially inclusive technologies. Strategic partnerships, established with sound frameworks and implementable timelines, can help stakeholders respond and adapt to a rapidly evolving financial services landscape globally. After all, universal financial inclusion can only be achieved when innovation is aligned with shared strategic objectives in the entire ecosystem.

Fintech has the power to uplift the lives of the 1.7 billion people who are outside of the traditional financial system. With the advancement of AI, Blockchain and Cryptocurrency technologies, there has never been a better time to call upon all stakeholders across the value chain – investors, businesses, consumers and regulators alike – to take part in the development of the fintech ecosystem. Fintech is a force for good – and it is here to stay.

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Verified compensation data of Software Engineers and other technology talents. Analysis of top paying companies.

Overview

This joint report recognises an unsolved pain point in the tech community – existing compensation solutions and reports were insufficient despite the abundance of data. They could not accurately capture the nuances of the tech industry where the 90th percentile of software engineers are paid as much as 3x more than those in the 10th percentile.

Salary data for Singapore are derived from NodeFlair’s proprietary database of over 30,000 data points from companies of all sizes and industries. This includes user submissions verified by documents (payslips and offer letters) as well as job advertisements from various aggregated from various job portals for the year 2021. Salary data for India and Indonesia are derived from over 5,300 data points from companies of all sizes and industries. These data are from job postings in these countries for the period of Q4 of 2021.

Salary data is not provided by the industry experts interviewed in the report.

In-depth interviews about the best talent management best practices with over 10 founders and engineering leaders. These leaders and companies are primarily in Singapore, but also with engineering footprints in other Asia countries such as India, Indonesia, Vietnam, Malaysia, Taiwan, Hong Kong and more.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

Tech talent compensation in Singapore increased 22% last year. The massive demand for tech talent is fueled by the wave of venture capital into tech startups in the region and global tech companies setting up in Singapore, layered on top of a limited tech talent supply.

In 2018, Quest Ventures invested in NodeFlair’s vision to build a solution for tech talent and businesses. Recognising the gravity of the global tech talent squeeze and its impact on Singapore and Asia, the team went on a mission to diagnose the pain points for tech talent and hiring entities. Salary is identified as the largest push and pull factor, and the reason responsible for failed job placement.

This report uncovers the tech talent salary black box and empowers tech talent and employers by analysing more than 30,000 data points from NodeFlair’s proprietary database, and in-depth interviews with founders and engineering leaders.

Salary transparency is paramount to both tech talent and employers. It makes the hiring process more time-efficient and prevents unnecessary unhappiness resulting from misalignment in salary expectations. Tech talent will also be more empowered in job interviews and compensation negotiations when they have access to up-to-date market salary benchmarks. Employers can further develop and finetune their human capital strategy and budget to be more competitive in their hiring process, increasing tech talent attraction, and improving retention. Beyond salary, the report also consolidated practical and actionable insights from founders and engineering leaders.

We congratulate NodeFlair on the release of this ambitious report.

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Top challenges for Hiring Tech Talents in 2022

The talent war for experienced talents will intensify even more. The demand for senior engineers is higher due to the bullish funding scene and competition from foreign tech firms. Companies with deep pockets would “buy time with money” by prioritizing senior hires, as they are more operationally ready and take less time to onboard and contribute. On the supply side, while the border is opening up from the pandemic and companies are adopting a more remote approach for their engineering team, we expect this transition to take some time.

The rise of salary for tech talents is not slowing anytime soon. A better salary package is the top reason (65%) talents are looking for new opportunities. That ranks higher than other reasons like their desire to work on new technologies, work-life balance and growth opportunities. While companies can, and will, work on the non-compensation aspect to attract talents, the easier way out in the short term will be to increase their hiring budget, especially when they are on a hiring spree.

Companies can expect a talent drain as newer and more attractive technologies and sectors like blockchain and Web3 arise. In 2021, investors poured $30 billion into blockchain and cryptocurrency due to the growth and demand for Web3, NFTs and other related areas. We have observed that due to the underwhelming supply
of engineers specialized in blockchain development, companies have adjusted their hiring strategy by targeting software engineers who are interested in picking up blockchain
development instead. With the boom in space not slowing down anytime soon, companies will face tougher competition.

Most in-demand skills and competencies in 2022

Talent management skills will become increasingly important. As the war for tech talents grows fiercer, companies will see a drop in average tenure and a higher turnover rate. At some tipping point, the tangible and intangible cost of attracting, recruiting and onboarding talents will rise to be too expensive for companies if they do not retain these great talents well. Companies need to invest in leaders who can grow and retain these talents through non-compensation means, such as enforcing a higher quality engineering culture and creating a better Developer Experience (DX). While companies can solve their recruitment challenge by offering higher compensation, they require a distinguished engineering leader to manage the team well to ensure their hiring investment is not wasted.

How should companies position themselves to stay competitive in the tech talent market in 2022?

Instead of focusing on recruitment, companies should also focus on retention. Many companies are spending a lot of manpower, time and money in recruiting talents, but few allocates sufficient resources to talent retention. Non-technical leaders and CEOs have to understand that talent churn is much more expensive for engineering than a simple one-off recruitment cost. The time needed to replace these members and onboard new ones is longer for engineering is longer than other functions.

Attract talents with better non-compensation benefits. After salary, the top 3 reasons why talents are looking then considering new opportunities are 1) Wanting to work with new technologies, 2) Better flexibility and work-life balance and 3) Growth or leadership positions. Re-evaluate your existing working environment to improve these aspects, such as getting rid of rigid working hours and allowing for working from home (even if it is not required by government regulation).

Be more flexible with the hiring requirements. Companies often have a long list of required skill sets that they look for in their ideal candidate. However, in many situations, many of these skills are not crucial or can be picked up relatively easy as long as someone has experience in similar technology. Instead, have a clear list of the must-have and good-to-have and rank candidates based on how many good-to-have checkboxes they ticked. Doing so widens your pool of candidates and reduce the time you take to hire the right person.

Re-evaluate the hiring process. Often, companies have too many interview rounds than they need. Also, most of the assessments are not conclusive in determining if a candidate is suitable for the role. Instead, companies should figure out and eliminate interview rounds that are repetitive and ineffective. This way, they can complete the entire interview process much faster and have a lower chance of candidates withdrawing their applications.

Build up their engineering presence through various channels. At any time, only 20% of the market are active job seekers, while 54% are passive and open to new opportunities. The top 2 methods talents are learning about companies are through their network and reading about news and articles of the company. As such, invest money and effort in meetups and sharing, engineering blogs and developer advocacy, so that their company have huge mindshare.

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Download the full report here.

Powering Southeast Asia’s charge to a sustainable future

Credits

Analysts
Mr Ang Wei Xuan, Summer Analyst

Research
Mr James Tan

Overview

The world’s population reached 7.9 billion in 2021. Its resources are already being pushed to the brink, and we are facing unprecedented social inequalities, environmental degradation, and governance issues.

Without taking the necessary steps to mitigate these effects, we are poised to see temperatures rise by 1.5 to 2ºC by 2050. The resultant detrimental effects, including a large increase in the frequency and scale of natural disasters, spread of diseases and ecosystem disruption will make life untenable for many regions, including Southeast Asia.[1] This will derail the lives of millions, and it would not be unfair to say that how governments, corporations & communities come together to tackle this mammoth problem will define the lives of many generations to come.

The severity and urgency of the problem has seen hitherto silent stakeholders begin taking action to ensure sustainability on all fronts. In this regard, we believe that early stage venture capital can serve a crucial role in resolving critical problems by financing and developing innovative tech-based solutions. The dual goals of profit and impact allow leveraging of market forces to scale quickly and effectively. This report aims to provide an insight into the ongoing sustainability efforts, trends and outline the reasons for our bullish sentiments towards sustainability-focused investing.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

The ‘take-make-waste’ industrial model is no longer feasible. With a larger GDP than the rest of the world combined, and as the fastest growing economic region, what Asia does as it rises will have a significant impact.

With a trillion dollars in economic benefits if efforts to go green in Asia go right, and climate change and other disastrous effects if the efforts do not, the stakes are high. 

We believe that governments need to push for sustainable practices on a national, regional and international level.

We believe that businesses must align between sustainability and corporate gains. Old and new businesses alike must commit to incorporating ESG goals in their key decision making.

We believe that the financial services industry can encourage industries to implement ESG criteria into their decision making, as well as rewarding efforts made towards sustainable development.

Time is not on our side. Our three tenets are merely a starting point. Governments, corporations, and individuals that want to do more can count on increasing awareness and support globally to drive changes. We look forward to working with them towards a sustainable future.

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Defining Sustainability

The 1987 United Nations Brundtland Commission’ defined sustainability as the goal of “meeting the needs of the present without compromising the ability of future generations to meet their own needs. Today, sustainability is inevitably centered around environmental issues. However, we must keep in mind that sustainability also encompasses social issues like inequality, as well as economic issues such as trade, and that all these issues are often intertwined. 

Since the Industrial Revolution, the onset of capitalism and the industrial economic model has seen humanity consume resources at an unprecedented rate. Conservation of the environment was but an afterthought as natural resources were exploited for economic growth. Modern superpowers such as the USA and various European countries built their success on the back of the deployment of large quantities of less efficient technology, powered by finite natural resources. That has already caused irreversible damage to the ecosystem, creating issues such as global warming, extreme weather events and environmental degradation.

As of June 2021, the world population has reached approximately 7.9 billion. Sustaining so many on the old ‘take-make-waste’ industrial model is no longer feasible, and will only exacerbate the harm to our planet. We need to find ways to make more from less, focusing on social and environmental outcomes instead of economic ones. 

However, it is a tremendously unfair request from the Western developed countries (NOA, EUR) for countries in developing regions (APAC (including SSEA and EAS), MENA, LAC, SSA) to forgo the same tools and methods that had worked so well for them in their pursuit of economic development. 

As such, an integral determinant to the success of the sustainability push is how developing regions incorporate sustainable development as they rise.

Of particular importance will be Asia’s approach. Asia is the fastest growing economic region today, with a larger GDP than the rest of the world combined, both in nominal and PPP (Purchasing Power Parity) terms. By 2030, Asia will be home to 60% of global growth and 4.9 billion people.[2] While China, Japan and South Korea are already global leaders in green technology, how the rest of Asia adapts will become of paramount importance to the global fight for sustainability.

The physical effects of unsustainable growth, combined with growing research in and awareness of climate science & environmental issues have pushed sustainability to the forefront of the collective human consciousness, where it had once lingered at the back of for years. People today know that the fundamentals underpinning economic growth must change.

