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Southeast Asian tech hubs race to become the next Silicon Valley

Investment and government initiatives ignite startups scenes from Singapore to Penang

Southeast Asia's tech startup scene is getting hotter by the year. Money is pouring in and valuations are soaring as investors bet big on the region's rapid growth, huge markets and youthful, mobile-savvy consumers.

With so much at stake, cities from Singapore to Vietnam's Ho Chi Minh City are competing to become the next Silicon Valley -- home not only to successful startups but also to the mentors, investors and institutions that support them.

The Nikkei Asian Review looked at criteria ranging from number of startups to cost of office space and selected the five cities below as the hottest places for innovation in Southeast Asia.

Singapore's blue Block 71 hosts 250 startups as well as 30 incubators and venture capitalists. (Photo by Akira Kodaka)

In early 2015, Sinuhe Arroyo spotted a chance for his artificial intelligence startup to win a contract with a government agency in Singapore. But his colleagues warned him against it, since their company, Taiger, though based in Singapore, was incorporated in Spain.

Arroyo, the company's founder and chief executive, pressed ahead anyway -- and was pleasantly surprised when Taiger became the first foreign company to win a contract from the Singaporean government.

"My colleagues had opposed ... bidding, saying it would be a waste of time. But I insisted Singapore is such a transparent meritocracy that we have a chance to win a contract if we have a convincing technology. I was right," recalls Arroyo.

The Taiger team had moved to Singapore from the U.S. at the end of 2014 because they saw a less-cultivated, more transparent and faster-growing business-tech market in Asia.

In 2016, after receiving two more government tenders, Taiger reincorporated in Singapore. The following year, Singapore's startup-backing agency SGInnovate invested in Taiger in its first fundraising round, alongside local private equity firm Tembusu Partners.

Today Taiger is a darling of Singapore's AI startup scene. Its clients include such global companies as AIA Group, Banco Santander, Bank of America Merrill Lynch and Standard Chartered. And Arroyo advises government panels on national AI strategies.

Long established as a financial center, Singapore has become the leading startup hub in Southeast Asia thanks to a mix of ready capital and government policies. According to Enterprise Singapore, the number of startups in the city-state increased from about 2,800 in 2003 to 4,300 in 2016. Venture capital funding jumped from $80 million in 2010 to $1.2 billion in 2017, according to KPMG.

Singaporean venture capitalist Yinglan Tan sees a "lifetime opportunity" in his home country. He left Sequoia Capital last year to found his own venture capital firm, Insignia Ventures Partners, based in Singapore.

He sees plenty of room for growth, noting that Southeast Asia's total tech industry market cap is roughly $20 billion, compared to $300 billion in India, where the GDP per capita of $1,700 is less than half of Southeast Asia's $3,800. "Southeast Asia's tech industry should be at least $100 billion, which presents a huge opportunity for various types of startups and VCs," Tan said.

Singapore is attracting global investors who want to use it as a base to invest in Southeast Asia's tech sector, mainly because of the country's rule of law and tax regime, Tan said. It is also attracting entrepreneurs and other talent thanks to its ease of doing businesses, quality of life and high level of education, he added.

"Lots of U.S.-educated fellow Singaporeans are coming back," Tan said. Some nonnative entrepreneurs like Arroyo, a Spanish citizen, are choosing Singapore as the place for incorporation as well.

As a Sequoia partner, Tan lived in Silicon Valley, which has thrived with an ecosystem of angel investors, entrepreneurs-turned-mentors, venture capitalists, lawyers and banks. He says that Singapore is rapidly developing those supporting functions as well. "Five years ago there was almost none of those. Now we see a critical mass of mentors and supporters," Tan said.

Taiger CEO and founder Sinuhe Arroyo says foreign businesses can flourish in Singapore if they have a "convincing technology." (Photo by Akira Kodaka)

One of those crucial elements is incubation space. The Singaporean government has been proactive in fostering this aspect as well.

In 2011 the National University of Singapore launched a startup-incubation space called Block 71 in a renovated industrial building. Taking its name from its street address, Block 71 adopted a similar strategy as 500 Startups, the pioneering incubator launched a year earlier in Silicon Valley.

