The economic outlook in the Association of Southeast Asian Nations (ASEAN) took a slight downturn in the second quarter (Q2) of 2023 as the global financial system continues to face challenges from various factors. Tech startups in the region have borne the brunt of the worsening monetary climate as they struggle to raise funds, maintain cash flow, invest in research and development (R&D), or pay for essential business commodities.
According to a report from McKinsey & Co., six of the biggest economies in ASEAN—Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam—experienced declining or worsening economic indicators compared to the first quarter (Q1). As such, macroeconomic indicators like trade, private consumption, fixed investment, and the purchasing manager’s index (PMI) were not doing well.
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In the financial category, indicators like currency were either worse or showed no significant change. Foreign direct investment (FDI) inflows only improved in Indonesia and Vietnam, but the rest of the countries had worsening situations. Malaysia suffered the most, experiencing a severe decline in its FDI figures.
With the numbers showing that there will be moderate economic growth in the coming months, Southeast Asia startups can find ways to overcome the challenges and achieve success.
Economic challenges for Southeast Asia’s startups
ASEAN is feeling the strain of multiple economic headwinds, such as limited fundraising, talent recruitment and retention problems, investors withholding funding, and many other issues. Tech stocks for companies like Grab were down by about 20% in local and foreign stock markets as valuations decreased.
Venture capital (VC) funding always looked likely to be reduced in 2023 because of geopolitical tensions hampering businesses, international sanctions affecting global markets, and supply chain disruptions interfering with trade.
Inflation and rising interest rates are also hurting companies and reducing funding worldwide. Moreover, the high rates and recession fears are raising business costs and limiting manufacturing. The global economic downturn is restricting international trade, lowering countries’ revenues.
Additionally, there are increased energy costs, and attempts to combat the impact of climate change and carbon emissions are expensive. Some investors are avoiding companies that do not have environmental, social, and governance (ESG) policies in place.
Southeast Asia is dealing with a talent crunch because of broad market competition, a limited number of tech experts, and expensive recruitment costs. Due to decreased funds, businesses struggle to recruit and retain the best workers. For example, Shopee laid off some employees to streamline business operations.
Plus, there is a shift in employee expectations after people’s experiences during the COVID-19 pandemic were overwhelming. Workers now expect more benefits, such as medical payments and reskilling, which can be costly for an organisation.
How Southeast Asia’s tech startups are weathering the economic storm
Southeast Asia startups must focus on developing innovative products and services that meet customer demands to survive the current economic storm. They should look to expand their businesses into other regional nations and diversify their income streams. Tech startups continue to impact ASEAN’s economy, creating jobs and providing solutions in different industries in alignment with individual countries’ digital transformation policies and initiatives.
The fastest-growing industries are eCommerce, digital healthcare, financial technology (fintech), renewable energy, and education technology (edtech). This means opportunities are available to make a difference in the region. For example, Lazada is investing in logistics to bring eCommerce deliveries to customers faster and more securely.
Founders should look to raise money from investors to back their growth, research, and innovation. But first, they need to understand how to negotiate for funds. They should begin with the end in mind, be ready to accept rejections, and stay flexible with financing options. Lastly, they should give investors a viable exit strategy to increase their chances of getting funding.
According to professional services firm PWC, Southeast Asia looks primed for a shift to a cashless system, which offers opportunities for novel startups. The region has a burgeoning consumer base, internet access, mobile wallets, and technologies like generative AI, which can automate functions, create content, solve customer service issues, and provide market analysis reports. However, companies must ensure that digital payment services will be inclusive, trustworthy, secure, accessible, simple, and affordable.
While the economic outlook looks bleak, the startup ecosystem is continually growing. There must be a concerted effort to maintain government support, and companies should look into diversifying their offerings and revenue possibilities. For instance, the on-demand multiservice platform Gojek merged with eCommerce company Tokopedia to form GoTo, raising over USD 1 billion on the stock market. Grab also went public, but it has turned itself into an all-purpose platform—a superapp—providing many types of services and payment options.
Finally, the region must transition to cleaner energy to meet its fuel demands, remove carbon dioxide emissions, increase access to electricity and clean cooking, and provide affordable access to sustainable energy. Handled well, it will play a critical part in boosting the economy.