The UN has contributed towards pushing for global cooperation in this regard, and the well-known Sustainable Development Goals (SDGs) spur ambitious targets for companies, countries and individuals. Reaching them can only be achieved via sustainable practices. This can be defined as generating positive value for stakeholders, or not harming them at minimum, and improving environmental, social and governance (ESG) performance in areas where one has an impact.[3] However, the increase in adoption of sustainable practices by countries and corporations in recent years has its roots not just in lofty aspirations, but also in more practical reasons.

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Governance Case for Sustainability

Traditionally, governments have avoided pursuing an overt sustainability agenda. While Bhutan has achieved carbon negative status, it did so at the expense of economic growth; few developing countries are willing to make that tradeoff.[4] Sustainability seemed to be a luxury only wealthy countries could afford. 

However, in the face of worsening climate risks, developing Asian governments have become increasingly aware that they can no longer afford to focus exclusively on economic growth and leave sustainability for later. They have to achieve both in tandem, or risk facing larger problems in the future.

High Stakes & Strong Motivations

Asia, and to a large extent Southeast Asia (SEA), is particularly vulnerable to climate change, due to the concentration of economic activity and population along coastlines and the reliance on agriculture, forestry & natural resources for livelihoods. Rising temperatures, sea levels, increased frequency of natural disasters (floods, cyclones, heat waves) and decreasing rainfall are effects that governments cannot afford to sit back and ignore. The rapid onset of pollution and degradation has had far-reaching consequences on the standards of living for citizens in Asian countries. Studies have also shown that deforestation and climate change increase the risk of zoonotic disease transmission (such as COVID-19). Becoming more sustainable has become a key socio-political promise for governments, with good reason. 

In the absence of appropriate adaptation and mitigation measures, McKinsey predicts that by 2050, up to $4.7 trillion of GDP in Asia will be at risk annually due to increased heat and humidity causing a loss of effective outdoor working hours.[5] It has also been predicted that by 2050, the exacerbation of natural disasters could cause $1.2 trillion of damage to capital stock from flooding in any given year and cause up to 40% of land area to experience shifts in biomes, affecting ecosystems and livelihoods. These effects have been corroborated by independent research done by the Asian Development Bank (ADB), which projects a decline of up to 50% rice yield potential and 6.7% combined GDP each year by 2100.[6]

Significant Potential Upside

On the other hand, Asian and South-East Asian economies have much to gain by focusing on greening their economy. A report by Bain claims that SEA could see up to US$1 trillion in economic benefits up for grabs by 2030 if it successfully builds a green economy and becomes a more attractive investment destination. [7]

Research done by think tanks ClimateWorks and Vivid Economics posit that a low-carbon industrial strategy could be the golden opportunity for ASEAN to recover from COVID-19.[8] They argue that ASEAN member countries are uniquely positioned, being both in close physical proximity as well as possessing strong existing trade relations with China, Korea and Japan, the current leaders in low-carbon technology. Combined with lower wage structures, improving infrastructure and a supportive legal environment, ASEAN is an attractive prospect for the leaders looking to scale up production and build more resilient supply chains. This opportunity for technology and expertise transfer for ASEAN countries to restructure their own economies while providing sustainable jobs for the economy.

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Business Case for Sustainability

Thankfully, the policymaker’s viewpoint is shared by the corporate world. Leading management consulting firms such as Accenture and McKinsey have argued that sustainability and the circular economy represent the greatest business opportunity in over 100 years.[9] Traditionally, ESG goals were only pursued by companies on the basis that it coincided with their business philosophy or core values. Today, ESG goals are pursued because the double bottom line has been proven to be achievable, and there are tangible benefits to proactively integrating sustainable practices into one’s business strategy.

Managing Risks

Supply chains have a history of being affected by events outside any company’s control. Resource depletion and degradation of natural capital assets have the potential to rack up staggering losses for overly dependent corporations. By investing in the appropriate green technology and pivoting to more sustainable practices, corporations can reduce their vulnerability to resource scarcity and supply chain disruptions, but also avoid potentially having stranded assets. 

Bolster Performance 

A summary of 200 studies investigating the link between corporate performance and ESG goals done by the University of Oxford and Arabesque has posited that good ESG performance positively correlates to better stock price performance, operational performance and lower cost of capital in more than 80% of all cases. [10]

Mounting Investor Expectations

While ESG reporting is not a new phenomenon, it has only been in recent years that institutional investors have pushed for greater accountability of companies with regard to ESG challenges. This is in line with greater civic consciousness and expectations for companies to step up and contribute to solving issues like income inequality, climate change etc.

The 2020 EY Global Institutional Investor Survey of nearly 300 institutional investors shows that 91% used non-financial performance as a pivotal consideration in investment decision-making, and investors are set to consider it even more rigorously as the links between ESG performance and financial performance become clearer.[11] Despite the setbacks of the COVID-19 pandemic, investors have not reverted to short-term performance models. Rather, it has cemented the importance of long term resilience and the crucial role ESG performance plays in achieving that. Investors are also holding companies accountable, and those that fail to meet expectations risk losing precious access to capital markets. 

The wealth transfer to the younger generation has also seen a shift in investing philosophies, with surveys showing that Millennial respondents are more committed towards achieving social impact and long-term value creation with their investments than simple financial gains.[12] 

Larry Fink, CEO of Blackrock, has testified to the shift in client priorities towards climate change and sustainability agendas, most recently in his 2021 letter to CEOs.[13] This is a reflection of the growing number of institutional investors, not just Blackrock, that are demanding both greater reporting and moving their investments towards sustainability-focused companies. 

Companies looking to navigate through the changing financial services landscape will have to adapt to mounting pressure from investors with regards to sustainability. 

Mounting Consumer Expectations

In the past, consumers had previously balked at paying extra for sustainable products, and companies with sustainable products at higher prices were typically doomed to failure. However, changing consumer trends, spurred in part by the coming of age of the environmentally & socially-conscious millennials/Gen Zs and enabled by increasing levels of wealth in a post-recession world, have fuelled an increase in the demand for products whose brands display evidence of corporate social responsibility, sustainability and respect for others.

Recent empirical research strongly supports the existence of ‘shared value’, the proposition that companies can do well by doing good.[14] This offers companies the opportunity to build new global brands specialising in green products and surpassing large incumbent competitors. For example, EV companies have the opportunity to upstage traditional car manufacturers as trends change. 

According to the Harvard Business Review, companies can even charge up to 20% price premiums based on positive corporate responsibility practices.[15] This strong customer motivation to support sustainability further shows itself in the form of consumer support for a range of trustworthy sustainable products & services, creating superior revenue growth channels for companies. [16]

Achievable Double Bottom Line

Corroboration by multiple sources and the cumulative efforts of research done over the years has made it apparent that the double bottom line is no longer imaginary. A pivot to sustainability is as inevitable as it is necessary. The earlier companies recognise and make efforts to reposition themselves, the better poised they will be to ride through the green revolution. We can expect that as the business case becomes more apparent to top management, sustainability will be adopted at an increasing pace.

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Categorising Businesses Based On Their Approach to Sustainability

Today, we can categorise businesses into 4 main categories based on their approach to sustainability.[17] Out of these four, three types are receptive towards ESG goals, namely: 

1. Businesses in industries with traditionally unsustainable supply or value chains, but are committed to pivoting towards environmentally friendly processes and products. Examples include those in the automotive industry that are making the switch to EVs or those in the consumer electronics industry that are considering social issues such as minimum wages, living standards and conservation of resources/recycling. 

2. Businesses that disrupted older business models and brought about positive ESG-related impact as a byproduct. Examples include ride-sharing companies such as GoJek, Uber, Lyft, Grab that have reduced the need for everyone to purchase a car by making ‘private’ transport ubiquitous and cheap, conserving the resources associated with car production and ownership. In Singapore, BlueSG is pioneering accessible EV rental. Airbnb has minimised hotel wastages by capitalizing on spare bedroom capacity globally.

3. Businesses that are driven by sustainability from the onset. This includes any form of social enterprise or primarily impact-focused businesses. Internationally, examples include Unilever and Novelis.

The last type of businesses however are standing in the way of widespread adoption of sustainability. This group comprises of: 

4. Large businesses in legacy/sunset industries such as those in coal, gas or petrochemicals, that still have significant political/lobbying influence where they are based.

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Three Tenets For Sustainability

Growing awareness within the public and private sectors of the perils of feckless and unrestrained industrialisation has prompted increased attention to the subject of sustainability. It is heartening to see that all UN member states have signed commitments to the UN’s Sustainable Development Goals (SDGs), and companies are making visible efforts to achieve sustainable milestones. Regionally, we are also seeing increased attention and support by blocs such as the EU and ASEAN, and there have been many other international agreements in pursuit of sustainability goals, such as the Paris Agreement, the Sendai Framework for Disaster Risk Reduction, the New Urban Agenda etc.

To bring the quest for sustainability to the next level, we believe that there are three mutually reinforcing keys that need to be employed in tandem.

Firstly, there needs to be support from the respective governments to push for sustainable practices on a national, regional and international level. 

Secondly, businesses must become increasingly aware of the ever-growing alignment between sustainability and corporate gains. This can be achieved in two tranches. Existing businesses need to be convinced of the positive correlation, and subsequently commit to re-pivoting & incorporating ESG goals into their key decision making. Additionally, new sustainable impact-focused businesses must be given the opportunity to grow, provided that they meet critical criteria for success, both in terms of impact and in terms of profitability. 

Lastly, the financial services industry needs to accomplish the dual roles of pressuring industries to implement ESG criteria into their decision making, as well as enabling and rewarding efforts made towards sustainable development. This will be crucial in pushing industries towards the tipping point.[18] 

Quest Ventures is a long-standing believer in the business case for sustainability. In our 2020 publication done in collaboration with INSEAD MBA, we firmly stated our belief that business and ESG impacts are not mutually exclusive.[19] 

While most demonstrated success has been in tech-related startups in Indonesia, Quest Ventures today is actively searching for start-ups with impactful value propositions and solid business models, operating within SEA, across a range of verticals. In our opinion, technology is key to ensuring that sustainability is synonymous with growth. 

We have high hopes for the SEA region in particular, as there is notable progress being made towards unlocking the region’s sustainability. In this report, we will also be discussing Asia’s potential, how close it is to realising that potential and where we expect to see the largest developments in sustainability unfold.

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The First Tenet: Governments

Private Sectors Follow The Government’s Lead

The business environment in Asia has historically been strongly intertwined with government prerogatives and the public sector. Governments provide the necessary support and confidence for businesses looking to test new waters, and their commitment provides strong impetus for the private sector. 

