Ben Mathias | The Next Decade: Perspectives in Southeast Asia and India and ensuing Investment Opportunities - Recap

The Next Decade: Perspectives in Southeast Asia and India and Ensuing Investment Opportunities

In the recent Super Return Asia event held at the Marina Bay Sands Expo Singapore, I had the opportunity to present on the topic “The Next Decade: Perspectives in Southeast Asia and India and Ensuing Investment Opportunities”.

In the face of rapidly changing preferences of consumers and businesses, you may be wondering what the emerging themes in venture investments in SEA and India might be for the next ten years?

Here’re the highlights and key takeaways from my presentation to shed some light on this question.

Introduction of Vertex Ventures:

• Vertex Ventures is a global VC network comprising six funds: five early stage funds and one growth stage fund. With over 100+ professionals globally, we offer in-depth local knowledge and connections to valuable networks across the regions, as a way of providing maximum value to our companies.
• Our global network allows us to cross-pollinate learnings and identify global trends.
• As part of the global network of VC funds, Vertex Ventures SEA & India first started in 2010 and is today’s oldest and most experienced VC in this region. We made over 70 investments to-date across multiple sectors ranging from consumer internet, enterprise solution, fintech, agritech, healthcare and sustainability. We are also fortunate to have backed regional unicorns in their early days such as Grab, Patsnap, Nium, Licious and FirstCry.
• We look at emerging markets across SEA and India, and have on-ground presence across the geographies to identify the best-in-class investment opportunities.

The significant size of opportunity in SEA and India:

• SEA and India combined represents the world’s 4th largest economic block. This is next only to the US, China, and EU. SEA and India is one of the fastest growing economic blocks in the world.
• In the next decade, SEA and India will more than double in GDP. This alone signifies the sheer potential of these geographies. This will be enabled by various factors, most important of which is increasing population & disposable incomes.
• In the next decade, we will see 110 million new households added to the middle income segment. This means more than 350 million individuals will be added to this high disposable income group. This is more than the total population of the US!
• We expect increasing demand for consumer products. We are also seeing a rapid change in consumer preferences. The market is ripe for innovation and disruption of old incumbent companies. We expect a new wave of businesses, owing to the new wave of consumers
• If we look at the number of internet users, SEA and India have consistently added over 200 million users every year for the last two years.
• In 2021, SEA and India combined just surpassed US & China. And we see this gap only widening over the next decade.

A large and growing Gen Z segment in SEA and India:

• SEA and India are home to a large number of young people. They are digitally native and extremely aspirational. More than 50% of our population is below the age of 45!
• We will have one of the world’s largest working populations. Investing in this human capital can unlock great potential
• On a global level, we are home to 20% of the World’s Gen Z and 33% of the World's Millennials.
• If we look at per capita income 10 years from today, we expect the Gen Zs and Millennials to be the highest earners, and hence the highest spenders.
• Today, the oldest Gen Z is aged 25 and is at the start of their career. Unsurprisingly, as this cohort matures further, their annual gross income will rise up to eventually be the highest income consumer group in the next decade. And this is a group of people that grew up with the internet.
• And while we have a large internet user base of over 1.1 billion (source: statista and Livemint), what’s even more peculiar is that these young people are very active on social media.
• Over 30% of the global active user base of the Facebook family of apps, comes from SEA & India. Almost 4x of the user base in the US. While for Youtube this number is almost 3x.
• The young population is not just digitally native, they are highly connected and consume a lot of social media content. This makes them aspirational, and influences their consumer preferences at a mass scale.

Increasing consumption will keep inspiring new consumer models

• New-age consumers are increasingly spending time online, engaging with brands that align with their belief systems and shopping with local brands that are good value for money
• Social media plays an important role in the life of Gen Z and millennials. And businesses have to recognise that. They need to focus on the needs of the new-age customers
• We expect a point of inflection in brands that are targeting this generation
• One of our portfolio company, RPG Ventures, houses 6 direct-to-consumer brands, ships to 32 countries, and uses community opinions to spearhead product innovation
• Our portfolio Licious is India’s leading D2C meat and seafood brand. Currently operational in 25 Indian cities, has a fully vertically integrated sustainable supply chain

Monetisation of the creator economy

• Increasing social media penetration has created a platform for more equal access to voice, opportunity and information.
• Younger consumers connect and form communities and subcultures that overcome geographical barriers through digital platforms. Trends spread across geographies in ways that have not been seen before.
• Content is now being monetised. And we are seeing emerging businesses that layer commerce on top of content.
• Our portfolio MeTub, Vietnam’s leading multi-channel network, for digital entertainment and lifestyle. They now have over 350 million subscribers.
• Our portfolio KukuFM is a vernacular audio platform in India, selling content in 6 Indian languages. They have crossed 1.5 million active subscribers and will grow the base to 10 million by the end of 2023.

Financial inclusion set to grow- new solutions will penetrate and better serve the underbanked and unbanked

• Spending time online, ultimately means transacting online, and supercharged by the pandemic, we have seen the massive acceleration of digital payment adoption. The COVID-19 pandemic has forced customers to turn to digital channels and mobile banking; moving past cash to e-payments.
• India and Thailand are leading the world in real-time digital transactions.
• In 2021, of all the real-time digital transactions in the world, over 40% originated from India alone. Payment infrastructure in India is light years ahead of that in any part of the world.
• Given the large population, there is a large credit market in SEA & India too. However, more than half of the adult population in SEA and India remain underserved or unbanked.
• Established fintech players are mostly serving the banked segments while the penetration to the underbanked and unbanked segment has seen limited success
• So far, the cost to serve the underbanked segment has been prohibitively high and distribution has not evolved along with customer needs
• However, with digital penetration, this is rapidly changing. New models will emerge to better serve the underserved.
• Our portfolios Kissht in India and SCB Abacus in Thailand are both digital consumer-lending businesses, targeting the individuals and SMEs. They have online first distribution channels, and target the underbanked/unbanked segment of customers.

