Southeast Asia, part 2: Investors, entrepreneurs look to specialized solutions in complex region

Despite its relatively small geographic size, Southeast Asia is one of the world’s most diverse regions, and with 650 million people, its population is larger than North America.

Generally defined as the 10 member states of the Association of Southeast Asian Nations - Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Laos, Myanmar, Cambodia and Vietnam - Southeast Asia has a wide range of languages, religions, cultures and economic development.

But the overall picture is one of growth.

At a meeting of the ASEAN economic ministers in August 2018 , the association reported that if the region were a single country, it would be the world’s fourth-largest economy by 2030.

One reason for this upward trajectory: a very young population that’s giving the region a huge labor force, estimated to be second only to China and India. As of 2017, more than half of the region’s residents were between the ages of 20 and 54, with another 34.5% below 20.

These figures are, in part, the reason travel and tourism predictions for the region are generally positive, forecasting increases in both intra-ASEAN travel and international visitation.

According to GlobalData’s March 2019 report, Tourism Destination Market Insights: ASEAN , the region is one of the fastest-growing destination regions in the world.

The report predicts a compound annual growth rate of visitors of 4.72% between 2018 and 2022, from 129.2 million to 155.4 million people.

“As disposable incomes rise, solo travelers, families and couples are all attracted to the ASEAN region for its beauty, range of activities and friendly locals. Backpacking, medical and wellness travel and food tourism will be some important trends for the countries to embrace in order to increase their appeal further,” says Laura Beaton, travel and tourism analyst at GlobalData.

Where business is strong, innovation will follow.

According to Cento Ventures’ Southeast Asia Tech Investment report for the first half of 2019, nearly $6 billion was invested during that six-month period in more than 300 companies across a variety of sectors, and the company predicts total investments for 2019 to match the 2018 amount of about $12 billion.

And a forecast from Golden Gate Ventures and INSEAD predicts at least 700 startup exits in Southeast Asia between 2023 and 2025.

“There is certainly no better time to be an entrepreneur in the thriving entrepreneurial ecosystem of Southeast Asia,” says Claudia Zeisberger, professor of entrepreneurship and family enterprise at INSEAD, in the report.

For the second piece in our series on Southeast Asia, we survey the travel startup landscape with insights from investors and founders in the region.

Follow the money

According to Phocuswright’s The State of Travel Startups Interactive Database , Southeast Asia has just over 100 travel industry startups that have been founded since 2005 and are still operating.

Three of them, Singapore-based Grab and Indonesia-based Gojek and Traveloka , are among the region’s 11 unicorns - companies with a value of at least $1 billion.

Other large and notable brands include budget lodging startup Reddoorz , online travel marketplace Wego and tours and activities provider BeMyGuest .

The region’s favorable macro-economic outlook is one of the drivers of this growth.

“If you look at the affluence of the average Southeast Asian, it’s about twice as affluent - using GDP per capita as a proxy - as the average Indian. It’s still a decade behind China but in this very promising phase where you are already at like 6X discretionary income relative to India, per capita,” says Oliver Rippel, co-founder and partner at Asia Partners, a private equity firm focused on growth-stage investments in Southeast Asia.

“And online travel is usually one of the pioneering segments in terms of transactive e-commerce services in emerging markets. We’ve seen that in markets like China and India.”

In August, Asia Partners led a $70 million Series C financing round for RedDoorz.

Rippel says RedDoorz’s focus on providing a tech solution for one- and two-star hotels is serving a hugely scalable market of budget properties that still need to come online and that serve many of the region’s first-time travelers.

Kuo-Yi Lim, co-founder and managing partner at Monk’s Hill Ventures, a firm investing in post-seed stage tech startups in Southeast Asia including KKDay and GoQuo , says the region’s middle class – growing in size, affluence and comfort with digital consumption – is in need of more solutions to serve its flourishing interest in domestic travel.

“Indonesia for example is a huge country – 270 million people, a sprawling archipelago of thousands of islands, a lot of interesting attractions,” he says.

“But it is very unorganized, very fragmented, very non-transparent. So there is a lot of opportunity for folks to provide that organization, the distribution, linkages around that to facilitate those travels.”