This is exemplified by the Singapore government’s approach to building ecosystems within the economy, such as the start-up ecosystem back in 2015.[20] This ranged from broader policies such as positioning itself as a launchpad into SEA and a general openness to foreign talent and investment, the long-term commitment to the end-goal and vision for the local start-up scene to smaller details such as the fostering of a close community within a start-up hub (Block 71 in Ayer Rajah, JTC Launchpad), the nurturing human capital (the NUS Overseas Colleges (NOC) programme, SMU’s Institute of Innovation and Entrepreneurship (IIE) etc.) and capital investments (indirectly) through Temasek Holdings. It is clear that when governments are onboard and committed to certain agendas, there will be sufficient traction to overcome inaction and uncertainty in the private sector. 

Another case study would be the importance of government initiatives in promoting the uptake of green technology. Globally, early attempts to introduce electric vehicles to the markets failed to make headways. Alongside improving technology and lower costs, electric vehicles have finally managed to take off, but only after governments stepped in with additional initiatives to supplement the manufacturers’ best efforts. These include CO2 emissions regulation schemes (e.g. in China, EU, California), efforts to expand the charging infrastructure in countries and subsidies to make EVs viable and competitive options against vehicles with internal combustion engines.[21] It is clear that the EV market would not have developed to where it is today if governments had taken the backseat. In Singapore’s Green Plan 2030, it intends to double the number of EV charging points to 60,000 by 2030, and gradually phase out internal combustion engines. It has also tightened the various vehicle emissions schemes in a bid to shift consumers to hybrid and electric vehicles. This marks the first of many ASEAN countries’ attempts to shift the citizenry towards EVs, where there has been little to no mainstream adoption before. 

In this regard, governmental buy-in is an essential first step for convincing businesses and individuals to come aboard. Likewise, when it comes to ensuring a concerted push for sustainability across sectors, governments must lead the way, in order for this to be implemented into business strategies and personal actions.

While the COVID-19 crisis has had a devastating impact, it has also provided the opportunity for countries to restructure and rebuild back greener. In this regard, Europe leads the rest of the world in its efforts to resurrect itself as a greener economy. In the next few years, billions of dollars will flow into infrastructure and business investments across Southeast Asia and the entire Asian continent as well, and this opportunity needs to be grasped to strike a proper balance between social & environmental capital and economic outcomes, as discussed briefly earlier.

Questions Over Commitment

However, some remain skeptical of the prospects, pointing to studies showing that governments have been split with regards to their approach. An ING report offers the following analysis of several APAC/SEA countries and their Environmental Performance Indicator and green spending as a percentage of total Covid-19 stimulus. There is a clear discrepancy between countries like Singapore and countries like the Philippines and Indonesia.

Additionally, some point to certain indicators within Asia-centric measuring indexes, such as the Hinrich Foundation Sustainable Trade Index (STI) that allows us to get a more in-depth analysis of 19 Asian economies and how they fare in terms of sustainability across 3 factors: economy, environment and society.[23] 

Taking a closer look at Indonesia, we see progress being made with regards to labor standards and educational attainment, and it has also increased factors like financial sector depth and technological innovation while reducing trade in natural resources.[24] However, Indonesia continues to do poorly in terms of environmental factors such as transfer emissions and air pollution. 

Meanwhile, Vietnam regressed relative to other Asian economies in terms of social and environmental sustainability, showing declining labor standards and a lack of improvement in environmental considerations relative to 2018. [25]

Furthermore, some point towards ASEAN’s lackluster performance with regards to reaching its 2030 Sustainable Development Goals, where it continues to poorly perform with regards to environmental sustainability despite having made significant progress on socio-economic fronts.[26]

Cause for Optimism 

Nevertheless, we are optimistic that Asia and ASEAN will still be able to build back post-COVID, more sustainably than ever, due to several mitigating factors. 

Firstly, as the ING report rightly acknowledges, several countries are progressing on a “background of general environmental progress”.[27] It is also important to note that sustainability goes beyond environmental performance, and that we are looking for more than government spending, but the development of an environment that encourages private sector attention and adoption of sustainability on a national and regional scale. 

Secondly, we cannot focus solely on negative aspects highlighted in the STI. While some countries have consistently done well on the STI, such as South Korea and Japan, others are still making good progress in other areas.[28] For example, China has made significant progress in reducing air pollution, while Pakistan reduced its deforestation considerably. Indonesia, Myanmar and Laos managed to diversify their trade bases away from natural resources, and Singapore also managed to reduce air/water pollution while implementing carbon pricing and lowering transfer emissions (pointing towards cleaner export industries).

This leads us to the conclusion that there is still progress being made overall, bearing in mind that the STI ranks economies relative to one another based on current achievements, and uses that as a proxy to measure progress towards meeting the Sustainable Development Goals.   A low ranking does not necessarily mean that nothing is being done in any particular regard. In fact, we are witnessing pivots to sustainability in many countries that might require several years to bear fruit. The existence of the STI serves to continually suggest areas for improvement for both the public and private sector to come in and plug the gaps, and should not be taken as a pessimistic outlook for the region. Rather, the existence of such academically rigorous comparisons indicate that sustainability on all fronts is being taken increasingly seriously, and play an important role in encouraging the various governments to do better. 

In fact, encouraging development has always been brewing in Asian countries. To provide some balance to the earlier discussion, it is important to note what countries like Vietnam, Indonesia, Singapore and even China have been doing with regards to meeting the SDGs. 

Vietnam managed to move from being one of the poorest countries in the 1980s-1990s, to lower middle-income status by the 2010s, while keeping the SDGs in sight, and even presented a National Report on Sustainable Development at the UN Conference on Sustainable Development (RIO+20) in 2012 and a Voluntary National Review of its progress towards the SDGs in 2018. [29,30]

Vietnam continues to incorporate SDGs into its national development strategy, such as its previous 2011-2020 Social and Economic Development Strategy (SEDS) and 2016-2020 Social and Economic Development Plan (SEDP), and upcoming 2021-2030 SEDS and 2021-2025 SEDP.[31] The government has also done good work in encouraging sustainable practices and investments in the private sector, with initiatives such as the setting up of the Vietnam Business Council for Sustainable Development (VBCSD) and the creation of an enabling legal environment.[32] A more detailed report of Vietnam’s development and SDG progress is available from the IMF.[33] 

It is also crucial to note Vietnam’s track record of efficiency with regards to adopting sustainable practices. This is shown through their achievement of installing 5 gigawatts (GW) of solar energy by 2020, exceeding their 1GW goal.[34] This also highlights the ability of Southeast Asian countries to execute plans quickly and effectively, bolstering our confidence in the region’s prospects. With Vietnam being Asia’s top performing economy through the pandemic, it is not a stretch to say that sustainable development will find its way into the government’s priorities again soon, and that this run of poor form is but a blip on an otherwise stellar trajectory. [35]

We also saw Indonesia launch its first sustainable development plan, the RPJMN 2020-2024 in January 2020. Research done by the Ministry of National Development Planning in collaboration with the World Resources Institute found that sustainable, inclusive growth could “deliver average GDP growth of 6 percent per year through 2045 and, compared to business as usual, create more than 15 million additional greener and better-paying jobs, halve extreme poverty, and save 40,000 lives annually from reduced air and water pollution – all while reducing greenhouse gas emissions by nearly 43 percent by 2030, exceeding Indonesia’s current international target.”[36] Buoyed by the prospects, Indonesian policymakers are doubling down on efforts to roll out low carbon development initiatives, and we believe that Indonesia stands a good chance of success with the scale of their efforts. 

In Singapore, the government also continues to push for greater sustainability across all sectors of the industry, having recently unveiled the Singapore Green Plan 2030.[37] This is a comprehensive plan that aims to garner buy-in from the citizenry and private businesses through initiatives including, but not limited to, the Eco Stewardship programme, greening of resource-intensive industries such as the petrochemicals industry, and the Enterprise Sustainability Programme to support local enterprises to adopt sustainable practices and seize opportunities in the sector. Singapore intends to position itself as a sustainability solutions hub, offering tech solutions for water treatment, upcycling, urban farming, decarbonization etc. There is also awareness that sustainable technology in areas such as agriculture can be used to further other goals, such as Singapore’s ‘30 by 30’ food self-sufficiency. 

We remain optimistic that individual member states of ASEAN recognise the importance of sustainability, and that armed with the data from research and the growing technology available, they will be able to tackle the various issues that have drawn attention from detractors. As a regional entity, we believe ASEAN will continue to play a formative role in promoting sustainability by providing the right environment for growth. This includes, but is not limited to: regional cooperation, laying out regional standards for sustainable finance and monitoring sustainability efforts. 

On a larger scale, we have seen Asian countries make significant pledges to meet the Paris Agreement’s goals. A large number of these initiatives revolve around achieving carbon neutrality, adopting new energy sources or reducing the emissions intensity of GDP. [38] It is inevitable that governments will have to step in and provide the necessary carrots and sticks to attain these goals.

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The Second Tenet: Businesses

Becoming Aware Of The Business Case

While the business case for sustainability constitutes an indisputable fact, sustainability cannot succeed if corporations and businesses do not acknowledge or implement strategies according to it. Presently, the business case is catching on quickly via two methods.  

The first method is organic, as management becomes self-aware of the impacts caused by both the supply chain and value chain. This can come about through generational power transfers, as existing businesses hand over management responsibilities to a younger generation of CEOs. A study of young CEOs in China proved that they are more conscious about their ESG footprint and have higher tendencies to adopt sustainable practices within their companies (Shahab, Ntim 2019).[39]

The second method is through third-party pressures strong enough to overcome entrenched resistance. In this approach, there are some overlaps with the business case, such as investors and consumers demanding greater accountability and moving towards more sustainability-focused companies.

Internally, throughout the corporate ladder, employees are becoming increasingly vocal about value-alignment with the company they are working with. When it comes to hiring and retaining top tier talent from the millennial generation, a survey showed that nearly 40% decided between jobs based on the company’s sustainability performance, while almost 70% of respondents said that a company’s sustainability plans would influence their long-term decision to stay.[34] Performance indicators and employee happiness also increase when employees think what they are doing has meaning.This complements a large body of research that points to the growing phenomenon of workers choosing value creation over wealth generation.[41] Ultimately, the speed and efficacy will depend on the willpower and action of various stakeholders mentioned above. 

For the companies that have caught on to the winds of change, there are several essential steps that can be taken to prepare their company. 

First, corporations should conduct an honest appraisal of their current business practices and environment. This will involve examining the industry they operate in, their supply chain, as well as their value chain to note the impacts that their product/production processes are generating. 

There are many available scoring systems that companies can choose to use, one such system being Hedstrom Associates’ proprietary Corporate Sustainability Scorecard.[42] In short, this evaluates a company’s sustainability efforts in terms of 4 key aspects: Governance and Leadership, Strategy and Execution, Environmental Stewardship and Social Responsibility. Each section had 17 elements and 8-12 sub-elements, totalling about 150 Key Sustainability Indicators (KSI). A thorough evaluation will allow management to determine how far along the company is on the path to sustainability, how they compare to peers and competitors, and what the best practices today are. This will pave the way forwards with regards to the next steps that the company should be taking. 

