As we continue to step into the new decade in 2021, the startup and venture capital ecosystems rode out the disruptive chaos of 2020, mainly due to COVID-19, into a more predictable state of change in the coming days.
Venture Capitalists (VCs) believe in capitalizing on disruptive innovation and developing technologies to displace older technologies, create new markets, and prepare the world for unexpected situations (e.g., global pandemics)–even if not all the startups and industries that VCs invest in may do so. There are many risks involved when investing in innovation, mainly attributed to the rapid pace of change, exposure across sectors and market cap, regulatory hurdles, political or legal pressure, and competitive landscape.
VCs risk capital and take on these risks in exchange for technology breakthroughs, substantial productivity gains, and sustained economic growth. Investment in innovations also creates tremendous employment opportunities. According to a study by Stanford University, 38 percent of the working population of America is hired by VC-backed firms.
Southeast Asia (SEA) was also propelled into a blockbuster economy, through VC and startup activities in the last 5-10 years. This has led to the creation of new markets, uplifting of vulnerable communities, and significant economic advancement in the formal and informal economy. Even as SEA braced itself against the waves of COVID-19 impacts in 2020, ASEAN-5 economies are only looking to contract -2 percent, second-lowest in Asia-Pacific (after China). Venture capital investments also stood resilient in face of the pandemic, with a nearly -2 percent dip in total capital raised by SEA-based startups in 2020 ($8.6 billion), as compared to 2019 ($8.76 billion).
So what may lie ahead for the region this year?
From studies of global and regional trends, these top three sectors are positioned for success: Digital Wallets, Virtual Worlds, and New Retail.
1. Digital wallets
In just two years—between 2017 and 2019—the number of e-wallet users globally exploded from 500 million to 2.1 billion.
Digital wallets are a global phenomenon
The US digital wallet opportunity alone would be worth $4.6 trillion, according to ARK, fueled by the viral peer-to-peer payment ecosystems, savvy marketing strategies, and dramatically lower cost structures (Customer Acquisition Cost (CAC): $1,000 for traditional institutions, $20 for digital wallets). In addition, because payments offer access to an immensely valuable source of data on user preferences, interests, and purchasing behavior, digital wallets can expand to provide financial services (Payments, Insurance, Personal Credit and Mortgage, Saving and Spending Account, Brokerage), and serve as lead generation platforms for offline and online commerce.
In Asia, the tremendous success of digital wallets in China (Alipay and WeChat) has foreshadowed the same for Southeast Asia. BCG reports Southeast Asia possesses many of the key characteristics that fueled the takeoff and rapid evolution of digital payments in China: high digital penetration and digital engagement, extensive friction between consumers and commercial banks, investments by startups and digital platforms, a steady expansion of e-payment use cases, and a strong government push.
However, in Southeast Asia, the Digital Wallet industry is still in its infancy and is only reaching its tipping point, with at least 10 percent of the adult populations of Malaysia, Vietnam, Thailand, Indonesia, and Singapore already use e-wallets.
The COVID-19 outbreak and its sustained impacts look to encourage more Southeast Asian households to embrace digital payments, as contactless payments/ transactions are safer options.
BCG projects an increase in the adoption of digital wallets in the next five years for all the consumers (banked, underbanked, and unbanked). The unbanked is projected to experience a surge in adoption from 13 percent to 58 percent by 2025, the banked will reach 84 percent by 2025, and 78 percent for the underbanked.
The share of the value of transactions made via e-wallets will roughly double for the underbanked, reaching 25 percent by 2025 and take a fivefold leap to 20 percent for the unbanked.
Digital wallets present a huge opportunity in Southeast Asia in the coming years, mirroring the success in China, propelling it to mass adoption across all consumer profiles.
2. Virtual worlds
Virtual Worlds consist of video games, augmented reality (AR), and virtual reality (VR), and the opportunity in “The Metaverse” formed by these are huge. According to ARK’s research, revenue from virtual worlds will compound 17 percent annually from roughly $180 billion today to $390 billion by 2025.
Asia games revenue (inclusive of China, SEA, China Taiwan, India, Japan, and South Korea) to exceed $65 billion in 2020 with the number of gamers reaching 1.5 billion across the region.
In-game purchases as a percent of total gaming revenue increased from 20 percent to 75 percent from 2010 to 2020 and is projected to hit 95 percent by 2025. If the increasing trend of both monetization and time spent remains in place, in-game purchase revenue could compound 21 percnt annually during the next five years, from roughly $130 billion in 2020 to nearly $350 billion by 2025.