Today Block 71 is a cluster of seven incubation buildings set on a 16,000-sq.-meter piece of land. It hosts 250 startups and 30 incubators and VCs -- making it one of the largest clusters of startups in the world.

Michael Yap, a Block 71-based venture capitalist who worked in Prime Minister Lee Hsien Loong's office when Block 71 was launched, says Singaporeans still need to "think harder" about how the city-state should adapt to change.

For example, if Indonesia -- the region's largest economy and home to four "unicorns" -- accelerates reforms and becomes more business-friendly, it is unclear whether Singapore could maintain its advantage as a regional hub for entrepreneurs and investors.

"We should think about what roles we can play in different environments so that people would not forget about Singapore and jump to Indonesia," Yap said.

By Ken Koyanagi, Nikkei Asian Review editor-at-large

Strong economic fundamentals are helping Jakarta's startup scene thrive. (Photo by Keiichiro Asahara)

Indonesia's capital may not be the easiest place to do business -- the city is plagued by chronic traffic jams, and there is plenty of red tape. But despite the hassles, Jakarta has recently become one of Southeast Asia's most exciting startup hubs.

Indonesia boasts four unicorns -- startups valued at $1 billion or more -- and it is the second-largest recipient of venture capital in Southeast Asia, behind only Singapore. Venture capital firms pumped $1.4 billion into 123 deals in 2016, double the value of their commitments a year earlier, according to consultancy AT Kearney and Google. Deal values more than likely doubled again in 2017.

"Now we are seeing a much more consistent rise of startups," said Ridzki Syahputera, corporate development manager at Convergence Ventures, a local venture capital firm. "I think a lot of it is market confidence that they will get funding. Entrepreneurs believe that they can get funding, whereas five years ago, they might have thought, only if I am really the best would I be able to successfully fundraise."

It is Indonesia's market potential that has international investors excited. The country has the world's fourth-largest population, of over 260 million people, 60% of whom are under 40. They are also digital-savvy: Smartphone penetration is set to reach 78% in 2020.

Unlike countries with smaller domestic markets like Singapore or South Korea, Indonesia's startup scene is focused on the consumer sector. Its unicorns are all consumer-centric: Tokopedia and Bukalapak are e-commerce companies, while Go-Jek started off as a ride-hailing app and is now a platform for ordering a variety of daily services. Traveloka is an online travel service.

The next wave of startups has focused on ancillary services like payments, logistics and advertising technology. And while the shallowness of Indonesia's capital markets means that an IPO exit strategy is unfeasible for most startups, the country's unicorns are now acting as acquirers of these new businesses -- further invigorating the ecosystem in the nation's capital.

President Joko Widodo's push to make Indonesia the biggest digital economy in the region has contributed to the momentum. His administration is backing an initiative to foster 1,000 startups by 2020 with a total valuation of $10 billion, and it plays a key role in the Nexticorn program, which brings together promising local startups with international investors to help with latter-stage funding.

In 2017 Widodo ordered the relevant ministries to support startups, including by offering grants to incubators. His administration also made it easier for e-commerce companies to receive low-rate bank loans and provided simplified tax procedures for those with annual turnover below 4.8 billion rupiah.

"I am pretty content with what is happening, how Jakarta is developing as a city," said Benedicto Haryono, co-founder and CEO of the online P2P lending service KoinWorks. Founded in 2015, it is one of the many fintech startups that are springing up in the city.

But he added that problems remain. "Hiring is still a challenge. [There is a] lack of talent, the talent pool is so small," Haryono said. "If you have money, yes you can hire, but if you have to compete with the likes of Go-Jek on hiring, it is difficult."

This issue is "not easy to fix overnight," said Shekhar Chauhan, principal at AT Kearney. According to the consultancy, Indonesia produces only 278 engineers per 1 million people each year, far behind regional peers like Malaysia or Thailand, which produce well over a thousand.