With regards to environmental stewardship, a common ideal for businesses across industries should be the attainment of a circular economy. This refers to an economy where waste and pollution is reduced, products and materials are reused & recycled and natural resources are regenerated. This concept applies across the supply chain and the value chain, so we will briefly cover some of the general aspirations.[44]

Reduction: This can be defined very broadly to encompass a variety of processes. Constraining ourselves to the supply chain, there are several ‘reductions’ that companies should aim for.

One of them is to reduce the negative externalities created during production. For example, aiming for carbon neutrality is a fine goal for those in the manufacturing line, and beverage companies such as the Coca-Cola Company might pursue water neutrality. Additionally, companies should seek to reduce the amount of raw materials necessary, especially if the process of obtaining said materials endangers the environment (mining, logging). This amounts to a need for innovation, both to discover alternatives and to discover more efficient ways of production. 

With regards to the value chain, reduction is typically done by consumers, by being more mindful of their consumption and not to be as wasteful. On the companies’ end, we prefer to term their efforts in reducing waste as reusing and recycling. 

Reuse & Recycling: Companies should try to recover and recollect used consumer goods or byproducts from the production process, and reuse or recycle them for other purposes. This is especially pertinent when it comes to plastic products, which do not biodegrade in landfills, or for rare metals used to produce electronics and are already in scarce supply. By lengthening the lifespan of each material, we will need to use less in the long run. 

Regeneration: Companies that have no choice but to use natural resources such as timber should be proactive in the regeneration of forests. Switching to renewable resources (such as solar power as opposed to fossil fuels) for certain processes will also go a long way in stretching the lifespan of the finite resources we have left. In fact, they should be prioritised and implemented where possible. 

When it comes to social responsibility, all corporations, regardless of the scale of their operations, have the bare minimum responsibility of making sure that their business activities do not infringe or compromise on the quality of life for local communities, diminish their dignity or threaten their way of life. The best practice for corporations would be to rise while simultaneously uplifting the community that they are based in. This could be through providing fairly compensated employment, providing sufficient employment benefits, bearing the cost of building shared infrastructure (e.g. roads) or supporting the community through various other means. Companies should be going beyond the bare minimum stipulated by the law. Even in the absence of proper regulation, companies should be mindful and aware of these issues, not just out of compassion but also to not draw the ire of the public eye, as Apple, Nike and Volvo have learnt the hard way. 

By virtue of their size and the value of the foreign direct investment they represent to developing countries, large corporations have the power to make certain prerequisites before committing to a new plant or factory in developing countries. This gives them the opportunity to make positive change, such as pushing governments to incorporate proper labour laws, safety regulations and requirements in order to become more attractive. Companies should not exploit the lack of such governance, but rather set the precedent and industry standards where possible. 

Second, businesses need to engage in greater sustainability reporting. In some cases, certain metrics are not being measured at all, and in other cases, the impacts are not fully investigated. Where possible, corporations should continuously seek to implement new technology that allows for accurate tracking, diagnosis and reduction of detrimental impacts. 

Instead of having to retroactively modify old policies, start-ups might find it easier to embed ESG policies into their fresher business practices. On the other hand, startups might also be pioneering new concepts and technology that already have a sustainability-related value proposition. 

Regardless, the key for businesses is to possess a management both aware of the risks ahead and committed to contributing to sustainable development. We can thankfully count on the fast-changing financial services landscape to bolster these dual factors.

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The Third Tenet: Finance

An Overview of Sustainable Finance

Sustainable finance, as defined by the Monetary Authority of Singapore (MAS), is “the practice of integrating environmental, social and governance (ESG) criteria into financial services to bring about sustainable development outcomes, including mitigating and adapting to the adverse effects of climate change.”[45] In addition, the European Commission states that “Sustainable finance also encompasses transparency when it comes to risks related to ESG factors that may have an impact on the financial system, and the mitigation of such risks through the appropriate governance of financial and corporate actors.”[46] In recent years, there has been growing understanding that businesses and governments will need the financial sector’s assistance in order to grasp the high-risk high-return opportunities associated with sustainability, and that the UN SDGs will be unobtainable without them. 

This has opened the door for companies to issue financing instruments (sustainable bonds) for the specific purpose of environmental/social projects. These instruments include green bonds, social bonds and sustainability bonds, which must be exclusively used for projects that bring about positive environmental/social impact. These open new financing channels for companies to pivot successfully, or undertake new climate/environmental related projects. 

Another class of financial instruments, Sustainability-Linked Bonds (SLBs), are bond instruments which tie the financial/structural characteristics according to whether the issuer achieves predefined sustainability KPIs or ESG objectives. This provides financial institutions with the opportunity to lay down industry-agnostic and industry-specific metrics for sustainability/ESG objectives. These have grown in number along with the development of measurement metrics for sustainability objectives, such as the Sustainability Accounting Standards Board’s Materiality Map.[47] As our understanding of important indicators develops, it becomes easier for investors to not only trust green investments, but also sift through and evaluate opportunities. 

Movements in Asia by governments and financial institutions mean that these new classes of financial instruments are rapidly catching on. According to a Moody’s report, Asia Pacific issuers accounted for 24% of global dollar-denominated green bond issuance, up from 8% 5 years ago.[48] 

As of 2019, the Asian Development Bank (ADB) has issued $7.9 billion worth of green bonds since its first issuance in 2015.[49] Nikkei Asia estimates that the Asian dollar-denominated green-bond market is now worth USD 50 Billion, and HSBC adds that despite the downturn caused by COVID-19, issuance will return to pre-pandemic levels in 2021.[50]

In March this year, J.P. Morgan led Asia (ex-Japan)’s first SLB, with a $200 million note for Hong Kong-based property developer New World Development (NWD).[51] This offering was hugely oversubscribed, and is reflective of a greater phenomenon in the sustainable finance sector, with demand for green bonds consistently outstripping supply (by almost 6x). 

These new types of financial instruments have caught the eye of fund managers and Asian investors for several reasons. 

Firstly, there is evidence that bond returns from green bonds are in line with returns generated from traditional financial instruments. This helps to allay concerns that expected returns will be compromised for the sake of particular agendas. Another draw is that Asian green bonds remain priced consistently with conventional bonds, whereas in Europe investors would have to pay an 9 basis-point price premium on average for holding European green bonds. The homogeneity between asset classes has contributed to the positive reception in Asia. 

Secondly, the governments of regional powers have moved to support the burgeoning investment sector. For example, the Monetary Authority of Singapore (MAS) has set up a sustainable bond grant scheme by subsidizing part of the costs incurred by first-time and repeat issuers, and has also set up a Green Finance Industry Taskforce (GFIT) to coordinate efforts in the space by banks, asset managers and issuers.[52] Japan has most recently issued its first government backed green bonds for environmentally friendly houses. Many Asian countries including China and ASEAN countries have also stepped up by publishing green guidelines and frameworks for the financial services industry. Regionally, we have also seen the ASEAN Green Bonds Standards being established, and China’s publication of the Green Bond Project Endorsed Catalogue of the People’s Republic of China. 

Issuance in the first half of 2021 has already surpassed the record total in 2020. We expect to see the issuance of such bonds increase even further in the future, as governments provide the necessary support required to promote the issuance of such bonds in order to meet their carbon neutrality and sustainability goals, companies recognise the credibility green finance instruments provide to their brand image and investors increasingly include them in their portfolios.

Sustainable investing has also gotten increasing attention and acceptance from the financial services industry. It refers to the investment philosophy of achieving competitive (comparable relative to traditional investing methodologies) portfolio risk/return profiles while also achieving positive ESG effect. It’s rise is mainly due to the rising pervasiveness of values-based and performance-based mindsets. The former refers to genuine concern about the long-term health of the environment and society, while the latter refers to the acknowledgement of the growth potential in ESG-related investments as well as the recognition of potential ESG risks and the need to mitigate them.  

Sustainable investing encompasses a range of strategies that are each best suited to a particular class of investor. These strategies are best expressed via the diagram below, and we will go into more detail on several of these strategies below.

Institutional Investors

The UN Principles for Responsible Investment give us a succinct summary of the roles institutional investors can play in pushing for ESG agendas in countries. 

Institutional investors are more likely to engage in the ‘Avoid’ strategies, such as negative screening, in a bid to reduce their investments and/or support for unsustainable businesses.

This is an approach favored by banks, such as the Overseas Chinese Banking Corporation (OCBC), which has moved away from financing infrastructure reliant on fossil fuels, in favor of providing loans to build sustainable infrastructure such as wind and solar farms.[54] Such an approach has also been codified by the World Bank’s private lending vehicle, the International Finance Corporation (IFC), in their Green Equity Approach (GEA) aimed at eliminating coal financing within its portfolio.[55] More recently, the Asian Development Bank announced in May 2021 that it would no longer finance fossil fuel projects if other cost-effective technologies were viable alternatives.[56]

Furthermore, funds such as Blackrock, State Street, Vanguard & Temasek are leading the rest of the pack with regards to integrating sustainability into the active investment process and reducing exposure to sectors with heightened ESG risk.[57] Different financial groups in Asian countries are also gradually renouncing unsustainable investments, and incorporating climate risk into their assessments of investments.[58] In the coming years, we will definitely see more financial groups come under pressure from a multitude of stakeholders and eventually conform to the green standards set by supranational organizations such as the United Nations or ASEAN. As financial institutions walk away from short-term profit and overturning decades-old stances on highly resisted policies such as coal bans, it is inevitable that the next pockets of growth will reside in verticals that can best capitalise on new-found demand for green solutions. 

Additionally, we have also seen institutional investors increasingly factor sustainability metrics and risks (eg. climate risks, transition risks, physical risks, long-term impacts on profitability) into their decision-making process. For example, asset/wealth managers like Blackrock, UBS, Citi and Blue Harbour Group are increasingly integrating proprietary ESG measurement tools to assess related risks, characteristics and signals of companies, with the goal of offering a suite of index funds and exchange-traded funds (ETFs).[59, 60, 61] With the influence that they have on management, large asset managers can show their support for certain management proposals and actions during the proxy voting season. For example, Blackrock has voted against management recommendations on more than 250 resolutions in 2021 compared to 53 resolutions in 2020, based on environmental considerations.[62]

These asset managers are also pushing for corporate sustainability reports to follow sector-specific standards, frameworks & regulation, which would make it easier to conduct research, make comparisons and allocate capital.[63] A UBS survey of over 100 asset managers also showed almost 75% of asset managers were intending to vote in favor of climate-related disclosures.[64] In Asia, ESG reporting is largely guided by voluntary reporting frameworks such as the GRI Standards.[65,66] However, we are also seeing convergence to common standards, with single standard discussions dominating events such as the Asia Sustainability Reporting Summit 2020.[67] In ASEAN, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines all require some form of ESG disclosure and each government offers guidelines to issuers.[68, 69] 

According to research done by Morningstar, there were 534 sustainable index mutual funds and exchange-traded funds globally, accounting for $250 billion as of June 30 2021.[70] This is not just due to funds pushing forward with their own beliefs about sustainability, but reflective of growing demand from individual investors and the trust in ESG-based assets to outperform the broader market.[71]

Institutional investors might also consider impact investing in the private markets as another way of achieving positive ESG effects. This can be done through direct equity investment in private companies (SMEs), or through investing in private equity (PE) funds or fund of funds (FoFs). 

