The Sober Potential and Rising in Southeast Asia
A report from my first trip to #southeastasia since Covid. Sober and disciplined, a new era of potential is rising.
“To get too comfortable with explaining a certain trend or phenomena is to forget the exception lurking around the corner, to mistake change for continuity, and to assume that something discovered is a new phenomenon.” – Michael Vatikiotis in Blood and Silk: Power and Conflict in Modern Southeast Asia
I just returned from two weeks in Southeast Asia, meeting over sixty venture investors, entrepreneurs, journalists, policy experts and alike. It was my first physical return since Covid, though I have been “there” on zoom almost daily throughout. As any good journalist can tell you, there is no comparison being on the ground despite the efficiency of the virtual.
If one speaks to enough people, one risks hearing 360 degrees of opinion. One of my favorite venture capitalists comforted me a little noting, “Don’t worry – in two months everyone will be saying something different anyhow….” She may have captured a broader truth of our times, but a few themes did stubbornly come through.
I. There has long been a debate whether Southeast Asia is even a region.
The rich and diverse cultures, histories, languages, distances have long weighed significantly in the negative. One policy hand told me, “The history of agreement among ASEAN leaders has been inconsistent at best. Vietnam even thinks the South China Sea is theirs!” Even some leading regional tech investors noted that the reach of the ride-sharing and super app juggernaut Grab is more an exception that proves the rule: “It really is a regional combination of national and local plays than a consistent regional-wide enterprise.” There have long been hopes for regional fintech juggernauts here among other regions of the world, but individual nations stubbornly continue to protect their own businesses, legacy and new, through regulation especially in key areas like finance, health, and education.
At the same time, geographic proximity has its place, and Southeast Asia represents over 600 million people. Shared consumer needs as the per capita incomes rise are not to be underestimated. There are more similarities than outsiders recognize as these possess some of the youngest, digitally connected, hungry and ambitious populations today. While admiring China, there is comfort in being “not China” at the same time. This unifies not only politicians and entrepreneurs alike but offers large global tech investors an alternative as they have recently reassessed their portfolio risk in the Middle Kingdom and seek “Asia-like returns” elsewhere. No surprise in recent months that some of the largest university endowments have been touring the region, some specifically looking to hedge their China investments.
The caliber, experience and sophistication of regional venture capital has never been greater and has more dry powder to invest than any time in history. Some investors told me they worry that there is TOO much capital for the quantity of quality entrepreneurs, and this would push valuations artificially high. But one of the most respected walked me through his math: “Over 4,000 companies in the region approach us each year, easily a third an easy pass. Last year we met 500 of the best in person or on zoom. 100 were very good and we debated at length. We invested in seven. How can you tell me there is too much capital?” Others noted that there is an increased opportunity in the “growth” stage – companies who have proven themselves through the difficult Covid years and require more significant capital to scale significantly now.
“Exits” – return to investors of companies being sold on public markets or acquired by strategic corporations – remains few and far between. This introduces a sobering tautology. If there are fewer returns, increasing capital and not enough quality investments, valuations will remain high. The key questions will be what new theses at scale will arise and how increasingly experienced investors differentiate themselves to entrepreneurs.
Investors and entrepreneurs alike grappling what the next theses will come next. There was uniform belief that the future is less about the next ride or bike share apps and more the thorny region-wide needs in areas of health care, education, biotech, environment, and infrastructure. While there was clearly acceleration of human behavior to tech adoption during covid – millions compelled to buy, sell, meet, order food, take classes, seek health care from pure necessity – there also has been a striking desire for physical engagement. What is without doubt is that the entrepreneurs across the region are ready to go. Tempered by experience in the West, or in working at a Grab, or in their own previous startups and humbled by what for many was their first experience this year in a down cycle, the best are sobered, serious and disciplined.
Geographically, Indonesia draws great attention for its market size and evidence of increasing regulatory openness to global investment especially in areas of technology. Vietnam has among the most tenacious and creative tech talent and is being eyed by major western companies looking for new and additional partners to manufacture and assemble ever more sophisticated tech products.
II. But the hub of the region, perhaps the newest hub of Asia, is Singapore.
Almost every meeting began with people describing the very recent changes here. In less than a year the amount of money coming to the country primarily from Shanghai and Hong Kong is without precedence. One analyst told me “Dubai is benefitting from the European War in the millions and billions; Singapore from uncertainty in China in the billions and perhaps trillions.” Still another noted that while Singapore has been welcoming to emigres from Hong Kong since 1997, today it is “the new capital of Asia” a place where any successful enterprise can base to go global. When and how that capital will be aimed at tech opportunities in the region is yet to be determined. Most believed this shift is structural and not temporary. Several noted that even Chinese at home have come to refer to Singapore as the “Singapore district” not suggesting a Taiwan-like connection but descriptive observation of the shift.
A key distinction my meetings underscored is the movement not merely of capital, but the quiet encouragement of broader global ecosystem builders – talent, banking, money managers, lawyers, accounting firms and more. Major global tech and cloud computing companies – including those from China – have built significant data serving operations here to meet global market demand for safe harbor of data security and protections. The competitive advantage is not bristling or boasting, but steadily proving that this is the most reliable and open place to do business.
Where things will go from here is a heated debate. We live in an era of uncertainty that pushes for an attitude of wait and see, and some I met are not sure how structural these shifts really will be. For all the strength of Singapore’s technocracy, a long-lauded meritocracy embracing technology to modernize policy making and infrastructure, some believe it is a victim of its own success and less willing to take risk and push through bureaucracy.