"One of the recommendations we had was facilitating, getting in more foreign talent, which is another issue in Indonesia," Chauhan said. Indonesia is wary of bringing in skilled foreign labor, as it may hamper job opportunities for its young workforce.

The combination of large amounts of money chasing startups without enough talent is raising some concern among investors, he added.

"That is where they might hit roadblocks," Chauhan said.

By Nikkei staff writer Shotaro Tani

The Thai capital appeals to entrepreneurs for many of the same reasons it appeals to tourists.   © Reuters

The charms of Bangkok that have long attracted holiday goers are increasingly appealing to multinational entrepreneurs wanting to set up shop in Asia. Developed infrastructure, good access to neighboring markets, affordable prices and sunny weather are only a handful of the reasons why startups are sprouting in the Thai capital.

German-born Michael Cluzel, co-founder and group CEO of restaurant booking app operator Eatigo, chose Bangkok for its headquarters and the app's debut market because of its high mobile internet penetration rate and less competitive environment compared to advanced Western economies.

Eatigo offers diners time-based discounts -- deals are better during off-peak hours -- so that eateries can fill up their empty tables. Cluzel got the idea from how airplanes and hotels change their rates depending on availability.

"Nobody in the world had ever done such an app for restaurants before so we needed to invent a new playbook," Cluzel told the Nikkei Asian Review. "We didn't want to do it through a looking glass in New York or San Francisco -- we wanted to be in a market where we can learn, and Asia was just right."

Bangkok was a good fit for Eatigo, with its population of 8.2 million, rising middle class, few restaurant app rivals, strong dining culture and -- perhaps above all -- discount-loving consumers.

Cluzel and his three co-founders also saw Bangkok as a springboard to other Asian markets.

"If it works here, we thought it is going to work in Manila, Kuala Lumpur and Jakarta," he said, citing similarities such as the culture of dining out and expanding middle-income consumers.

After launching in Bangkok in 2014, the app is now in six countries, including in competitive markets like Manila, Kuala Lumpur, Mumbai, Singapore and Hong Kong -- and has grabbed the leading share in many of them.

Multinational startups like Eatigo are not unusual in Bangkok. Japanese entrepreneur Yojiro Koshi picked Bangkok as the base for TalentEx, which offers human resource-related services, in part because he liked its mix of urban development and livability.

"Bangkok was livable for my family, compared to Singapore, which would be too expensive, or Jakarta, which still lacks a lot of basic infrastructure like public transportation," he said. Bangkok also has a large base of Japanese corporations that could be his potential clients.

Rising government support is set to draw more startups to Thailand, especially Bangkok. The military junta has positioned startups as a crucial player in its "Thailand 4.0" policy, which aims to shift the nation's industries from labor-intensive to tech-oriented and knowledge-based.

One obstacle facing entrepreneurs launching a startup in Thailand is the 49% foreign ownership cap, which restricts them from receiving funds from foreign venture capital firms, and a range of business fields that are off-limits to foreigners unless they have a Thai co-founder.

But three government policies -- the Thailand Startup Act, Regulatory Sandbox Act and Thai Bayh-Dole Act -- are in the works that could ease some of these restrictions. A clause in the draft of the Thailand Startup Act, for example, would allow startups to be 100% foreign-owned. The new rules are expected to be enacted before the next general election, which could come as early as February 2019.

Online fashion brand Pomelo is based in Bangkok but hopeful of cracking the Chinese market. (Photo by Akira Kodaka)

Funding opportunities are growing, too. Thai startups raised at least $100 million in 2017, a more than tenfold increase from 2013, according to startup website Techsauce. Thai corporations and state-owned enterprises have launched a slew of venture capital firms and accelerator programs in the past year or two. And in May, the Stock Exchange of Thailand launched a crowdfunding platform for startups and small and midsize enterprises to source funding from institutional investors and venture capitals.

Foreign capital is also flowing in. In late 2017, Bangkok-based online fashion brand Pomelo Fashion raised $19 million in a series B round led by Chinese e-commerce giant JD.com and Indonesian investment firm Provident Capital Partners. Japan's leading online fashion company Start Today (since renamed Zozo) also joined the round. It was reportedly the largest series B fundraising in Thailand at that time.