The execution of that – bringing these long-tail suppliers spread through Southeast Asia online – is a complicated task.

“The main challenge here is not so much one in terms of identifying the right business model ... the challenge is more in terms of the execution on the ground,” Rippel says.

“You have to build an effective account management structure on the ground in the various markets. You can’t just acquire those businesses through online means because often they are not online yet. So the local nuances of how to conduct business requires a certain organizational and execution muscle that many of these companies have to build up from scratch.”

For new startups there is also the challenge of standing out in an ever-more-crowded market.

“For a while there was quite a bit of open space for folks to enter, and now founders need to be a lot more innovative, a lot more nuanced in their approaches to become successful,” Lim says.

“That’s the challenge from an investor’s perspective. When we look at new innovative startups, we are always looking in the rearview mirror and wondering when would an incumbent and or a larger emerging platform player like Traveloka catch up to it or even take advantage of the same opportunity.”

Lim notes Airbnb’s dominance growing as it has expanded into experiences and restaurants, and Google’s ever-expanding presence.

“Google is looming. The question is when will Southeast Asia be in its crosshairs. That remains to be seen,” he says.

Founders move forward

Despite the competitive landscape, two founders we spoke to are optimistic about their prospects for success in Southeast Asia.

Dylan Tan co-founded Singapore-based Split in mid-2018. The company enables airlines, hotels and online travel agencies to allow customers to pay in installments. Split provides the technology and also pays the travel suppliers instantly at the point of sale – eliminating the risk of non-payment or fraud for those suppliers.

“In Southeast Asia, the majority of the people don’t own credit cards. For the vast majority, they are newly entering the middle class, entering the digital economy and there is not a lot of data about them in the financial institutions, so banks are not willing to take the risk to issue credit cards,” Tan says.

“So if I knew if I could take away the upfront cost, I could get potentially millions of people traveling. And I think many of them would be traveling for the first time, given Southeast Asia’s booming middle class.”

In October 2018, Split won the Startup of the Year award at the WebInTravel conference. Since then the company has signed a Malaysian ground transportation online travel agency, CatchThatBus, and an airline (which Tan says he cannot yet name). And Tan says on average, travelers that pay in installments through Split are spending 19% more than travelers paying up front.

Now the company is raising its seed round, which Tan says he hopes to close next month, and continuing to develop its technology.

“We can’t just build one installment product, because the payments landscape is extremely fragmented in Southeast Asia,” he says.

“So as we enter different markets we need to localize our product. It’s a huge thing to tackle.”

BedLinker founder and CEO Thuan Dao also has a vision of expansion throughout Southeast Asia, but for now he’s focusing on Vietnam. That’s the home base of his company, which is a marketplace for travel agencies, tour operators, destination management companies and travel management companies to access hotel inventory.

Founded in December 2017, the company now has direct contracts with about 700 three- to five- star hotels in Vietnam – a fraction Dao’s estimate of around 4,000 properties total in the country. He also works with third-party suppliers such as HotelBeds to provide inventory in Malaysia, Indonesia, Thailand, Philippines and Myanmar.

“Hotels and resorts in Vietnam and other Southeast Asia countries are booming, and they need help to distribute their hotel inventory to the world so they can get inbound business,” he says.

“Independent hotels and resorts don’t have enough money to invest in technology, so we now we invest in technology and create this platform to connect them to a wider market overseas.”

Dao says he is in the midst of a Series A funding round, working with investors from Singapore, Japan and Korea, which he hopes to close before the end of the year.

The capital will be put toward his vision of making BedLinker first the largest supplier in Vietnam, not just for hotels but eventually also car transfers and tours and activities, and then to expand throughout Southeast Asia.

“There is not much competition now in Vietnam. We want to take this opportunity to go fast to get market share,” he says.

In fact, both BedLinker and Split are operating in less-crowded B2B solution space. According to Phocuswright analyst Coney Dongre, eliminating the outlier of Traveloka, “90% of the funding secured by Southeast Asia startups between 2009 and the first half of 2019 has gone to B2C startups, likely because the evolution of consumers from offline to online offers enormous growth opportunity.” (With Traveoka included that percentage jumps to 97%).

• Southeast Asia, part 1: How low-cost options, mobile reliance are driving travel transformation