As the global game market saw almost 20 percent growth in 2020 from the previous year, the Southeast Asian market is expected to triple from what it was in 2017 by 2023. Research has shown that more than half of SEA’s online population spends money on games, with men more likely to spend on games than women (60 percent of men vs. 44 percent of women).
Singapore emerges as one of the top destinations for gaming companies, with 83 game developers, marketers, publishers, and manufacturers choosing to base their businesses in Singapore. Aside from the presence of industry powerhouses like Ubisoft and Riot Games, local giants like gaming hardware company Razer are expected to continue their dominance.
Sea Limited’s Garena is also dominating the games platform. In terms of market value, Sea Limited is nearly twice as big as Singapore’s largest listed company, DBS Group, and three times larger than Singtel, the leading telecommunications operator in Singapore.
Virtual worlds present another tremendous opportunity in the Southeast Asian region, riding on the tailwind of the COVID-19 pandemic and the rapid development of the mobile-first nations.
3. New retail
New Retail is a term coined by Alibaba’s charismatic founder Jack Ma, referring to the integration, or interlinking, of online and offline shopping using modern technologies, data, and customer engagement techniques. It is not new, and the revolution in retail started even before it is turbocharged by the COVID-19 pandemic.
Interest in improving fulfillment peaked, in terms of streamlining and automating the fulfillment process. Store automation also became a major focus to ensure a contactless store experience. We also saw big techs moved further into commerce, with Facebook, WhatsApp, Google, Amazon launching, investing in and acquiring retail tech companies and solutions.
Excluding services and food & grocery, companies that sell tangible goods online, as well as technologies that enable online sales experienced a slight dip in deal number, but an overall increase in deal value in 2020.
- Deal number: 888 (2020), 921 (2019), -4 percent
- Deal value: $19.409B (2020), $18.891B (2019), +3 percent
Around 40 million people in six countries across Southeast Asia (Singapore, Malaysia, Indonesia, the Philippines, Vietnam, and Thailand) came online for the first time in 2020, pushing the total number of internet users in Southeast Asia to 400 million.
Southeast Asia is poised to hit $100 billion in gross merchandise value (GMV) in 2020, with e-commerce registering a 63 percent growth. B2B marketplaces for small businesses are positioned for tremendous growth.
In Vietnam, the e-commerce B2B market is predicted to multiply by 3x to 4x in 2021 to reach $500 million to $600 million, even when it is still quite nascent, with less than $150 million in GMV in 2020. While Telio and VinShop currently command a majority of the market in this sector, Grab had started to digitalize wet markets in Vietnam, the third Southeast Asian country where it has done so.
Supply chain and logistics
Tech-enabled startups delivering services across the supply chain, from freight shipping and warehousing to inventory management and last-mile delivery, has experienced slight dips in both deal number and value in 2020, but Q4 2020 saw the number of deals soared more than 40 percent and the deal value is close to 4x that of the previous quarter.
- Deal number: 516 (2020), 560 (2019), -8 percent
- Deal value: $14.543B (2020), $14,867B (2019), -2 percent
The robotization of the supply chain will see further developments, which will continue to drive e-commerce efficiencies through autonomous delivery, robotic fulfillment, and on-demand warehousing.
This will be alongside the rise of autonomous logistics, with notable funding in the long-haul trucking, mid-mile logistics, and last-mile delivery space.
Bonus: Deep learning
Deep learning is creating the next generation of computing platforms, including consumer apps (e.g., TikTok used deep learning for content recommendations, has outgrown Snapchat and Pinterest combined). This will shape the consumers in their lifestyles and behaviors in a big way.
In 2020, deep learning powered almost all large scale internet services including search, social media, and video recommendations. ARK’s research stated that, during the next decade, they believe the most important software will be created by deep learning, enabling self-driving cars, accelerated drug discovery, and more.
It is predicted that deep learning will add $30 trillion to equity market capitalizations during the next 15-20 years.
As the startup and venture capital ecosystems gear up for the year ahead in 2021, it is expected that the digital economy in Southeast Asia will continue to develop. Firms that introduce disruptive technologies in the tailwind industries such as Digital Wallets, Virtual Worlds, and New Retail are poised to thrive, as their solutions will continue to unlock new growth opportunities in existing markets and/or create new markets. VCs that are able to capitalize on these growth opportunities by investing in startups well-positioned to deploy disruptive technologies in the pandemic-ridden and post-pandemic world will stand to capture the most valuable companies in the coming decades and reap exceptional returns.
This post first appeared on TechNode Global.