"Our investors have created so many new opportunities for our Thai company," said David Jou, the Korean-American co-founder of Pomelo. The fast-fashion brand focuses primarily on Asian markets. Its designers are all hired locally to fit local tastes, and their price points are about half those of Western fashion brands like Zara and H&M.

JD has listed Pomelo's clothes on its websites in Thailand and Indonesia and might pave the way for Pomelo to venture into the Chinese market, Jou said. The fact that it is a Thai company might help: Thailand is the No. 1 destination for Chinese travelers, and its food is popular in China.

"Being a Thai company," Jou said, "is an opportunity for us."

By Nikkei staff writer Yukako Ono

Drone startup Poladrone is one of Penang's homegrown success stories. (Photo by Akira Kodaka)

There is no doubt that Malaysia's most famous startup is the one that got away. Two years after Anthony Tan and Tan Hooi Ling launched the MyTeksi ride-hailing app in Malaysia, the company -- by then renamed Grab -- relocated its headquarters to neighboring Singapore. Since that move in 2014, Grab has become a $10 billion company and taken over Uber's Southeast Asia business.

But Ashran Ghazi, who runs the Malaysian Global Innovation and Creativity Centre, or MaGIC, says he is not dwelling on the past. His agency, which was set up in 2014 to raise the country's next generation of entrepreneurs, is focused on building "awesome companies," he said. Keeping successful startups in Malaysia is not a primary consideration, he added.

There is no shortage of entrepreneurs in the country, many of whom are congregating in the northern island of Penang. Among them is Ai Ching Goh, who gave up her marketing job at Procter & Gamble to establish Piktochart, a visual communications app that makes it easier for nondesigners to create infographics. Founded in 2012 Piktochart boasts over 13 million registered users -- about half of whom are in North America.

"We are not just a design-tool app per se but one that allows users to tell a better story through charts," said 32-year-old Goh, who has about 60 employees representing 15 nationalities.

The company's app is aimed at anyone from students to small and midsize businesses.

Penang has long been home to multinational companies, including chipmaking giant Intel, which fostered a strong engineering workforce. The state government is pushing harder to encourage entrepreneurship, a job that should be easier since the national elections in May. Penang was under opposition rule for a decade, which meant it received little aid for development from the federal government.

"It is pivotal to show that it's possible for a company based in Penang to become a global company," said Howie Chang of aCAT, an agency launched in 2015 to promote entrepreneurship.

Among Penang's homegrown engineers is 26-year-old Jin Xi Cheong, who left Intel to start Poladrone, a drone startup that launched in 2016 with guidance from aCat.

The company uses drones to take high-resolution photographs for technical analysis in the agriculture and oil and gas sectors. Now based near Kuala Lumpur, Poladrone counts Malaysia's leading palm oil companies like Sime Darby Plantation as its customers. Its services include measuring tree density for fertilizer forecasts and disease detection -- jobs that had to be done manually before.

Plantation owners in neighboring Indonesia, Thailand and Vietnam have knocked on Poladrone's door for solutions, said Cheong, adding that he is considering expanding abroad.

Another Penang startup is EasyParcel, an online parcel delivery operator that has tied up with over 10 couriers, including DHL and FedEx. After four years in operation, EasyParcel has over 400,000 users in Malaysia, Indonesia, Singapore and Thailand, earning a margin from the bulk discount provided by the couriers.

Most of these startups share a common feature: government support of some kind, especially funding. The Cradle Fund is one of the government agencies that has been nurturing startups since 2003, disbursing grants of between 25,000 ringgit ($6,012) and 800,000 ringgit.

The fund, which has backed over 700 tech-based startups, has also become a source of venture capital. With a targeted investment size of between 1 million ringgit and 3 million ringgit per company, its wholly owned unit Cradle Seed Ventures takes minority equity stakes of not more than 25% in companies that are involved in mobile technology, software and enterprise solutions, and hardware engineering.