Impact Investing

Impact investing refers to capital placed into private equities in the hopes of generating ESG value alongside financial returns. This can take place across many different sectors and aim to achieve many different objectives, but the unifying themes are as follows. 

Impact investors draw their faith from several underlying beliefs. Firstly, the historical success private businesses have shown in innovating and solving the problems of the day. Secondly, there are untapped financial opportunities to be found by focusing on overcoming the gaps between achieving ESG goals. This is termed as ‘base-of-the-pyramid investing’, where providing basic services to the poor offers large opportunities for SMEs to expand. Lastly, they also believe that greentech and sustainability is the next pocket of growth. 

Some investors may choose to focus on capital preservation (‘impact first’), while others might be more focused on financial returns (‘financial first’). However, both are similar in that they seek a base-level of financial return as opposed to philanthropic grant giving. Detractors might say that impact investment is profiteering off others’ suffering, but studies have shown that this is a more efficient way of raising capital for those in need, and provides the right incentives to ensure that allocated capital brings long-term value as opposed to one-way grant allocation.[72]

The IFC has stated that private investments in SMEs is the top way of achieving maximum social impact on local economies.[73] This is due to the knock-on effects such as job creation, poverty reduction and economic development. 

We echo this sentiment at Quest Ventures, and firmly believe that private equity investments are particularly powerful in emerging markets such as Southeast Asia. According to the Business & Sustainable Development Commission, a significant percentage (> 50%) of the SDGs’ business opportunities are in developing countries, and emerging markets constitute the biggest opportunities in the agritech, smart cities, cleantech, healthtech verticals.[74] Advancing impact investment in emerging markets could create more than USD 12 trillion in market opportunities and up to 380 million jobs by 2030, of which many would be in emerging market cities. 

Finally, impact investors such as venture capitalists are uniquely positioned to guide and ensure tangible impact. By taking equity at an early stage, lead VCs sit on the board of their portfolio companies, allowing them to observe the impact trajectory of the startup. VCs are also able to lend their expertise to ensure SMEs have the best chance of succeeding, both as a business and as a changemaker. In companies that do not have an explicit impact agenda, VCs can still influence company direction and monitor indicators in the same way as larger asset managers. Some VCs even go as far as to explicitly include ‘sustainability clauses’ in term sheets, calling on firms to “regularly measure their carbon footprints, implement carbon offset schemes and promote environmental responsibility when engaging with customers and suppliers.”, as reported by CNBC.[75] 

Impact related venture capital investments are not new – between 2006 to 2011, $25 billion was invested by Silicon Valley VCs into cleantech startups, aimed at reforming the energy sector. However, these bets did not pay off and failure rates were high, contributing to low IRRs and poor risk/return profiles, with almost half of the invested amount being lost.[76] 

However, we believe that the developments over the past 10 years make it the right time to start rethinking about impact investments now. A concerted global movement across governments, businesses, individuals and the financial services industries have created the right policy environment and corporate demand for new green/sustainable solutions to flourish. 

The level of technology today far outstrips that of the start of the millennium, which has opened up many opportunities for technological innovation in various verticals. There are many new applications (AI, blockchain, etc.) that can simultaneously disrupt and greenify industries. Analysis done by PwC and Microsoft show that applying AI alone in 4 sectors of the economy has the potential to eliminate 2.4 gigatons of global CO2 emissions in 2030, a clear sign of the potential that lies ahead.[77]

Green investments today are no longer limited to the energy sector, but also include any technology that helps to decarbonise the economy (broadly termed as climate tech, including energy, smart cities, smart mobility etc.). Impact investors are also increasingly looking at other verticals such as fintech and agritech, that can help to improve social conditions and achieve sustainability. 

Additionally, we can learn from the failures between 2006 to 2011 to refine our criteria for seeking out the companies that are more likely to succeed. In order for start-ups with a sustainability objective to achieve the IRR needed for venture capital investing, it goes without saying that they have to be evaluated stringently. 

With early stage investments, venture capitalists need to be discerning in selecting the right start-ups. The right fund manager will ask the right questions when assessing startups for feasible business ventures and substantial impact outcomes before making a decision with confidence. For example: 

What level of impact value can potentially come from this business? 

At Quest Ventures, we believe that outcomes for individual companies are measurable. We do so via the Logical Framework Approach (LFA), which is further expounded on, along with other impact investing frameworks for early stage venture capital in our previous publication.[78] Keeping the end in mind, the company can be assessed Focusing on a particular part of the value chain that can create the most impact? 

Other considerations also include: 

1. How scalable and replicable is this business model across the region? 
2. What is the path to profitability? 
3. Will large amounts of upfront capital be required to prove the model? 
4. Is this the most effective solution to solve this particular problem? 

Research done by PwC has stated that VC investment into climate tech is rising again, from $418 million per annum in 2013 to $16.3 billion in 2019, backing up our belief that there is an increasing amount of sound business opportunities that are capital efficient, create substantial & tangible ESG value and are technically feasible, making them suitable for venture investment.[79]

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Trends and Developments I

There are several spaces that we have identified and are keeping an eye on. Below we provide a high-level overview of each particular industry, focusing on upcoming technology, as well as innovative business models.

Energy

Given the increasing public awareness of the need for cleaner energy and the efforts by governments to encourage a phasing-in of clean/sustainable energy sources, it is inevitable that we will see the toppling of the oil & gas era soon. These winds of change also mean that the energy sector’s landscape has morphed considerably since the early 2000s. 

Today, solar and wind power technologies are well-proven and established, but still require additional innovations to provide a set of solutions that can rival and beat fossil fuels. Notably, there will need to be improvements in battery development, which is critical to overcoming the intermittent nature of renewable energy sources and reducing reliance on nature. In order to transition smoothly from fossil fuels, there also needs to be continued innovation in reducing emissions in electronics and supporting the spread of renewable energy (load-balancing and supply-demand balancing mechanisms). Lastly, the energy sector needs to continue to refine emerging technologies such as hydrogen fuel cells and biofuels. 

Achieving sustainability for the environment in the energy sector would be a smooth and accelerated transition to a zero-emission economy, globally and regionally. This can be measured via increasing the penetration of renewables and declining carbon emissions. On a social scale, impact for sustainability can be measured by bringing affordable and environmentally friendly electricity to communities that are off-the-grid and relying on damaging fuel sources such as coal and kerosene. 

Renewable Energy Generation

Besides solar and wind energy, the other forms of renewable energy that are often brought up are nuclear, geothermal and hydro power. We are bearish towards these forms of renewable energy for several reasons. 

Nuclear power is still risky, as evidenced by the various incidents, and there is the real possibility of societal and political backlash from the risks as well as the potential ecosystem & environmental damage that arises from the radioactive waste produced. Nuclear plants require large capital expenses to build and maintain. With safer, cheaper and equally viable alternatives in solar and wind energy, there is no strong reason for ASEAN countries to overtly support or implement nuclear power. There is also a long way to go before safer nuclear fusion technology becomes a reality. According to Dealroom data, VCs have steered clear of nuclear generation focused start-ups, similar to Quest Ventures’ position.[80] 

Likewise, geothermal and hydro power are also limited in where they can be applied across the region, and will require much more R&D and capital investment over a longer horizon before becoming commercially viable and/or see widespread adoption. 

While it will be interesting to see how and where these three forms of renewable energy will come into play in the future, we expect that the renewable energy will continue to mainly come from solar or wind power. 

Energy Storage

Lithium-ion batteries are the de-facto option for energy storage today. In recent years, they have been heavily used as part of electric vehicles (EVs), and in renewable energy-powered power grids and solar/wind farms. However, there are several issues with the existing lithium-ion battery technology that are limiting its applications. 

Firstly, their energy density is still inferior to fossil fuels. Fossil fuels remain more convenient and efficient – a fully charged battery in an EV will not allow one to travel as far as a full tank of petrol, and will likely weigh more as well. Batteries are also limited in terms of how well they can hold their charge over periods of time. This limits the applications of batteries to small electronics such as drones and smartphones, or electric cars and electric trucks at best. While inventions such as commercial electric planes would reduce air travel costs and emissions significantly, they regrettably remain unachievable. 

Even the most advanced lithium ion batteries today contain 14 times less usable energy than jet fuel, and a plane cannot possibly carry the weight of X such batteries to make up for the difference in energy density.[81] According to a study, batteries would need to be 4x as energy dense as the most advanced lithium ion batteries today before they can power a commercial airplane for ~1000km.[82] 

Secondly, battery costs remain high. Battery costs are measured in terms of the amount of money spent for every kilowatt-hour of electricity the battery can hold. While lithium ion battery costs have fallen from $1000/kWh to $200/kWh from 2010 to 2017, further reductions must be made in the next decade.[83] The US Department of Energy estimates that battery costs will need to fall to $125/kWh in order for EV ownership to rival gas-powered car ownership, and for renewable energy power grids to replace traditional grids, battery costs will have to fall even further to $10/kWh.[84] Besides costly production, batteries have a limited lifespan and will require replacements after a particular number of charge cycles. This adds additional cost considerations that will detract from adoption of renewable energy solutions. 

Thirdly, lithium-ion batteries use rare metals such as lithium, nickel, manganese and cobalt as key materials. Besides being only found in small quantities, they are often mined in countries with dubious labor and environmental regulations, such as the Democratic Republic of Congo. 

There have been some noteworthy developments coming from start-ups across the world aimed at tackling these limitations. 

The overall battery’s energy density can be increased theoretically by increasing the energy density of either the cathode, anode or both. The most promising cathode appears to be the lithium nickel-manganese-cobalt (NMC) 811 cathodes (the numbers refer to the ratios of the respective metals). However, more innovation needs to be done to increase its short lifespan. While most batteries have relied on graphite as the anode, materials such as silicon and lithium are being considered as potential better alternatives. Silicon anode technology is being used by start-ups such Silanano, and companies like Daimler and BMW have expressed their interest. Some startups are even looking at producing silicon sustainably (e.g. produced from barley husk ash or sand).[85] Other startups and researchers have also proposed alternative batteries, such as graphene batteries, lithium-sulfur batteries, solid-state lithium-ion batteries, gold nanowire batteries, sodium-ion batteries etc.[86] Each of these technologies has the potential to rival lithium-ion batteries in the next decade. 

