Startup failures in Southeast Asia mirror what happens in other regions. They all start out with innovative ideas and high growth potential, but only a few ever make it. Some eventually grow to achieve billion-dollar valuations—unicorn status—like Grab and J&T Express. Others suffer a slow deterioration, losing what little value they had, laying off workers and closing up.
In the first half (H1) of 2024, the tech ecosystem supporting Southeast Asian startups reached USD 454 billion and unearthed 55 unicorns. While these numbers go against the notion of companies ever failing, there are many reasons why surviving after launching a business can be particularly difficult in this region.
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Why do so many startups fail after launch?
Here are four of the challenges many emerging businesses encounter:
- The sharp decline in follow-on funding: Without adequate follow-on capital, i.e. money raised after the initial funding, companies are unlikely to survive in the long term. The current funding trends primarily focus on early-stage startups, companies with Environmental, Social, and Governance policies (ESG), and sustainable and scalable business models.
This year’s startup funding in Southeast Asia highlighted the continued fundraising winter caused by challenging economic and geopolitical conditions. According to DealStreetAsia, the capital raised markedly declined in the third quarter (Q3) of this year, with the deal volume for the first nine months being less than half the amount raised in the same period in 2020.
- Dramatic reduction in demand for products: Markets are at the mercy of shifting consumer habits, and companies must be agile to adapt quickly. For example, the increasingly popular financial technology (fintech) sector—which receives a lot of investment—has thus far raised USD 1.4 billion. This level of funding is a Year-on-Year (YoY) decline of less than 1%. The reduced capital could be due to other factors, yet startups failing to understand the needed sector changes may play a part.
Investors want startups that know their market, correctly time product launches well, have reasonable prices, and offer data privacy and security. For example, tourism tech is helping to address changing customer preferences by giving travellers better experiences through booking apps, providing updated information on local attractions, and offering travel management options.
- Governance issues: Startups need strong leaders with a business plan who can establish robust cash flow management, use analysis and reporting to improve performance and seek to attract and retain customers. Businesses making monetary mistakes, such as spending money too fast or failing to invest in marketing, will encounter debt and management problems.
Moreover, they will be wary of scaling too quickly, neglecting cybersecurity, failing to adapt to market conditions, and misunderstanding legal and regulatory responsibilities.
- Slowing economic conditions: The global economy has had its fair share of ups and downs this year, putting pressure on Southeast Asian startups. The cost of commodities increased, high energy prices affected production expenses, and inflation made market competition a nightmare. Furthermore, geopolitical tensions disrupted supply chains, increased the charges on raw material delivery, and protectionist policies compounded the trading challenges.
Steps needed for startups to thrive
Based on the reasons above, startups can bolster their operations and business models to become more resilient in the following ways:
- Target the green approach: According to Bain & Company, Southeast Asia must seize the opportunity to use the green transition for economic growth. The green digital economy will enable startups to develop nature-based solutions that benefit their communities while bringing profits.
It will involve focusing on sustainability, producing green products, using clean energy, and employing reusable packaging while avoiding greenwashing.
- Adopt cutting-edge technologies: The World Economic Forum (Weforum) posits that the region’s digital economy has seen profitability multiply 2.5X to reach USD 11 billion in 2024. Technologies like artificial intelligence, blockchain, and others create opportunities for startups to innovate, sell, and generate substantial revenues.
As the sector grows, regional governments must invest more in infrastructure, creating job opportunities and nurturing a budding talent pool through education and upskilling initiatives.
- Recruit the best talent: Glints for Employers notes that demand for tech employees remains high across markets. While AI is improving productivity, it is vital to use the technology to assist in recruiting the best talent in various sectors. The report also points out that cross-border hiring is gaining momentum as a cost-effective and profitable approach for Southeast Asian startups to add to the workforce.
Recruiting experts makes identifying opportunities easier, increases the likelihood of meeting customer needs, and bolsters the possibility of remaining competitive.
- Improve business operations: Founders must ensure the company is adaptable, shows financial discipline by cutting unnecessary expenses, and has a plan for the future. Additionally, they must guarantee cybersecurity by performing vulnerability checks, managing passwords and access, and using resilient encryption protocols.
Overall, startup failures in Southeast Asia can be prevented with sound business principles, guarding against common business risks, securing consistent investment funding, and having a bit of luck along the way.