To the Goldilocks of Southeast Asia: Consolidate or Die


When categorised according to target markets, there are three types of startups (notwithstanding hybrids):

1) Startups that are global from the outset: these companies can provide their products and services to customers regardless of where they are located. The caveat here is that these kinds of companies must provide a consistently high quality of service for all customers regardless of location; finding customers in different countries and time zones, especially first adopters that initially require a high touch, is also tremendously difficult.

2) Startups that are local from the outset: these provincial companies are concerned only with their immediate customers, and either do not have the ability or need to expand into new markets. Note that local doesn’t necessarily mean ‘small.’ Sometimes, startups are blessed with a substantial local market; for those that are not, they must simply make due if they do not intend to expand. Depending on the size of their selected market, these startups can either flourish, or expire.

3) Startups that are regional from the outset: these are the Goldilocks of Southeast Asia. Their markets are not too big, nor too small; they are companies that have the potential to scale across multiple markets in the region. They are geographically close to their initial customers but nevertheless provide a service or solve a problem that is immediately recognisable to consumers across Southeast Asia. They do not share the same burdens of quality of global startups, nor the market constraints of local ones. Given such potential, Goldilocks attract a tremendous amount of venture financing, especially once they start scaling into new markets. And, perhaps most importantly, successful regional companies are prime acquisition targets for overseas companies looking to enter the region.

It’s to the companies in the third bucket that I offer these words of advice: consolidate or die.

If I were to generalise, many Southeast Asian companies fall into the third and final bucket. These startups are usually consumer-facing, relatively niche in their product or service offerings, and are, at least initially, very local in their focus: reservation booking systems, local review portals, event management platforms, and curated ecommerce and travel sites are some examples of these types of startups.

Ironically, what makes these startups unique is their ubiquity across Southeast Asia. There are many, many startups across the region operating in the same exact industry, offering identical or similar products and services, and separated only by a sovereign border and a few miles of terrain or ocean.

Southeast Asia is a curious double-edged sword. Scaling successfully across the region is extraordinarily difficult, but it makes for a hypnotically powerful narrative: regional companies attract the lion’s share of investment; create strong barriers to entry for new startups; and become strategic acquisitions for overseas companies looking to expand.

So powerful is this narrative that financing into these types of companies is largely dependent on their ability, actual or perceived, to scale successfully across Southeast Asia. Companies that show consistent market traction receive funding; companies that do not, don’t. Indeed, the greatest predictor on whether or not a Glodilocks startup can close its round of funding is its capacity to grow beyond its immediate markets.

Therein lies the fundamental weakness of Goldilocks: these startups need to expand to survive, but are crippled by incumbents in target markets. Almost every country in the region has market leaders in these particular industries. However, given the necessity of expansion, they move into new markets.

And in so doing, they transform from entrenched incumbent into new entrant competing for market share against well-established market leaders. The result is they burn cash too quickly and extinguish themselves, or they flounder, seek financing to mitigate their negative cash flow, and fail to close the round. Left without funding, these companies also expire.

To the Goldilocks of Southeast Asia: consolidate or die.

Consolidation must happen. There are simply too many companies, providing too similar a product or service, in too small an initial market. These companies must expand to survive, and in so doing, the vast majority of them become unsustainable. Some, a rare few, will successfully navigate said expansion and become regional behemoths, but far more companies will struggle. I lend this advice to these companies.

Consolidation is an elegant solution, but difficult to execute. Instead of competing for venture dollars, a consolidated entity would attract considerably more interest from institutional funds. Instead of wasting funds on aggressive marketing campaigns and untested hires, a consolidated entity would have an established customer pipeline and brand in each market on which it could rely. Instead of competing for market share across the region, a consolidated entity can separately manage and grow across selected markets.

Seamless execution of this kind of consolidation would be painful, specifically in terms of corporate structure, ownership, and actual country of incorporation. But the alternatives are arguably more so. Granted, companies might consider themselves part of that rare company that can successfully overtake Southeast Asia, regardless of competition or strategy, but I would ask these companies to also consider the alternatives.

The recent acquisitions of Love out Loud Asia by Lunch Actually, and LoveByte by MigMe, are two prominent examples of consolidation in a very crowded space. And I can guarantee there will be more to come, especially as the flow of venture financing into Southeast Asia accelerates.

The moral of the story: you may be a Goldilocks startup in your own market, but go looking for porridge elsewhere and you’re liable to get eaten by a big, bad bear.