Large battery makers and start-ups are coming up with solutions to reduce or replace unsustainable rare metals, in a bid to reduce supply chain and environmental risks. For example, some battery producers are adopting lithium nickel-manganese-cobalt (NMC) cathodes with lower ratios of cobalt (NMC 811, 532 or 622 vs NMC 111 respectively), while others are replacing cobalt completely with other mixtures (e.g. lithium iron phosphate (LFP) cathodes made by Aceleron). 

In the pursuit of sustainability, we are also seeing technology being applied by startups to search for rare metal deposits where extraction causes less negative externalities.[88] For example, Kobold is deploying AI to search for cobalt in places around the world with better environmental and labour regulations, while Deep Green is exploring deep-sea mining. Additionally, start-ups are pioneering new battery technology, utilising common metals and even materials like cotton to create batteries that can be used in small electronics and EVs. Audi and Umicore research and testing has shown that 95% of rare metals can be recycled.[89] Start-ups are now trying to find innovative ways to both improve this figure and ensure recycling’s cost-effectiveness. Lastly, start-ups are also trying to commercialise systems to recover rare metals lost during production processes.[90] Proper sourcing and recycling will help to conserve finite resources while the search for better long-term solutions is ongoing. 

New types of batteries, cheaper raw materials as a result of better sourcing, different materials being used or the circular economy are all ways of successfully bringing down production costs. 

With many interesting and novel technologies being developed, the energy storage vertical is one of the most interesting ones to watch out for within the energy sector itself. 

Alternative Fuels – Hydrogen

Hydrogen is the most abundant element on Earth. It can be obtained through water electrolysis (splitting of water into hydrogen and oxygen via electric currents), fermentation of biomass feedstock, or through natural gas reforming.[91, 92] The resulting hydrogen can then be used to release energy on recombination with oxygen, with water as a byproduct. This makes hydrogen one of the cleanest energy sources available, when electrolysis is done with renewable electricity (termed as green hydrogen).  

Hydrogen fuel cells are seen as a viable alternative to electric batteries. Applications such as hydrogen vehicles are being developed in tandem with EVs, and research suggests that green hydrogen will bring life-cycle emissions of vehicles lower than that of EVs, because of the current environmental costs of lithium-ion battery production.[93] 

Nevertheless, the technology remains more of a niche than electric vehicles, due to limitations in infrastructure (hydrogen refuelling stations) and efficiency. However, innovative methods of electrolysis (e.g. photobiological, photoelectrochemical water splitting) and innovations in fuel cell technology could both supplement and supplant the dominance of batteries in electric powered transportation, especially in larger vehicles hampered by battery capacity. 

Alternative Fuels – Biofuels

Biofuels can be divided into three generations. The first generation of biofuels were made from food crops, which meant that it’s sustainability and ethicality was immediately called into question. The second generation of biofuels, which we are currently using, are made from damaged or waste grain, forestry waste or even household waste. The third generation of biofuels will be the ones that are fully synthetic, but those are a long way off from achieving commercial success. 

In ASEAN, we expect biofuels to grow in importance for several reasons. Firstly, growing certain crops for biofuels is a part of the rural development strategy for countries that retain a large agricultural base, such as Indonesia, Philippines and Thailand. As food production expands due to increased farm productivity, there is more waste grain and residues from harvests that can be used as feedstock for biofuel production.[94] This provides an additional source of rural income opportunities, aiding in the reduction of poverty for rural communities. In fact, growing non-food crops in rotation with existing crops can provide synergistic properties such as mutually fertilising the soil for each subsequent season and maximising land use during off-seasons.[95] This also applies to the forest plantations found all over Southeast Asia, and the communities formed around them. As such, there is incentive for several governments to get involved in promoting biofuel adoption. We are already seeing in the form of biofuel mandates, such as Malaysia’s attempt to support its palm oil industry. Singapore’s Economic Development Board (EDB) is also carrying out a study to determine if materials such as palm oil, sugarcane and plant biomass can be used to produce fuels, chemicals and polymers.[96] 

Secondly, biofuels present a solution for countries to reduce their global carbon emissions quickly, as they often require little modification before usage. According to research by the International Renewable Energy Agency (IRENA), biofuels could potentially sustain up to two-fifths of the region’s projected transport fuel requirements by 2050, achieving considerable carbon emissions reductions and contributing to the energy security of each country.[97] 

We are already seeing interesting movements made by start-ups in the area. Alpha Biofuels, a Singapore company, is converting used cooking oil into biodiesel, successfully using it in a bulk carrier.[98] The biggest challenge will be creating efficient fuels while balancing land use biofuel crop growth against other priorities. Hence, we can expect innovation to continue not just in the refining process and application of biofuels, but also in the agritech space to improve yield efficiencies of crops and hence residual biomass feedstock.

Grid Management

Increasing access to electricity and bringing communities on to the grid is one of the sustainable development goals. Aided by the decreasing capital costs of solar panels and turbines and small power grids, start-ups have married impact with business opportunities by providing electricity to rural households through pay-as-you-go or lease-to-own models. This is currently being done throughout Southeast Asia, in Myanmar, Indonesia, Philippines and Thailand, and has the added bonus of reducing usage of environmentally unfriendly sources such as kerosene and charcoal.

Looking Beyond

Evidently, there is still all to play for in the energy sector, and whichever companies can best balance safety and efficiency to come up with the best solutions can potentially see themselves becoming the Shell or Exxon of the electric era. The energy sector also parallels other sectors dealing with essential resources, such as water and air, where the challenge lies in Increasing accessibility to safe sources of essential resources at an affordable cost.

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Trends and Developments II

There are several spaces that we have identified and are keeping an eye on. Below we provide a high-level overview of each particular industry, focusing on upcoming technology, as well as innovative business models.

Infrastructure

According to the UN, the world population will be approximately 9 billion by 2050, of which almost 66% will be living in cities.[99] This places great strain on existing infrastructure, as well as the environment. It is imperative that governments take the necessary steps to mitigate these challenges now. Naturally, this also provides the private sector with the opportunity to step in with solutions. 

Smart Mobility

In sprawling urban jungles, getting from one place to another quickly is important for both life and work. This makes the development of efficient yet sustainable public and private transport options critical to the productivity of the country. 

With regards to public transport, we are seeing constant improvement on train and bus services. In Singapore, rail operators have implemented technology such as re-using energy from braking trains to power up other trains, and are looking at lighter trains and recyclable parts.[100] Efforts are also being undertaken by start-ups across ASEAN to provide cleaner public transport options. This include hardware options such as buses running entirely on biogas, or using AI & user apps to introduce dynamic routing & buspooling (e.g. Rushowl in Singapore, Bussr in Indonesia). The end goal we should be working towards is a rail system like Sweden’s, which runs entirely on renewable energy.  To continue pushing public transport (trains, buses, bicycles etc.) as a viable alternative to private transport, ASEAN governments need to continue their commitments to building the necessary infrastructure. 

We are seeing an increase in the availability of hybrid vehicles and EVs in ASEAN. Nissan recently announced in 2021 that Thailand would be its EV hub for the region, and startups across ASEAN have sprung up to produce their own EVs, electric bicycles, scooters etc. Similarly, infrastructure investments and government regulation will be key towards advancing the adoption of EVs. Thankfully, we have seen the Singaporean, Thai, Indonesian and Philippines governments commit to building this infrastructure. Singapore aims to install 60,000 charging points by 2030, and the Asian Development Bank (ADB) has signed a green loan to Energy Absolute in Thailand to finance a EV charging network.[101, 102] We are also seeing subsidies for electric vehicle ownership, including the reduction of road taxes on the basis of reduced carbon emissions, and stricter requirements on models that are allowed to be distributed or even driven within countries. 

We are also seeing the proliferation of tech-based mobility solutions that are disrupting traditional notions of private hire vehicles and private car ownership. This includes the now well-known model of ride-hailing (e.g. Grab, Uber, Gojek, Ola, Lyft, Didi etc.), as well as ride-sharing (e.g. Grabhitch).  We are also seeing the proliferation and expansion of car-sharing mobility startups such as BlueSG (Singapore), SoCar (South Korea) within Southeast Asia. Micro-mobility is also a plausible trend to look out for. While we have seen the rise and less than glamorous fall of bike-sharing start-ups such as Ofo, oBike and Mobike, the micro-mobility scene today is looking towards electric scooters as the next last-mile mobility solution.[103] With the operational and regulatory lessons learnt from bike-sharing, e-scooter sharing might be able to succeed where bike-sharing failed.[104] Lastly, the parking and navigation space is also seeing several start-ups attempt to use AI and blockchain technology to solve congestion, parking inefficiencies and other pain points. 

Smart Logistics

The pandemic has heightened demand for online purchases and highlighted the inefficiencies in the current processes and systems. There is room for AI and technology to bring about coordination, efficiency and optimization to the fragmented logistics network. By offering SaaS or in-house solutions, start-ups may potentially find success in a region where logistics and shipping continues to be a large industry. We are also seeing new fringe applications aimed at revolutionising last-mile logistics solutions, such as drone delivery. 

Smart Buildings

Being geographically positioned near the equator, tropical countries in Southeast Asia are some of the hottest all-year round. Additionally, Asian cities are some of the most densely populated, characterised by high-rise living and congestion. High population density, together with intense human activity and energy consumption synonymous with urban living environments has resulted in what is known today as the urban heat island (UHI) phenomenon. High temperatures in turn spur citizens to rely on air conditioning to create artificially cool indoors environments conducive for work, which consume large quantities of electricity from the grid, creating a large carbon footprint while venting hot air outdoors, raising the temperatures further. Heat stress is expected to cost APAC 62 million full-time jobs by 2030, or 3.1% of the workforce, according to the International Labour Organization, thus it is imperative that future urban planning and development aim to mitigate rising temperatures.[105] 

We should be looking towards constructing or converting existing buildings into green buildings. These are buildings that use innovative architectural designs or inventions to achieve sustainability. Countries assess green buildings via rating schemes, such as the Singapore Building Construction Authority (BCA)’s Green Mark rating scheme and their counterparts in Malaysia & Indonesia etc.[106] These are attuned to the regional context, focusing on passive: and active: technologies that can promote cooler buildings while reducing energy consumption.[107, 108]  

Examples of technologies include:[109]

1. Design innovation led by modelling software to optimise shade and ventilation
2. Architectural designs like overhangs, planters to block direct solar exposure, roof greening and facades
3. Efficient cooling systems such as water cooling for data centers 
4. Motion sensors and intelligent building control systems that regulate electricity use based on activity/outside temperature
5. Solar windows and cool roofs, paints that reflect sunlight and prevent absorbing heat
6. Sustainable construction materials with less embodied carbon

Governments are increasingly launching grants for green building technologies, and start-ups can take advantage of these to get their innovations ready for commercialization and further funding.  

