While Southeast Asia’s startup ecosystems are still young compared to those in China or India, it has matured over the last five years. Unicorns like Grab, Gojek and Garena are continuing to grow, and more competitive startups are emerging in sectors like fintech, e-commerce and logistics. That leads to the question: Will consolidation start to pick up?
The consensus by investors interviewed by Extra Crunch is: Yes, but slowly at first. In the meantime, there are still roadblocks to mergers and acquisitions, including few buyers and the size of markets like Indonesia, which means startups there have a lot of room to grow on their own, even alongside competitors. But many Southeast Asian startup ecosystems are rapidly evolving, and consolidations may speed up in the next few years.
During a Disrupt session, East Ventures partner Melisa Irene spoke about consolidation as a strategy, especially when larger companies, like Grab, decide to expand into new services by acquiring smaller players. In an interview with Extra Crunch, Irene elaborated on the idea.
“Companies that want to get more value out of their customers by expanding into other services can do it internally by developing it, or do it externally by buying existing companies that have been operating in the same or adjacent sectors,” she said.
For many years, companies opted not to do that because of the cost, she added, but that mindset started to shift a few years ago.
In 2018, Grab acquired Uber’s Southeast Asia operations, still one of the highest-profile examples of consolidation in the region. The “superapp” also built out its financial services business by acquiring fintech startups Kudo, iKaaz, Bento and OVO.
Grab rival Gojek has been an even busier buyer, acquiring 13 startups so far according to Crunchbase, including Vietnamese payments startup WePay and Indonesian point-of-sale platform Moka earlier this year.
Meanwhile, Traveloka acquired three competing online travel agencies in 2018, while e-commerce platform Tokopedia bought Bridestory, its first publicly known acquisition, last year to expand into the Indonesian bridal industry.
Still in its early stages
Golden Gate Ventures partner Justin Hall said he has seen attitudes toward consolidation in Southeast Asia gradually shift since the investment firm was founded in 2011.
“I would say over the next two to three years, we’re definitely going to start seeing much more M&A occurring than versus the last eight to 10 years. It’s the confluence of different factors. One, I think corporate VC is starting to pour a little bit more money into the space. You have a lot of international tech companies, e.g., from China, or regional unicorns that are being much more acquisitive in their strategy,” Hall said.
He added that an often overlooked factor is that a lot of regional early-stage and institutional funds launched about a decade ago, building a foundation for Southeast Asia’s startup ecosystems. Many of these funds started out with a 10-year mandate and as a result, general partners may start examining how they can orchestrate sales, for example by talking to corporate acquirers, financiers or other sources of capital for an exit.
“A lot of activity that you’re starting to see right now is under the table. We have funds coming up on that 10-year mark, saying, ‘Let’s see where we can derive value within our portfolio, within specific companies that we can sell.’ That is going to start happening en masse over the next two years once we hit that 10-year mark for a lot of these funds.”
Roadblocks
A roadblock to consolidation in Southeast Asia is that many companies simply are not at the stage where they have the resources to make acquisitions.
“The likelihood of consolidation is predicated on two key things. One is the prevalence of competitors and the other one, which is just as, if not more important, is a war chest to finance those acquisitions,” Hall said. “In certain verticals, we haven’t seen that yet.”
While some Southeast Asian companies are approaching that scale, most still aren’t at the point where they can use acquisition as a tool for growth.
Jefrey Joe, co-founder and managing partner at Alpha JWC, which focuses on early-stage companies primarily in Indonesia, said his firm thinks the startup ecosystem is moving in that direction. “But we still see this as an early market to consolidate,” he added. “Our view is will we see consolidation in the next year? Definitely. But will we see a lot of it, I don’t think so. In fintech, we may see a couple of payment startups consolidating.”
Hall and Irene also forecast consolidation happening in e-commerce, logistics and fintech, especially as many Southeast Asian markets focus on digital banking and payments to increase financial inclusion. “There’s a huge amount of money pouring into companies that are looking to grow that digital banking offering, and these digital banking offerings many times are regional in scope,” Hall said. “If you’re referring to Grab and Gojek and their aspirations, they might see acquisitions of smaller financial services on the ground of the markets they want to expand into as a viable strategy.”
One angle East Ventures’ Irene finds interesting are acquisitions aimed at helping bigger players like Grab and Gojek add more merchants to their platforms while also capturing more data for their operations. She points to Gojek’s acquisition of Moka as an example. “That acquisition was natural given the volume of transactions they process and the size of the businesses, so financial services are very core to the operations they are doing,” she said.
Consolidation as a roadmap into new countries
Another thing that may drive startup consolidation in Southeast Asia is the desire to enter new markets. Though Southeast Asia is often described as one big ecosystem, the region consists of 11 countries, each with its own culture, language, infrastructure and needs.
