15 Feb 2021

Takaki NAKAMURA, Executive Director, Partnership Group, Vertex Holdings

Venture Capital Landscape in Southeast Asia

Innovation Ecosystem

1. Introduction

Grab, Shopee, PropertyGuru, Carousell, Anywheel... I'm sure many of our readers living in Singapore (SG) have had some experience with these apps. All of these are SG startups including the ones that have now become giants. Beyond SG companies, Zoom, Netflix, WhatsApp, Slack, may be apps you use in your daily life. These examples tell us the importance of startup innovation in our lives and businesses cannot be overlooked. In Japan, the start-up ecosystem is attracting a great deal of attention, with a rising trend toward Digital Transformation (DX) and the establishment of Corporate Venture Capital (CVC).

In this article, I would like to shed light on the Venture Capital (VC) industry, which I myself am a part of, as it plays a major role in underpinning that ecosystem. From an insider's point of view, here is an overview of the VC business, which is rarely mentioned in the media, as well as investment and key trends in Southeast Asia (SEA) and the challenges facing the industry. I hope this article will help you understand the industry and the region better.

2. How the VC business works

To begin, let's briefly touch on the mechanics of the VC business which has three main entities. The first is the General Partner (GP), the entity that manages the investment fund. The second is the Limited Partner (LP), the entity that provides the funds for investment activities. Lastly, there are the startups, the entities that receive investment from the funds.

How does the 3 parties work in tandem? It begins with the GPs raising funds from LPs. Based on their funds raised and investment philosophies, they select the startups, invest in them, grow them and provide management support. If their portfolio company pays a dividend or the VC exits, the investment is distributed back to the LP.

Figure 1: Fund structure


A startup has various stages. From the early days of the company, to the growth stage where the company acquired a stable influx of customers, to the exit stage where an IPO is possible, the investment and support required varies depending on the stage. For this reason, VCs define their own focus, and based on that, they build their own organizations and define the amount of funds to be raised from LPs.

3. The Southeast Asian VC/startup market

According to Genome's Global Startup Ecosystem Ranking, the only SEA city ranked in the Top 30 is SG (read more on Singapore’s innovation ecosystem here), and the SEA region as a whole is in its development stage.

Figure 2: Global Startup Ecosystem Ranking


*Source: Startup Genome-The Global Startup Ecosystem Report GSER 2020

Indeed, the pace of development is fast. The graph below indicates the amount of VC investment growing rapidly with investments outside SG, especially Indonesia, increasing rapidly. Some unicorn companies providing consumer services (such as Gojek and Tokopedia), are contributing to this growth.

Figure 3: Change in SEA's VC investment (2010-2020)

*Source: Pitchbook

Hence, we believe SEA is a promising market with expectations to grow in the future due to the following factors:

(1) Growing population and economy

SEA's population currently stands at 660 million, which is about 9% of the world's population. The economy is also dominated by a young population (average age of 27), which is very active in consumption and the main driver of labour. Underpinned by this, the economy has maintained a GDP growth rate of 5% for the past five years (outperforming the global average by about 2%). Despite the slowdown caused by COVID-19, there is no doubt that it will continue to grow at a faster pace than the rest of the world.

(2) Connectivity

For many startups, basic infrastructures such as internet and smartphones, are important prerequisites for business development. SEA is an economy with the most mobile internet-immersed people in the world. Due to the tremendous Internet penetration rate, it has grown rapidly to the point where 360 million people, or 50% of the entire population, are now Internet users (of which, nearly 90% are millennials). In addition, the SEA Internet market size is now estimated to be around JPY 10 Trillion . This is based on the people living in urban areas. As the Internet spreads to non-millennials or those living in rural areas, the market is expected to grow from JPY 10 Trillion to JPY 30 Trillion by 2025. A comparative study on the average daily Internet usage of millennials in the SEA region against those in the U.S., Germany and France, has indicated that the former spent 8.1 hours on the Internet, while the latter spent 5.1 hours. It might be better to say that they are "immersed" in the Internet rather than "using" it.

(3) Structural social issues

On the other hand, there are various social issues and governments or large corporations do not have the capability and speed to solve them (except for SG). This is why startups have emerged as the alternative solution. An example would be the problems of underbanked SMEs/individuals. Some issues faced includes not knowing when and what will be delivered due to the complexity and disruption of logistics/distribution networks, traffic congestion and security issues, and an endless list of other issues.

The fundamental social environment mentioned above is not changing any time soon. This is why we believe the SEA startup ecosystem will continue to grow.

4. Key investment trends

Next, let's look at the emerging investment trends. The so-called "hot" sectors are likely to be Fintech, e-Commerce and Logistics, reflecting the social issues mentioned above. Although there are some variations among VCs, many have announced their intention to focus on these sectors.

Figure 4: Sectors that have attracted the most investment in the past year (SEA, June 2020)



At Vertex, we invest in these sectors, but we have defined two key investment strategies from a slightly different angle.

Consumption upgrading

The first is a type of service that "upgrades the consumer experience". For example, NIUM has built a platform that makes international money transfers inexpensive and easy. Their mobile app provides a seamless experience for migrant workers to send money to their families back home. It has also co-developed a travel card with VISA called Amaze Card to provide travellers with an experience that removes the burden associated with exchanging money into local currency. People classify NIUM as a fintech, but that is only one way of looking at it. Vertex believes NIUM is a platform that goes beyond finance to change the consumer's purchasing and living experience for the better.

