Michael Lints, venture partner at Singapore-based VC Golden Gate Ventures, outlined the opportunities for FinTech investors in South-East Asia, in a research interview with FinTech Global.
As FinTech markets across the US, Europe and China become saturated with companies and capital, more ambitious investors are turning their attention to opportunities in emerging markets. Brazilian challenger bank NuBank picked up $80m in a Series D round at the end of 2016 with US VCs such as Peter Theil’s Founders Fund, Ribbit Capital and Sequoia all chipping in. Africa is also beginning to see investors place bets in its sprouting ecosystems, with Techstar’s Greg Rodgers proclaiming: “The best investments of our life time will be in Africa and emerging markets.”
It’s South-East Asia, however, with its enticing mix of booming middle-class populations and rocketing smartphone adoption, that arguably offers the greatest opportunity for returns on FinTech investments, according to Michael Lints, venture partner at Singapore-based VC Golden Gate Ventures. He outlined the fertile potential that means South-East Asia should be on more FinTech investors’ radars, as well as the challenges intrepid backers face in the region.
Singapore and Indonesia lead investment
Lints highlights the primary sources of opportunity in the region as Singapore, with its long history as a leading financial hub in Asia, and Indonesia, with its massive population becoming tech savvy and gaining increasing levels of disposable income. The latter is the world’s fourth most-populous nation, with Jakarta alone home to 10 million people. The World Bank reported the country’s GDP per capita to have exploded from just $560 in 2000 to $3,374 in 2015, while the Indonesian FinTech Association says fewer than 36% of adults have formal bank accounts. Outside of these hotbeds for FinTech, however, promising startups are landing funding across the Philippines, Thailand, Vietnam and Cambodia.
South-East Asia as a whole saw investment into FinTech companies increase 173% year on year, from $122m in 2015 to $333m in 2016, according to FinTech Global data. The number of deals only increased slightly from 64 to 67 year on year, pointing to larger rounds for those startups attracting investors. The first quarter of 2017 saw a massive $652m invested across 16 deals. This figure was, however, inflated by the $550m raised by Singaporean would-be Alibaba and Alipay rival Sea Limited. Removing it from the total brings the figure to $102m with InsurTech startup Singapore Life’s $50m haul the largest in the region this year.
Singapore is the dominant region for investment with 97 deals completed, of which 75 were disclosed, with a total value of just more than $1bn from 2015 to Q1 2017. Only six of 17 rounds raised in Indonesia over the period disclosed the amount invested, those that did totalled more than $6.7m. It highlights the immaturity of the Indonesian market compared to that of Singapore, as well as the potential for startups and investors in the rapidly-growing nation.
1. The massive B2C opportunity
What many of the region’s startups have in common is a focus on consumer-facing technologies with the potential to gain hundreds of millions of daily users. Lints highlights payments as a major area of focus for business in the region, saying: “a large number of startups are focusing on the B2C payments market because that’s where there is an open gap, especially when you look at the number of people that never use a bank for their payments. For them is has always been cash but now they are using smartphones. Making these devices a means of doing online payments is a big market.”
The potential for companies aiming to provide basic financial services in these regions, amid low formal banking usage and rising smartphone penetration, is massive. Mobile payments, remittances and lending are just some of the very basic services startups are introducing to people for the first time – but other, relationship-based services such as insurance and wealth management are also entering the region.
“Slowly but steadily we’re seeing other verticals within FinTech pop up as well,” explained Lints. “For insurance we’re seeing startups on the direct business-to-consumer side, improving the customer experience and making it more agile. It started with comparison for insurance and banking products but now we’re moving into online brokerage and online insurance. We’re also seeing this in the wealth management side.”
2. Local players will beat out foreign invaders
Introducing technologies to new consumers is all well and good. But what happens when deep-pocketed incumbents wade into regions in search of user growth? Do the locals really stand a chance?
Lints believes natively-made companies have a “very big advantage” over international brands in these regions and emphasised: “For any foreign, larger player that is focussed on western standards it’s very difficult to penetrate the market.” Taking PayPal as an example of a business dominant in the western online payments space, he pointed out the sort of problems it would face in the South-East Asian market: “You need a credit card to use PayPal, but when there is a large population without a bank account or credit card it becomes impossible to access their service.”
Local companies with an intimate knowledge of problems specific to regions can create services better tailored to serve consumers than those entering from abroad. Beyond this, Lints highlighted the connected nature of these regionally-focused ecosystems. “Local entrepreneurs have been able to forge good relationships with local banks and regulators to build a local infrastructure that is hard for a forging company to replicate,” he said.