To keep up with global trends, the fund is on the lookout for companies active in artificial intelligence and blockchain technology.

Dzuleira Abu Bakar, Cradle Seed Ventures chief executive, however, says the idea is not simply to copy other markets.

"I believe each country moves at its own pace given the market dynamics, readiness of talent, infrastructure and other economic variables -- not so much the catch-up game but more of moving in the direction of where technology trends are headed towards."

By Nikkei staff writer CK Tan

Startups are flourishing in Ho Chi Minh City, particularly those related to blockchain technology. (Photo by Ken Kobayashi)

When e-commerce platform Sendo raised $50 million this year from SoftBank and other foreign investors, it was a reflection of two trends in Vietnam: booming online sales and rising interest in one of Asia's fastest-growing economies.

As an e-commerce platform for individuals and small businesses to sell their goods, Sendo has benefited from strong annual online sales growth of 30% in Vietnam in recent years. That high growth rate is expected to continue at least through 2020, according to the Vietnam E-commerce Association.

Nguyen Dac Viet Dung, Sendo's chairman, says he plans to raise more money to keep growing. "We [will] seek one or two more rounds of fundraising in the next five years," he told Nikkei in a recent interview.

Vietnam's startup environment is less well-developed than regional rivals like Singapore or Indonesia, but the central government is aiming to change that. It has set up three main high-tech parks in Hanoi, Danang and Ho Chi Minh City, and it is creating incentives for the development of new high-tech businesses -- including the planned launch of an $85 million startup fund this year.

Ho Chi Minh City has kicked off construction of an incubator for local tech startups inside the Saigon Hi-Tech Park, already home to tech giants such as Intel and Samsung. The facility will cover an area of over 11,000 sq. meters, and officials say the city has spent $90 million for startup and innovation programs there in the past two years.

Vietnam does not keep statistics on startups, but pan-Asia consultancy Dezan Shira & Associates says $290 million was invested in 92 Vietnamese startups in 2017. According to tech news site Techsauce, there were about 3,000 startups operating in the country last year.

Investment is coming from inside and outside Vietnam. Tiki, another e-commerce platform, raised $54 million from China's JD.com this year, following $17 million from internet company VNG in 2016 and an undisclosed amount from CyberAgent Ventures, Seedcom and Sumitomo. Momo, an e-wallet and payments app, received $28 million from Standard Chartered Private Equity and Goldman Sachs in 2016.

IDG Ventures Vietnam was the first venture capital firm to focus on technology startups in the country when it launched in 2004. The fund manages $100 million and has invested in some 40 startups in the fields of technology, media and consumer industries. This year, VinaCapital, an investment fund that manages $1.8 billion in assets, launched the $100 million VinaCapital Ventures VC fund, one of the biggest local funds for startups. In all, there are some 70 venture capital funds operating in Vietnam, more than two-thirds of them from overseas.

Much of the tech startup activity in Vietnam centers on blockchain and cryptocurrency technologies -- despite the fact that the country has yet to craft a regulatory framework for those industries following a series of scandals.

In April, Vietnam was at the center of the biggest fraud in cryptocurrency history, where investors said they were robbed of as much as $660 million through scams linked to initial coin offerings. The government has since taken a hard line on the industry.

But many companies remain bullish on the opportunity for blockchain-related businesses in Vietnam -- including Nami Corp. The company is developing AI and blockchain technologies for its financial investment ecosystem and products for managing financial services.

"Vietnam lacks a legal framework for crypto and related technologies, which means people are often confused when we talk about Bitcoin, cryptocurrencies and blockchain," said Giap Van Dai, the 27-year-old co-founder of Nami. "It should take four or five more years before the blockchain technique can be applied in local business communities, since it will take time for the market to accept it and for authorities to come up with related regulations."

According to Dai, the blockchain industry in Vietnam employs around 2,000 people, up from 30 in 2017. Many of them graduated overseas and gained experience developing apps, financial services and other products in developed countries, including in the U.S., Japan and Singapore.

"Young people are enthusiastic to learn and work in the new industry," Dai said.

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