III. Each meeting begins with, or quickly moves to, China.
China remains a model for many in Southeast Asia entrepreneurs, representing business models and approaches often more relevant to the region than Silicon Valley and, up until recently, an economic performance to be coveted. Examples are not merely from the tech world, as I met the “Lukin” (the Chinese Starbucks) of the Philippines. Views, at the same time, are also in flux. Like here in America there was a conventional wisdom a few months ago that China was all but squashing its innovation economy, but that view has softened since the Covid opening.
One senior person who had spent many years in China told me, “There is no time in history I’d rather be investing in tech startups in China. It's no longer about the next delivery app but massive challenges in health and related sectors that AI is about to unleash across the country and beyond.” Another noted, “You Americans criticize copycats – Chinese companies taking successes in the West and building them for our market. They were never copycats, but very innovative enterprises to meet consumer needs on our terms at scale. This is an effective play book you will see in sectors where there are big problems AI can solve.” I was chastised by more than one person about American failure to understand the “tall poppy” syndrome. That on occasions certain business leaders rise above the rest invites scrutiny from the government and they will knock it down if they feel the broader population or workers are disadvantaged. “But never confuse this as a failure of commitment to innovate and compete.” Others also noted that the American leading investment community expressing support for Chinese publicly traded companies recently is a tell.
IV. US – China relations were top of mind for all, Taiwan in particular.
There was expressed a consistent concern that there is increasingly little room to maneuver in rhetoric and action. There is great anticipation for the February visit of Secretary of State Blinken, and that they perceive a “lessening of tension” in recent months. Most of all there was almost a confusion that America – both in policy and in our tech sectors and investors – were not more aggressively engaging in Southeast Asia. One journalist there told me “The biggest fear here is that America would lose interest and pull out.” A leading regional scholar told me: “You would be pushing on an open door. You already represent by far more money coming through than any other in global financial markets. But no one gets up here each day wondering what America wants. China is respected but not fully trusted here. They have no real allies, they have transactions. But these transactions are heavily valued.”
A uniform message was that America is making a mistake pushing allies to choose between the two with a strategy less than clear for the long haul. “Why do you insist on poking the tiger?” one tech investor asked me. “China has plenty of its own problems. Stand up, of course, where you must. Get your own house in order. Reach out to allies eager to do more business with you. But understand there is choice. The best way for you guys to compete is, well, to compete.”
V. Maybe none of the above will matter anymore now because AI is here...
Hanging quietly and steadily over my visits were two significant shifts that are changing the world well beyond Southeast Asia – an increasing push for decentralization and the clarity of how artificial intelligence is now upon us.
There was a kind of schadenfreude especially among meetings more my age that crypto and Web3 may have seen its better days. One venture capitalist told me with a laugh that one significant investor in crypto said to him, without a hint of irony, “Web3 is dead here in Asia, let’s just rename it.” At one level this captures the cynicism if not opportunism of the go-go era we have recently been in. But at another he is right. I didn’t meet a single entrepreneur who wasn’t thinking about how to push innovation to open, make transparent, embrace data-driven transactions and tools away from the legacy, bureaucratic, top-down machinations of large institutions. Whatever the price or regulatory fights around crypto, I don’t believe those fundamental desires will change, and the tools will only get better. Two of my most interesting hours were spent with artists while saddened by the drop in NFT pricing, could not be more excited by the near infinite artistic expression that can be found in digital tools and platforms, and the belief that more artists can create and be compensated away from middlemen.
But the real revolution in our midst is artificial intelligence, made manifest and clear enough for my father to understand it in GPT3. There is no longer anything abstract about AI, it’s not some capability that Netflix or Amazon uses to make recommendations or some rise of the robots of the future. It is here and among us replacing astonishing roles we have taken for granted as human, unleashing the biggest questions of what it actually means to be human.
In Singapore I participated in a wonderful two-day scenario exercise with brilliant, global young people who created and unpacked six future cases for society, technology, governance and more. We also put those six “prompts” into Chat GPT3 and were astounded, rendered near speechless, in how inseparable it was from our own work. An Indonesian SaaS software company has had trouble cold calling American business customers had Chat GPT3 spit out a script that instantly and significantly increased their call centers getting to second meetings. Another entrepreneur has built their entire special offer and couponing strategy on language and metrics suggested by it. Another, on converting their code to python, simply plugged their old code and instantly received new code as good or better than their own engineers, opening up their time and likely need to hire additional resources over time. Another is using applications to answer email and told me they believe they have saved their company at least an hour a day per employee. Every venture capitalist I met has had their internal offsite on what this will mean to them and their investments. Every CEO is rethinking her or his strategy.
This is Guttenberg moment only globally and near overnight. And these are the earliest days.
Will this revolution be run by the billions in money and leading tech talent of America and China, maybe India? What will it mean to even “dominate” it once it’s out there and used with unique data sets around the globe? What will it mean to be in an emerging market and region, if anything, in this world with less machine learning talent and capital to deploy by an order of magnitude? Will “local and regional” be less about a country and more about each individual individually served by whatever comes of this?
One astute venture capitalist told me if nothing else the future will be less about the transaction per se, and more about the relationship – with each other and AI -- that the more the technology understands us not only individually but in our geographic context not only the more effective it will be, but the more room there is for regional innovation.
We shall see.
In the meantime I was highly encouraged by the soberness of it all – enthusiasm and ambition with an underpinning of realism without hubris I’ve not seen in two or three years. I look forward to returning to the region later this spring.