The economics of startups in asia
Building a startup in South East Asia is viable. But it comes with an additional set of challenges that startups in Europe and the US do not face.
Broadly, these would be social and economic factors. I don’t think I’m the right person to elaborate on the social factors. But I did experience some of the economic ones.
The difference in economies is the reason why an outsider can often supplant home grown startups. Many of the most successful startups in South East Asia are bankrolled by Rocket startups.
The main issue is that startups are funded in the local currency. While a seed round in the US might be a couple of million in USD a seed round in Malaysia is of a similar size but in Malaysian Ringgit. That makes is about four times less.
So, for instance, while EUR 300k might be pre-seed for an Antwerp based startup, that’s seed.
With this squish in funding come many challenges.
First of all, that means you can’t pay top talent
Really world class talent expects FAANG-level compensation. Even though the cost of living is significantly less the difference in perception between taking home $50k (which would be a great salary well above average in KL) and $120k is insurmountable. People would largely have the same standard of living, perhaps slightly better in KL. However, the perception in the difference of amounts, the ability to spend abroad, and the ability to save are severely impacted.
So, then we set sights on locally great talent. By and large, we’re able to get at least decent talent. However, as they acquire some experience it’s the startups that are funded from abroad that have an edge in offering them much better compensation.
The tools are also in USD
Nearly every tool that a startup might use is priced in USD. This makes it about four times more expensive. This doesn’t just mean vanity nice-to-have tools either. It applies across the board from hosting and email to marketing tools.
Startups abroad can optimize for developer time because the yearly cost of a tool is only a small fraction of their total compensation. This is much more difficult when tools effectively cost four times more.
When working for an early stage startup I’ve had to look for email providers that charge for storage, rather than per user. It simply would not have been economical to pay for a mailbox for a user. It would’ve cost about 5% of their salary just for email.
Expanding is also more expensive
It’s much cheaper for a US-based startup to expand to Thailand than for a Malaysian startup. Their money simply goes a longer way. Even establishing yourself as a key player in your country does not guarantee that you’d be able to favorably expand to the rest of the region.
Expanding beyond the region to countries with stronger currencies, even Singapore, is very difficult.
Therefore there are fewer later stage startups
As a result of all of the above, there are only a few large startups that can attract world class talent. This creates a negative feedback loop.
Successful ideas relocate abroad (see Grab relocating to Singapore). This pulls away the talent. Which leaves less talent to work for new startups. Which makes new successful startups relocate abroad.
So what to do about it?
I honestly don’t know.
One approach is what Rocket Internet is doing. The downside of that approach is that the profits are pulled out of the region. They’re not reinvested. The talent is also drawn out. I don’t think the market has any incentive to correct this. The people with money are making money, they’re just not local.
Since seed funding is relatively abundant, I guess that it would be in the government’s interest to act by developing initiatives that promote regional expansion while headquartering locally. For instance, providing incentives to Grab to stay instead of moving to Singapore. I thought at the time that it would be very much in the government’s interest to go above and beyond to accommodate them to keep them local.
The current initiatives aren’t targetted in that way. They’re more about gaining at least some benefit for international companies expanding into the region. This often means that they have to give up some percentage of ownership for the local branch. This doesn’t incentivize them to do anything local though, other then establish the sales team. It also just keeps symbolic ownership in funds that don’t provide support for the startup ecosystem.
[PS. If you’ve read this, please take a second to email me what you think and how I could have done better.]
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