Smart appliances are also continuously being developed, and continued innovation will serve to make them more energy efficient and lower costs, thus driving adoption. Homes are a main contributor to energy consumption as well, and establishing zero-energy homes will be an important goal for cities as well.

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Trends and Developments III

There are several spaces that we have identified and are keeping an eye on. Below we provide a high-level overview of each particular industry, focusing on upcoming technology, as well as innovative business models.

Agriculture

Agriculture remains one of the most vital sectors of most ASEAN economies. Research done shows that agriculture (including farming, fishing and forestry) continues to account for 10.2% of ASEAN’s total GDP as of 2019, and remains a key contributor to employment both in developing countries such as Myanmar (almost 50%), Laos, Vietnam and Thailand, as well as countries that are rapidly pivoting to industry and service sectors such as Indonesia and the Philippines.[110] When considering the agriculture value chain as a whole, the value created is multiplied (2.9x in the Philippines), increasing agriculture’s importance to economies as a whole.[111] 

Furthermore, with the global population set to reach 10 billion by 2050, agricultural production needs to double in order to provide sufficient food for all. More efficient and sustainable agriculture will be integral in meeting these needs without infringing further on the environment. Simply scaling up will place unprecedented levels of strain, resulting in groundwater depletion, soil degradation, loss of biodiversity amongst other climate stresses. There is a need for fragmented supply chains to become more unified and efficient, for land to be used more efficiently and for alternative foods to be developed and adopted. 

Efficiency

We have already seen an agricultural revolution in the form of hardware improvements. Today, we are seeing the rise of precision farming, where softwares such as GPS, AI & data analytics, IoT and cloud computing are used alongside hardware (sensors, machines, drones etc.) to provide farmers with the tools to monitor, anticipate and tackle challenges. This allows for improvements in crop yields and stabilizing of harvest levels to ensure food security. 

There is much room for efficiency gains in Southeast Asia. Countries like Vietnam and Myanmar are still on the backfoot compared to the rest of the region, with inefficiencies caused by overirrigation, misuse of fertilisers and pesticides and a multitude of other problems. The key will be bringing in technology at a low enough cost to encourage adoption by more than 100 million rural smallholder farmers which collectively produce a significant portion of the food consumed and exported in Southeast Asia.[112] 

Smallholder farmers are constrained by several interconnected problems. Despite high internet penetration (66%) in SEA, smallholders lack access to information (weather reports, market prices, how to mitigate pests and diseases etc.), financial resources (e.g. loans) to make large capital purchases to upgrade, and markets to sell their goods to.[113] The vacant space has seen startups spring up to tackle smallholders’ pain points. As of April 2020, there were 134 smallholder-centric agritech startups. Some rely on proven business models such as peer-to-peer lending, crowdfunding, digital marketplaces etc. (including B2B marketplace and P2P lending platform Tanihub and crowdfunding platform Cropital), while others have found success with promising business models such as farmer advisories, mechanization platforms and marketing traceability (ethical, fair value branding).[114] Other innovative business models include Fefifo, which provides ‘Farmspace as a service’ to take the burden of large capital outlay off farmers starting out small. 

On the other hand, there has also been innovation specifically aimed at uniting the fragmented value chain. By connecting farmers, supermarkets, restaurants and export hubs, as well as relying on technology such as blockchain, real-time analysis and more efficient logistics, startups have seen success in improving the pricing mechanisms in agribusiness, reducing perishable food wastage, lowering costs for businesses while providing better returns for the otherwise-exploited farmers. 

Better Land Use

Food and fibre production currently use more than half of the world’s ice-free land.[115] Increasing production used to mean increasing land use, but in the face of growing land scarcity and opportunity cost, we have to learn how to make better use of existing space, while looking towards freeing up land for other purposes. 

As a relatively outdated sector, land use is prone to being disrupted by technology. While this can be achieved in part through more efficient farming, there are specific technologies being developed to maximise each square foot of land used for farming. For example, vertical farming technology produces 2.5 times more crops per hectare across various crop varieties on average.[116] While the leaders in vertical farming technology might not be in ASEAN (China, Japan, South Korea, US and Europe dominate), ASEAN countries like Singapore and Thailand are already beginning to implement vertical farming both in urban and rural farms, with home farm brands such as Sky Greens (SG)  and NoBitter (TH) rapidly scaling up in their respective home countries.[117]

Singapore’s ambitious 30% home-grown food by 2030 objective has led to it taking the lead in ASEAN, as it attempts to bolster its food security through greater self-sufficiency (10% as of today). This has come in the form of grants (Singapore Food Agency (SFA) 30X30 Express Grant), monetary support to adopt new technologies (Agriculture Productivity Fund (APF)), and innovation funding (Enterprise Singapore (ESG) has set aside S$55 million). Technologies include indoor LED lighting for multi-story vegetable farms and multi-storey recirculating aquaculture systems, which are 10-15x more efficient and less labor intensive. 

If successful, the Singaporean method presents opportunities for expansion to the rest of the ASEAN countries that are yet to explore such methods. 

Alternative Foods

This vertical encompasses a variety of applications of biotechnologies, including but not limited to plant-based meats, lab-grown products and new plant-based food production. It has seen huge investor interest in recent years – based on PwC analysis on Dealroom data, they take up a third of overall investment, with higher than average deal sizes.[118] 

In part, this heightened investor interest is due to the hype surrounding plant-based meats. These products retain the taste profile and nutritional value of actual meat, while using 87% less water, 96% less land, and producing 89% less greenhouse gases.[119] The combination of taste and sustainability has appealed to consumers, allowing companies, most notably Impossible Foods and Beyond Meat, to achieve commercial success. It is expected that the overall Asian plant-based meat market will grow to US$1.7 billion (a 25% increase) by 2026.[120] This echoes predictions surrounding global market growth not just for plant-based meats, but low-GHG proteins and alternative foods in general.[121] 

We expect demand for plant-based products and low-GHG proteins to increase across Asia because of a growing consciousness amongst an increasingly affluent population about the need to eat healthily (plant-based diets, less meats), as well as a historical familiarity with soy-based products and mock meat.[122] 

We also believe that both the Asian and global market will not be dominated by US or European players. We are already seeing Asian start-ups taking the market by storm, with upcoming products that cater specifically to local taste buds and traditional cuisines, such as Hong-Kong based Avant Meats’ cell-based fish maw and sea cucumber and Phuture Foods’ Halal and Buddhist-friendly pork alternatives. Startups like Thailand’s Let’s Plant Meat also offer plant-based meat products at half the cost of Impossible Foods’, raising doubts on the validity of a first-mover advantage in this vertical, especially in new markets. 

In Southeast Asia, the Singapore government has been positioning the island state as ASEAN’s hub for plant-based food production. There have been substantial efforts to promote alternative protein development by startups, including funding matching by the government and providing conducive, supportive environments for start-ups focusing on alternative food solutions. Accelerator programs such as Innovate 360, Big Idea Ventures and GROW, as well as regular regional roadshows, seminars and events held in Singapore are part of the burgeoning biotechnology/foodtech innovation ecosystem.[123] 

Temasek Holdings, the government’s investment arm, was an early backer of US alternative protein start-ups Impossible Foods and JUST Egg, and aims to replicate that success at home.[124] Already, Singapore is home to some of the region’s hottest prospects, including Shiok Meats (cell-based shrimp), Karana (jackfruit-based meat), Life3 Biotech (plant-based chicken and prawns, algae-based proteins) Hegg Foods (vegan eggs) and TurtleTree Labs (lab-grown diary).[125, 126, 127] 

Looking Forward

Agriculture has a history of undergoing revolutions as a result of technological disruption. This trend is set to continue as agriculture undergoes its third and fourth revolution. Although deal activity in ASEAN today focuses on downstream innovation (unifying the supply chain, increasing efficiency of traditional methods) rather than upstream innovation (plant foods, new types of farming), we expect these verticals to garner more attention in recent years as the technology stabilizes and the agritech ecosystem develops.

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Conclusion

It would not be an exaggeration to say that achieving sustainability is the greatest hurdle facing the world today. Be that as it may, this is also our best opportunity to solve the problem before it spirals irreversibly out of control. In this report we have argued that achieving sustainability is our responsibility, and is one that does not require us to sacrifice other priorities. 

Many sectors that are critical for achieving sustainability are in dire need of (further) disruption. However, the need for significant capital outlay and government support in many sectors might not be compatible with traditional venture capital investment. Leaving capital intensive or underdeveloped sectors to other more suitable funding sources, venture investors should not shy away from the impact sector, as there are many unpolished gems to be discovered. 

Despite being limited in terms of opportunities that can be pursued, we have continued to keep an eye on a range of sectors and verticals, detailed above, regardless of their suitability for venture capital investments. There is value to this, as technology has historically shown that it is capable of turning concepts like feasibility, intensivity on their head quickly. By not writing off particular sectors or verticals and instead continuing to keep an eye on their developments, we ensure that Quest Ventures can be amongst the first to identify nascent opportunities. With that in mind, Quest Ventures takes a broad-based approach in analysing the core sectors that will make or break sustainability in ASEAN in the coming decades, a strategy that continues to serve us well. 

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State of Startup Ecosystem

Credits

Analysts
Mr Surendra Shenoy, Summer Analyst

Research
Mr James Tan

Overview

Called a “burgeoning startup economy” by TechCrunch, and home to seven unicorns (before the merger of Gojek and Tokopedia), the highest in Southeast Asia, the startup landscape of Indonesia has been the subject of a growing number of conversations. Prominent startups have been putting the archipelago on the map with their traction and innovation, especially during the COVID-19 pandemic, and this report covers a high-level overview of the state of the Indonesian ecosystem halfway through 2021.

Indonesia’s immense size and market potential continues to make it an attractive market for start-ups and investors, which in turn has allowed it to develop strong entrepreneurship ecosystems in major cities. However, key factors challenging this position are (1) the unequal development and ‘access gaps’ between different tiered cities; (2) key talent shortages undermining the ability of local start-ups to perform to their maximum potential; and (3) complexity in starting and operating a business in Indonesia.

On the other hand, ongoing trends, such as talent development initiatives, are quelling these challenges, and Indonesia overall remains a top entrepreneurship ecosystem, particularly in the areas of e-commerce, FinTech, and EdTech.

