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Talent shortage threatens growth of Southeast Asian start-ups

Some are opening tech hubs in India, China, US to attract experienced workers

Technicians at a startup in Singapore discuss their software. (Photo by Ken Kobayashi)   © Not selection

SINGAPORE -- The shortage of homegrown tech talent is the most pressing issue for Southeast Asia internet startups' growth, according to a joint research report by Google and Temasek. The problem has caused some players to open tech hubs in China, India and the U.S., where top engineering talent is more readily available.

The report notes that many Southeast Asian startups "have transformed from two-person projects into substantial businesses" as funding continues to grow rapidly due to opportunities presented by a growing middle class with greater spending power.

However, the battle for talent is also intensifying as Southeast Asian startups continue to face competition from international players and better-funded local companies. "In Southeast Asia, unlike in Silicon Valley, there is not a deep reservoir of executive experience," the report notes.

The shortage of homegrown talent has forced some companies to seek experienced workers by opening tech hubs in China, India and the U.S., while some startups choose to groom local workers. For example, Grab helps Southeast Asian engineers develop their skills through training opportunities provided by teams at R&D centers in Singapore, Beijing and Seattle, the report notes.

Fundraising continues to remain challenging for Southeast Asia internet start-ups and smaller ventures as global and regional investors prefer the largest and most established internet companies. Some $9 billion of the $12 billion invested in Southeast Asia since 2016 went to the region's "unicorns" -- startup companies valued at over $1 billion -- while companies with valuation below $100 million only raised $1.9 billion.

However, despite the challenges faced by the region's internet startups, global and regional investors have a "strong vote of confidence" in the region's internet economy, the report says. Venture capital investments in Southeast Asian companies made up 0.18% of the region's GDP in 2016, up from 0.04% in 2014. This puts the region on par with India, where venture capital investments made up 0.18% of its GDP in 2016.

Entrepreneurs and others from startups attend a Tech in Asia Singapore convention. (Photo by Ken Kobayashi)   © Not selection

The majority of investments from 2016 to the third quarter of 2017 were concentrated on companies based in Singapore and Indonesia. Singapore-based companies made up 58% of total funds raised in Southeast Asia, while Indonesia-based companies made up 34%.

The rapid expansion of both the e-commerce and the ride-hailing sectors in the region "has attracted significant investment activity," the report notes. From 2016 to the third quarter of 2017, Southeast Asian companies were able to raise more than $12 billion, compared to just $1 billion in 2015.

Southeast Asia's ride-hailing services have seen strong growth in the past two years, with the sector being "hotly contested" among Grab, Uber and Indonesia-focused player Go-Jek, the report says. As of the third quarter of 2017, the three players have engaged more than 2.5 million drivers in the region, which grew more than fourfold from 600,000 in 2015.

The report notes that the acceleration reflects "steep pent-up consumer demand, attractiveness for drivers as a viable job opportunity, and product innovation leading to improved user experience." It estimates that ride-hailing services in the region will reach $5.1 billion in 2017, more than double the figure in 2015. By 2025, the sector is expected to grow to $20.1 billion.

Consumer interest for e-commerce has also grown quickly across Southeast Asia with its market being "extremely dynamic and highly fragmented, with multiple coexisting business models." It adds that the acceleration of Southeast Asian e-commerce "has been driven by the surge of market places where small and medium businesses sell to consumers on mobile-first platforms." It estimates that e-commerce sales of such first-hand goods will reach $10.9 billion in gross merchandise value in 2017, up from $5.5 billion in 2015.

The research covers the region's six largest markets: Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. It covers four key growth sectors namely travel, media, ride-hailing and e-commerce and is based on Google's data and Temasek's research. Expert interviews and secondary data sources were also used to provide industry metric estimates and trends.

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