“Expanding into new markets is extremely difficult, but there is nonetheless a premium placed on founders and companies that can show they are operating in multiple markets, simultaneously, and that is going to be a primary driver for acquisitions across the region,” Hall said. An incumbent in a particular sector, like fintech, health or logistics, that has raised a significant amount of funding, may therefore look at potential acquisitions if they want to expand beyond their home market.
This is a shift from previous thinking, where companies often expanded by setting up their own teams in new markets, partly because they didn’t have the resources to buy other companies. Merging together companies that operate in different countries also requires “a specialist, a person who has been there, done that and been around the block.”
For that reason, Hall said these types of mergers may be spearheaded by Singaporean or Indonesian companies that have the experience and financial backing, though Singaporean companies are probably more likely to look toward acquisitions as an expansion strategy because Indonesia is already such a large and complex market that startups there often focus on it exclusively.
In Indonesia, Irene says that “different regions have different kinds of challenges,” so there is still ample room for companies to grow on their own without consolidating. For example, the country’s logistics infrastructure still needs to be built out, presenting many opportunities for startups. “To put it into perspective, if you want to ship goods from Jakarta to Surabaya, or from Jakarta to the east part of the country, you probably need to use different vendors. There are national vendors, but also regional vendors,” she said. “Those are things that need to be put in order to have a strong, connected supply chain for businesses.”
“There are opportunities for [Indonesian] companies to grow at this point in time,” she added. “But in four or five years, it will be interesting to see how the gameplay becomes, whether there is a player who is very strong at contracting all the way from the principal to the end consumers, or if it will be companies in two different verticals working together.”
Who will be Southeast Asia’s BAT?
With unicorns like Grab, Gojek, Traveloka and Tokopedia either acquiring or making investments in startups, there is the possibility that they will eventually play the same role that BAT (Baidu, Alibaba, Tencent) and other companies like ByteDance did in China. For example, both Gojek and Grab have their own investment arms, called Go-Ventures and Grab Ventures, respectively.
“Those are guys who are big enough and are able to expand their businesses through an acquisition strategy,” said Irene. “They have gone on that pathway, and it’s possible for them to have their own ecosystems. Gojek and Grab are investing, through their venture capital arms, in startups. The difference is the quantity at which Chinese and Southeast Asian companies are doing it. We’re doing it at much smaller scale.”
A key difference between the role of large tech companies in China and Southeast Asia is the funding environment, Hall said.
“I would say China was more of an exception, as to how fast it grew, because it was a single market, planned economy. The amount of foreign direct investment, both on the technology and money, pouring into that country was massive, in addition to how rapidly that economy grew. Southeast Asia, it’s apples to oranges,” he said. “If somebody is saying, why isn’t Southeast Asia growing as fast as China, there are many, many structural reasons for that. That being said, will Gojek play the role that Tencent did in the future, will Grab play the role that ByteDance did in the future … I do agree, it’s just going to take perhaps slightly longer to get there.”
Before going into venture capital, Joe served as chief operating officer of Groupon Indonesia. Groupon has businesses around the world, including in China. “At least from what I understand, the level of competition in China and India is way higher. When the Groupon model started in China [in 2011], there were hundreds, if not thousands of companies trying to do the same thing. In India, maybe not thousands, but close to 100,” he said. “In Indonesia, at best it was about 20. So the level of competition is much higher in China, quite high in India, but not so in Southeast Asia.”
One of the reasons for the proliferation of startups in China was the level of consolidation opportunities, Joe added. “They know what BAT is building and what they are going to do, so startup founders focus on that particular piece and hoping they will be acquired.”
That mindset hasn’t taken hold yet in Southeast Asia, partly because Grab, Gojek and other unicorns have yet to reach the level of profitability that the BAT companies had when they became bulwarks of China’s startup ecosystem, so they don’t have the same buying power.
Other potential startup buyers include conglomerates or financial institutions. For example, Irene notes that Bank Mandiri and Bank Rakyat Indonesia, two of the largest banks in Indonesia, have invested in or struck partnerships with startups. Indonesian telecom Telkomsel, which is partly owned by Singtel, is also a potential acquirer as it builds out its financial services platform, she added.
Though it may take several years for consolidation to start happening in earnest, investors are certain that mergers and acquisitions will ramp up. Once they do, it will have an impact on innovation by creating more exit opportunities for startups.
“Bear in mind, the amount of money that has poured into Southeast Asia over the last 10 years is extraordinary. We’ve gone from paradigm shift to paradigm shift over the last eight years in terms of more and more money coming in,” said Hall. “That’s money coming in, in spite of a lack of consistent exits that I was talking about. Once those exits start occurring repeatedly, it’s going to unlock more capital and attention and talent.”