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Foreword

Mr James Tan
Managing Partner
Quest Ventures

In recent years, Indonesia has taken the limelight for its pace of development across many sectors of its economy including technology.

An enormous population and growing income levels are two of many factors that have powered this growth, resulting in many unicorns and game-changing startups.

Challenges exist. From income inequality to unequal distribution of talent across the archipelago, Indonesia faces challenges typical of many emerging economies. Time will tell if the valuations that are placed on many startups justify the lofty expectations.

In the meantime, we believe that the Indonesian startup ecosystem is strong and, barring any systemic influences, will continue to grow in its influence across Southeast Asia.

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Indonesia: The Perfect Market?

Size and Market

The largest and most obvious pull factor of the archipelago lies in its sheer size. Indonesia hosts Southeast Asia’s largest population and economy, with over 270 million residents and a nominal GDP of over USD 1.1 trillion.[1] The country’s demographics also make it an attractive market. With a median age of 29.7 years, and 60% of the country under the age of 40, its young population is also especially open and welcoming of new tech-adoption.[2] Furthermore, as much as 95% of Indonesia’s internet users consume their content primarily on mobile, and average daily mobile use exceeds 5 hours, amongst the highest in the world, making the country particularly attractive for mobile-first start-ups.[3]

Internet and mobile penetration rates have also seen an uptake in recent years, with the number of internet users jumping from 30 million to over 150 million in the last decade due to long-term trends, construction of new telecommunication infrastructure and improved internet connectivity.[4] Moreover, this growth is expected to continue, and Indonesia’s internet economy, currently estimated at USD 44 billion, is expected to see double digit growth and reach 124 billion by 2025, setting it as the largest and fastest-growing Internet economy in Southeast Asia.[5]

Investment Hub of Emerging Asia

Indonesia’s attractiveness as an entrepreneurship ecosystem has also been bolstered by the inflow of capital funding into the country, with over USD 5.7 billion being raised in 2020, equalling 70% of SEA’s capital share.[6] Indonesia’s tier one cities in particular have stood out to investors, with ecosystems like Jakarta attracting over USD 845 million in early-stage funding alone, the highest amongst all emerging ecosystems. In fact, Jakarta’s ecosystem itself was valued at an estimated USD 26.3 billion, positioning the city as the world’s most valuable emerging ecosystem.[7] Moreover, Indonesia is likely to see continued good capital inflow, given the prevailing geopolitical tensions and increased investment risks involving popular destinations like China, the U.S., India, etc.[8, 9]

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Key Inherent Challenges

Disproportionate Development Across Cities

However, as hinted earlier, ecosystem development across its cities has been far from homogeneous. Outside of tier one cities, particularly Jakarta, entrepreneurs have limited access to capital, expertise, mentorship and other resources which are crucial ingredients in early-stage start-up success.[10] Moreover, even though cities like Yogyakarta, Bandung, Semarang and Surabaya have been recognised for their flourishing start-up ecosystems in their own right, only Jakarta has been ranked amongst the top 500 cities for start-ups.[11]

Furthermore, Indonesia’s unique geography, demographic diversity and relatively weak connectivity further exacerbates this problem of limited shared access to existing resources, and supports the continuation of an “access gap”. This “access gap” flows both ways; it not only limits in-roads for entrepreneurs in larger cities to their potential user bases in smaller ones, but also limits potential entrepreneurs in smaller cities who would be the most inclined to solve their local problems.[12]

Key Talent Shortages

Similarly, a challenge for entrepreneurs across Indonesia has been reliable access to crucial talent. The 2020 Talent in Asia study reported that over 50% of Indonesian employers face talent shortages, with the primary cause being an inability to find candidates with the right knowledge and experience.[13] Moreover, in the start-up space specifically, 90% of respondents believed that the skills gap was a major issue.[14] Structural issues like a relatively low tertiary education rate, as well as a documented ‘brain drain’ of qualified talent, has resulted in consistent shortage of talent, which in-turn has driven up the salaries and expectations of local talent.[15] Recent figures estimate that software engineers and other crucial start-up roles, such as digital marketers, often command salaries three to five times higher than the median wage in Southeast Asia.[16]

The inability of startups to sometimes afford required talent, especially early on in their development, has thus led to buried start-up ideas, early start-up deaths or underperformance. Even in later stages, rapid-scaling due to internal talent shortages has emerged as a serious challenge. Moreover, even when employers do hire talent, frequent complaints have risen of quick turnarounds, employee job-hopping, and moonlighting.[17] Furthermore, the lack of an ESOP culture, a crucial get round for most of these problems, has hampered employer’s abilities to attract and keep talent.[18]

Business Complexity

The last major challenge plaguing the Indonesian start-up ecosystem has been the complexity of setting up and running businesses in the country. The Global Business Complexity Index ranked Indonesia as the world’s most complex jurisdiction across their 77 analysed major countries.[19] Similarly, the World Bank’s ease of doing business index ranked Indonesia as 73rd across 190 global economies. The presence of neighbours with significantly better rankings, such as Singapore (2nd), Malaysia (12th) and Thailand (21st), further challenges Indonesia’s position as the regional business destination of choice.[20] Key issues that have been highlighted include difficulties in starting businesses, accounting & taxation, contract enforcement, trading across borders, and rigid employment regulations. A secondary concern has also been the government’s focus on local start-ups, with limited support for international start-ups entering Indonesia.

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Major Trends to Look Out For

Strong Growth in Lagging Cities

Nonetheless, optimism remains high around the Indonesian ecosystem due to ongoing trends, which are countering some of the aforementioned key challenges. While current ecosystem development has been disproportionate across cities, growth in tier two and three cities is actually outpacing growth in tier-one cities, a trend that is likely to continue for the next decade.[21] Moreover, these markets are by no means sub-par or unattractive to start-ups and investors. For example, by some estimates, adoption rates for e-commerce, e-payments, and lending in tier two and three cities is expected to grow up to 46% YoY towards 2025, and some investors foresee these ecosystems hosting the next Indonesian unicorns.[22] As such, the large and untapped potential across these segments in Indonesia will likely push more and more ambitious investors to these areas, and existing entrepreneurs will rise to build strong ecosystems across the archipelago.

Talent Development Initiatives

Similarly, all over Indonesia, various stakeholders are also engaging in top-down and bottom-up initiatives to breed technopreneurs and talent. The Indonesian government has openly declared its interest and priority in developing the entrepreneurship ecosystem and has engaged in initiatives like the 1001 Digital Startup Movement, BEKRAF, and KIBAR to assist entrepreneurs in different parts of their journey.[23, 24] On the other hand, startups like Glints and Hacktiv8 are offering bootcamps, courses and programs to upskill Indonesians with in-demand skills at a fraction of the time and cost of traditional degrees.[25] Similarly, larger players like Gojek and Tokopedia are taking active steps to alleviate talent shortages and investing in developing reliable talent pipelines by building internal capabilities through initiatives like GoAcademy and Tokopedia Academy.

Lastly, efforts are also being made to attract foreign talent, the Indonesian diaspora or ‘sea turtles’ (referring to Indonesians who return after studying and working overseas) to Indonesia. The government has indicated interests in developing Indonesia’s human resources as its priority target for 2020-2024, and is proposing initiatives such as strengthening the Ministry of Manpower and Transmigration’s purview, increasing benefits and incentives for returning Indonesians in public roles or universities, and increasing scholarship opportunities for locals and foreigners with bonds to return or work in Indonesia.[26, 27]

The impact of a reverse brain drain on the Indonesian start-up ecosystem cannot be overstated. Currently, over 90% of Indonesian unicorns and start-ups with valuations exceeding USD 100 million have co-founders or top leaders who have studied or worked overseas for a period of time.[28] Similar trends were also seen in other entrepreneurship hubs during their initial boom, such as Israel in the 1980s, or China in the early 2000s.[29] ‘Sea turtles’ and the wider Indonesian diaspora bring a perfect mix of good local understanding and strong international exposure, which in turn allows for the rapid development and success of the ecosystem. The trend of an increasing number of ‘sea turtles’, diaspora members and foreign talent coming to Indonesia thus foreshadows strong prospects for the local ecosystem.

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Notable Industries

E-Commerce

E-commerce and FinTech are amongst the two largest and fastest growing sectors in Indonesia, which are expected to continue seeing higher growth and entrants due to the growing internet economy and large unbanked or underbanked population. E-commerce sales currently only accounts for approximately 5% of Indonesia’s total retail volume, but is expected to more than quadruple within the next five years according to estimates by McKinsey.[30] The market has a mix of early, growth and late-stage players, including unicorns like GoTo, Bukalapak and Shopee (under Sea Group), making space for tough competition.

FinTech

As aforementioned, the mobile-centric and underbanked population has made FinTech a major market in Indonesia. Only 12% of SMEs have access to credit, and over 65% of the population is totally unbanked.[31] As such, investors have flocked to start-ups solving these problems and FinTech was the highest-invested single space by VCs in 2020.[32] Multiple solutions and sub-verticals currently exist, including P2P lending solutions, digital payments, earned wage access, personal finance management, alternative credit scoring, etc. However, as opposed to e-Commerce, the FinTech space has much fewer mature players, with a majority still in early stages, and the market appears to be highly fragmented with few dominant players. Consolidation is underway, further boosting the attractiveness of the industry, but the heavy involvement of the government and regulators also adds a layer of unpredictability.[33]

EdTech

The COVID-19 pandemic has also accelerated adoption and normalisation of EdTech solutions, which also cover many sub-verticals ranging from online learning platforms to AR/VR, for user bases ranging from pre-school children to post-graduate students. The market currently has a mix of early, growth and late-stage players, of which a significant number grew massively and raised multiple funding rounds during the pandemic. Even outside the pandemic, long-standing trends such as unequal or substandard teaching resources across the country, and the aforementioned skills gap or talent shortage, make EdTech an attractive industry full of opportunities.[34]

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Conclusion

Major prevailing trends are reducing some of the traditional challenges typically associated with the Indonesian ecosystem, such as strong growth within lagging cities countering ‘access gaps’ within these locations, or human resource development initiatives by various stakeholders alleviating talent shortages. However, some challenges such as Indonesia’s long-standing business complexity still remain, further exaggerated by the presence of business-friendly neighbours around it. 

Nonetheless, the overwhelming opportunities and potential in the Southeast Asian giant are making up for these shortcomings, and the ecosystem appears to be stronger than ever, particularly in comparison to other emerging markets. The COVID-19 pandemic has accelerated technology acceptance and adoption, and players from e-commerce, FinTech and EdTech have leveraged these circumstances to grow further, and look well-poised to continue doing so. Both investors and start-ups remain optimistic of growth in the future, with frequent talk of 10 more Indonesian unicorns in the next decade being floated as the new target, which for the most part, seems to be becoming more and more realistic with time.

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