Empowering SMEs

SEA's economy is driven by SMEs. However, many SMEs lack the resources to invest in technology and therefore tend to use cheap labour to run their operations manually. Solutions to support the digitization of these SMEs are noteworthy because of their large potential market size. An example would be Storehub from Malaysia. Using a SaaS model, Storehub offers a comprehensive store management platform to retail stores and restaurants in the region, helping them scale their businesses with the power of technology.

There are a number of SMEs that are unable to access finance from traditional lenders. In most SEA countries, private sector lenders offer secured loans to SMEs, which means that SMEs do not have fixed assets as collateral and will not be able to access finance which hinders their growth. Validus, a startup from SG, developed a peer-to-peer lending platform that leverages machine learning and big data analytics to help SMEs. Validus is currently operating in several SEA countries including Singapore, Indonesia, Thailand and Vietnam.

Tokopedia model vs Shopee model?

Another important aspect of SEA's startup investment is the concept of business models. Tokopedia and Shopee are two of SEA's leading e-Commerce companies, but can you tell the differences between the two? The main differences lie in the model where Tokopedia's model is focused on one country (Indonesia) while Shopee's is a multi-country model.

Figure 5: Tokopedia vs Shopee


*Source: iPrice group "Year End Report on Southeast Asia's Map of e-commerce"

With the exception of Indonesia, SEA has a population of almost 100 million people per country, which means the size of each market is not huge. In addition, each country has its own language and market characteristics and therefore requires a certain amount of time and localization. Therefore, to grow as a start-up in the region (except for some rare cases like Tokopedia), it is important to prepare for multi-country expansion in the early stages of a company's business and it is one of the checkpoints we consider when looking at potential investments.

5. Key countries to watch

On the other hand, there are only a limited number of startups that can suddenly expand into multiple countries. Hence, it is important to look at which ecosystems to focus from a country-by-country basis.


Indonesia's promise as a start-up ecosystem has been explained in length and many are familiar with its tale. With the world's fourth largest population of 270 million people and an Internet penetration rate of nearly 70%, it leaves room for growth, albeit at a high level. Despite its huge market and growth potential, there is no shortage of social issues such as the aforementioned SMEs, fragmented logistics network and supply chain, and a bank account ownership rate of less than 50% - all of which have spawned numerous unicorn companies.

Figure 6: Vertex Ventures SEA & India - Indonesia portfolio (example)



This country's VC investment pace is the fastest growing in the SEA region, supported by stable economic growth and the democratization of the Internet and Mobile. In addition to these macro trends, the entrepreneurial spirit of the Vietnamese people is noteworthy. Many Vietnamese entrepreneurs are Returning Vietnamese (so called “Việt kiều”) with overseas experience and a dream to set up their own business and contribute to the society. It is an ecosystem where they can meet the second and third generation of entrepreneurs who are extremely hungry. Furthermore, the country's ability to produce a large number of cost-competitive IT resources is another differentiating factor. Many SEA companies and multinational high-tech firms have set up technology development teams in Vietnam, which is a testament to the technological strength of the country's ecosystem.

6. Challenges in the SEA VC industry

I would like to conclude this article by discussing the characteristics and challenges of the SEA VC market.

The Immature IPO Market

As mentioned at the beginning of this article, VCs will not be able to realize returns on their investments until they successfully exit. If they do not continue to return a steady stream of capital to LPs, they will not be able to raise another round of funding. Therefore, the degree of exit options available will have a significant impact on the success or failure of the business. In this sense, SEA is an immature market, with most of the exits coming from M&A and IPOs accounting for less than 3% of the total exits.

Figure 7: SEA's Exit Breakdown (2015-2020)



In the case of early-stage VCs, there is an option to monetize their stake by selling it to mid/later VCs in the next round. However, for the mid/later VCs, the absence of IPO options mean they rely solely on M&A for exits, which raises a practical hurdle. This is indirectly hindering the expansion of the mid/later stage VC.

Lack of experienced VCs

The region as a whole still lacks a deep VC base (especially in mid/later stages). As seen in Figure 8, the majority of the VC landscape is still in early stage.

Figure 8: SEA VC Landscape


In addition, only about 20% of these funds are in continuous operation for 10 years. Typically, funds run for 10 years, which means that few VCs have experience in setting up a fund and closing it successfully.

Chua Joo Hock, Managing Partner of Vertex Ventures SEA & India, points to "sector-driven thinking" as a common approach for inexperienced VCs. This means deciding on a sector that is attracting investment, such as Fintech or Healthcare, and picking the startups that seem to make the most sense within that sector to invest in. This approach means an investor is entering the battle against valuations. Experienced VCs will look at "universal issues" rather than sectors and valuations. The idea is to focus not on what kind of "deal" they have been able to do, but on what kind of "business" they are supporting and the problems they are solving as a result. By carefully selecting investments based on the problems and committing to their growth with a long-term orientation, we will ultimately produce the best startups, provide high value as a VC, and contribute to building a strong ecosystem.

For the SEA VC/startup industry to grow, we believe the emergence of a deeper VC base at each stage (stabilization of procurement/exit) and a change in the mindset of VCs themselves from sector-driven thinking to problem-driven thinking will occur. In Omakase and the art of venture capital, very much like how the Taisho secures the finest ingredients for his/her customers, the growth in both breadth and depth for VCs ultimately helps it invest in the most disruptive and transformational startups.

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