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The rise of Southeast Asia's $1Tn tech economy

August 23, 2021
Jungle Insights

Southeast Asia today has taken center stage in the eyes of global investors as the world’s most promising venture capital market. With a massive untapped market of young internet users, the region appears to have moved past a key inflection point, from an emerging to a maturing tech ecosystem.

The region’s tech titans have grabbed headlines this year as they prepare to make their debut exits, either through a traditional IPO or via a special purpose acquisition company (SPAC).

For instance, there is Grab’s closely watched merger with US SPAC Altimeter, which will reportedly double Grab’s valuation to $40 billion; and Kredivo, a Jungle Ventures portfolio company, has recently announced its plans for a Nasdaq listing via a merger with VPC Impact Acquisition Holdings II at a $2.5 billion valuation. Plus, there’s GoTo (merged entity of Gojek and Tokopedia), Bukalapak, and many more.

Southeast Asia’s digital economy transformation is only beginning

Over the last five years, higher internet penetration and more digital-centric consumption has spurred tremendous digital transformation in Southeast Asia, leading to skyrocketing demand for digitally delivered services and catalyzing the listings of more regional tech companies.

Today, 70 percent of the region’s population is now online and consumers are transacting more on digital channels vs. traditional and brick and mortar. This transformation has led to the value of the Southeast Asian digital economy increasing from $32 billion in 2015 to $105 billion in 2020 (a 3x increase in transaction dollars on a 1.5x increase in users).

Despite the tremendous growth, Southeast Asia’s digital economy remains in the early stages of development. As of 2019, the digital economy’s share of total GDP stood at 3.7 percent, compared with 34.8 percent in China, 10.1 percent in the US and 8 percent in India, implying that Southeast Asia still has a huge runway for potential growth across many technology sectors.

Road to a trillion-dollar tech economy

Given the tremendous growth in Southeast Asia’s digital economy, it’s not surprising that many venture firms have entered the region to invest capital in emerging start-ups, which has produced dozens of unicorns and regional tech champions.

Combining the valuations of the most notable venture-backed Southeast Asian start-ups, our estimates suggest that the region’s tech companies currently represent a combined value of $340 billion. With a digital economy valued at $105 billion, this gives us a 3.2x multiple of start-up valuation to internet economy value.

According to Google, Temasek and Bain, Southeast Asia’s digital economy is projected to grow to $309 billion by 2025. Applying our 3.2x valuation to digital economy size multiple, the 2025 combined value of Southeast Asia tech companies is then estimated to potentially triple in size to reach $1 trillion by 2025.

We also note this estimate could be conservative given the accelerated pace of VC investing over the past six years. ASEAN-based venture assets under management today stand at a record $16 billion, a sum 2.6x the total in 2015.

On the deals front, the total value of venture capital transactions in Southeast Asia surged to more than $10 billion in the first half of 2021, beating out all previous full years.

The future’s looking rosy for Southeast Asia’s digital economy

With more Southeast Asian unicorns such as Kredivo, GoTo Group, Bukalapak, Traveloka and PropertyGuru emulating Grab with plans to go public in the US, VCs can invest more confidently as valuations materializing in the public markets present more exit opportunities. Getting there, however, requires a thriving ecosystem that can produce future champions.

Here, the role of Southeast Asia’s LPs and institutional investors in backing promising ventures is key. We believe that regional venture funds are better positioned to capitalize on this opportunity since they understand the local and geographical nuances which are so vital while making the right bets.

Even more, if listing is successful, Southeast Asia’s current tech champions can begin investing in and acquiring smaller start-ups, such as Grab’s holdings in OVO and Bukalapak as well as Sea Ltd’s SeaBank, formerly Bank BKE. This will accelerate investments and acquisitions in the region similar to China, where companies such as Alibaba and Tencent have aggressively invested and acquired companies to grow beyond their core businesses.

Given its tech trailblazers, local growth fundamentals and sky-high investor interest, Southeast Asia’s digital economy is well on its way to hit that magic trillion by 2025, but it will be only the first of many milestones to come.

As China’s red-hot venture market faces tightening foreign listing regulations and persistent geopolitical tensions with the West, international investors have been left searching for alternative allocation opportunities. If the stars were ever to align in favor of Southeast Asia’s venture capital market, now might just be the moment.

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