Open finance will evolve consumers’ banking experience

Open financial infrastructure refers to the unbundling of financial infrastructure. Open banking allows banks and financial institutions, that manufacture financial products, to sell them directly on consumer-facing platforms.

• Buying a TV on Amazon? You can buy a loan right at the checkout page. The loan is powered by a bank at the backend, but you as a consumer would not need to know that.
• Renting a car for intercity travel? You can include travel insurance along with your rent, and have a hassle free, seamless experience!
• Consumer platforms are now distribution channels for financial products. Open banking will democratize banking, and the opportunities are immense!
• In April 2021, Singapore’s Paynow and Thailand’s PromptPay linkage enabled customers to make transfers between the two countries through mobile numbers. The transfer is completed in minutes, as opposed to 1-2 days earlier. India’s UPI - has been a game changer in how B2B/B2C transactions are done today. And it will only get better from here!
• If we look at Vertex investments, NIUM offers banking-as-a-Service (BAAS). It is a global money movement platform. They operate in over 35 countries and are growing their footprint rapidly.
• Signzy, offers digital banking infrastructure, automating risk and compliance management. They serve over 250 institutions globally

Digitalization of MSM businesses and emergence of tools empower MSMEs

• There are a large number of MSMEs in SEA & India.
• In India, over 110 million MSMEs contribute to 37% of the GDP, employ 12% of the organised working population and make up 50% of the country’s exports.
• SEA has over 70 million MSMEs that contribute to 40% of the region’s combined GDP, employ a whopping 67% of the working population, and make up 19% of exports.
• COVID led to an extraordinary shift in consumer behavior. Not only did more people come online for the first time in 2020 and 2021, businesses also shifted online. In fact 1 in 3 believe they would not have survived COVID-19 without digital platforms. Rapid digital adoption will continue and MSMEs must digitalize or risk being left behind!
• Owing to the sheer size of the MSME market, digitisation implies a large potential
• Our portfolio Fairbanc digitises supply chain financing for its merchants, without the need of collaterals while ChattyBao empowers local kiranas with tools such as integrated payment, delivery and chat enabling them to compete against new-age e-commerce platforms.

Build up of Sustainable supply chains and businesses

• Supply chains in this part of the world are large and unorganized. Manufacturers are small and fragmented, which necessitates coordination between multiple of them. From manufacturers, stockists, and distributors, right down to retailers and consumers, the entire supply chain is manually managed through phone calls and emails. There are large delays, and barely any uniformity or transparency in pricing.
• COVID has unearthed & exacerbated this problem, but also served as an eye-opener. Based on a survey done by McKinsey, only 2% of companies have complete visibility into their supply chains.
• Our portfolio Janio is an integrated cross-border logistics platform, providing e-commerce logistics, freight forwarding, customs clearance services, and servicing goods worth over US$ 2b annually.
• Our portfolio Aruna disrupts highly fragmented and inefficient supply chain by dealing directly with fishermen and providing a more data-driven forecasting & harvesting for its value chain

Rise of Climate Tech solutions beyond EVs and Carbon trading

• Lastly, Climate and sustainability is increasingly becoming important. Transformation toward a greener economy offers >US$1Tn in annual economic opportunities by 2030. While still in its infancy, we believe that climate tech/innovation will touch, transform and refine every sector’s workflow.
• Looking across the sectors, climate tech will make its presence felt:
  • Mobility & transport: EVs & battery tech
  • Energy: Solar, wind, water energy
  • Food & Agriculture: alternative plant based meat, sustainable agriculture
  • Manufacturing & industries: pollution control, recycling, circular economy
  • Built environment: construction, sustainable buildings
  • Financial services: funding green projects
  • And across all sectors, the overarching theme will be to capture greenhouse gases, and manage and report climate change
• So, climate tech is not a new standalone sector, but a theme that will trickle down to the oldest sectors
• Carbon offset is an example to combat the reduction of Greenhouse gas emissions. Fairatmos is a carbon credit marketplace operating in Indonesia who is first to the market in unlocking the supply of carbon projects.

Conclusion

• We believe the next decade is the dawn of a golden era for SEA and India
• SEA and India population are young, extremely aspirational, and digitally native. This combination makes Southeast Asia and India a consumption powerhouse unlike the world has ever seen before. We believe we will see a big development of many consumer internet business models in the coming years to cater to the evolving needs.
• However, there are several pitfalls we have to look out for: Not everyone fits in the same basket economically, and hence different approaches are needed for different income segments.
• Open financial infrastructure helps in creating an open democratic access to financial services. Digitisation of MSMEs and integrating them with the mainstream markets will unlock great potential. And there is an increasing shift towards sustainably managing supply chains. Especially in the post Covid world.
• And lastly, climate tech is more important than ever before. And will be a large focus area for industry leaders, innovators and investors alike, in the coming decade.
• All in all, SEA and India are at the inflection point of growth - backed with a booming startup ecosystem coupled with supportive government regulations and a very healthy capital market..

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