3. Regulators & incumbents are supporting growth
The early stages of FinTech growth in western markets were defined by a narrative that emphasised disruption of incumbent firms, from Western Union to century-old banks, as well as bump-ups against regulators. That narrative has changed significantly as tradintional players look to future-proof themselves by working with or occasionally acquiring would-be disruptors. Relationships with regulators have also improved, with many FinTech entrepreneurs in the UK willing to praise the actions of the country’s Financial Conduct Authority.
Taking heed of western institutions’ initial reluctance to work with FinTech startups, incumbent firms and regulators in South-East Asia are embracing new tech, with Lints claiming saying the regulators are “very progressive in working with FinTech startups”.
This is especially the case with Monetary Authority of Singapore (MAS), which is actively pursuing policies intended to foster FinTech growth in the region. This includes MAS managing director Ravi Menon emphasising “regulation must not front-run innovation”, and streamlining complex regulation surrounding payments, insurance and wealth advice to make it easier for startups to bring these services to consumers. The authority also operates a ‘regulatory sandbox’ similar to the FCA’s often-praised scheme, to allow experimentation in an environment where damage is minimalised in the event of failure.
Corporates are also becoming involved in the region, with Aviva setting up shop in Singapore and established its ‘Digital Garage’ to work with local companies and test new ideas. In addition to partnering with new companies, corporates are also investing in startups – something Lints painted as a largely positive trend. “Through off-balance sheet investments, VC arms or setting up incubators corporates have been involved early on,” he said, but added “it’s good and bad. In a lot of spaces you don’t want to have a corporate at the table too soon in terms of investment, especially if it’s one that wants to acquire. But on the other hand, banks are adding a lot of value.”
He highlighted that, as a firm, Golden Gate is open to working with corporates, pointing specifically to Japanese web giant Rakuten as an incumbent it has done business with. Corporate investment often draws criticism over issues such as conflicts of interest between them and founders but for investors in the region the interest of established firms creates a group of potential buyers to fuel positive exits.
Challenges in South-East Asian FinTech Investment
1. The diversity of the region creates complications
One of the biggest challenges for companies and investors in South-East Asia compared to markets like the US or Europe is the differences between its ecosystems. The flight time between Singapore and Jakarta might only be an hour and 45 minutes – only half an hour longer than between Boston and New York – but they are vastly different business environments.
“You have different countries with different currencies, different regulations and different cultures,” said Lints. “If a company is based in the Netherlands, for example, and wants to expand to Belgium, France and Germany, at least in terms of how the countries work together there are a lot of things I can manage as a founder. But in South-East Asia the difference between Singapore and Indonesia is gigantic – not only in number of people, but how the country and its regulations work. Scaling in more than one country is always a challenge.”
2. There’s already a lot of money floating around
Despite its emerging market status, South-East Asia is not a region devoid of investment. The majority of the startup ecosystem is still in the early stages and looking for Seed or Series A capital, and Lints believes there is “more than enough funding that has to be deployed in the next four-to-five years. So in terms of capital, there definitely isn’t a shortage.”
At the later stages, where funding is scarcer than at the early stage, there is more capital becoming available to startups with corporates, private equity and larger tech firms making investments. MAS continues to encourage investment into the region, and at the start of the year passed regulation designed to make it easier to launch a VC fund in the city-state.
Lints highlighted the positive nature of the regulation in helping to differentiate a VC fund from a hedge fund, but stressed the need for continued care “because we need smart money, not loads of money.” For investors looking at the region for the first time these types of initiatives can make it easier to launch an Asian-focused arm, and while it risks becoming crowded and more competitive the wealth of capital also provides a wide selection of potential co-investors.
3. Many entrepreneurs are young and inexperienced
The region’s less-mature startup ecosystem mean most entrepreneurs lack the experience of founders in other parts of the globe. This requires investors to be willing to work closely with founders to grow businesses. Lints emphasised Golden Gate’s cooperation with entrepreneurs, and said the firm invests with the strategy of “getting hands-on and help them with fundraising, making key hires and striking up partnerships”.
This less mature ecosystem also influences what the firm looks for in a potential investment. VCs in any part of the world will point to the team as the most-important factor when deciding to invest but Lints added: “It starts with whether they have an open mindset. The entire region is at the beginning for technology startups. So, we’re looking for entrepreneurs that have an open mindset and are willing to be coached and to hire people who are better than them to make the company better.”
© 2017 FinTech Global & Investor Networks Ltd