Can S-E Asia beat the 80/20 rule of venture capital?

CONVENTIONAL wisdom in the Venture Capital (VC) business is that a small percentage of investments generate the majority of returns. The "80/20" principle - that 80 per cent of VC returns come from 20 per cent of startups - still resonates in the venture ecosystems of the US and other developed markets.

And this is despite last year's notable VC investment catastrophes, such as the fall of WeWork, and research showing that VCs pick winners just 2.5 per cent of the time.

In spite of this, the venture industry in the US is seeing unprecedented growth in recent years, with investments upwards of US$130 billion annually, and is being emulated around the world including parts of Asia and Africa.

But venture investing in emerging startup ecosystems like South-east Asia is fundamentally different from Silicon Valley.

US-based VCs tend to back a lot of breakthrough innovation and transformational technologies and experiment with new business models. This is an inherently high-risk approach. For every Airbnb, there is a pile of Zume Pizza slices in the garbage bin.

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In contrast, the early iterations of venture investing in emerging markets tend to focus on companies with technology and ideas already proven in developed markets, with adjustments to flourish in a developing market with different demographics.

The challenges that come with backing startups whose business potential is unproven in the new market are still there. But the overall risk profile is lower because the starting point is a proven model. Success depends more on execution and the translation of the business concept to a new market than on picking the right technology.

Unlike developed markets, where pushing the envelope may seem to be the only way to get ahead, VC investors in developing markets have the benefit of hindsight. Founders and their investors can learn from the successes and failures of the same models in other markets rather than figure it all out on their own.

We have seen this in the success of Grab and Gojek in South-east Asia, which started off by emulating Uber but quickly adapted the idea to make it relevant for the regional consumers.


Instead of cars, they focused on scooters as a more accessible, scaleable, and easily manoeuvrable solution for the famously crowded streets of Jakarta. They also enabled customers to transact in cash, which is critical when you're serving a large unbanked population lacking access to credit cards.

One might assume, incorrectly, that this seemingly easier path to build winners and the resulting competition would translate into a high failure rate in emerging markets, thus justifying the need for venture investors to extensively diversify as their US counterparts do.

It is true that the biggest barriers to entry in these markets are often related to operating complexity. But it is also true that regions like South-east Asia are significantly underserved, compared with mature markets. As a result, there are opportunities for more participants to succeed than in developed markets. For example, one of my firm's portfolio companies, Kredivo, is going after the consumer lending space in Indonesia where the credit card penetration is about 5 per cent, compared with 70 per cent in the US. A developed market equivalent to Kredivo might be US-based Affirm. So even if more competition shows up in Kredivo's space, there's still plenty of room for several mega companies to be formed.

A decade ago, 80 per cent of South-east Asians had limited or no access to the Internet, according to the 2019 South-east Asia Internet Economy Report from Google, Temasek and Bain & Company. But now, the region's 360 million Internet users are the world's most engaged mobile Internet users.

In fact, 90 per cent of them connect primarily through their mobile phones, according to the report. Moreover the region is one of the youngest populations in the world creating a huge captive audience for companies like Kredivo.

And we're seeing similar unprecedented growth led by digital transformation in almost every sector in the region. Consider the more than 100 million small and medium-sized enterprises (SMEs) in South-east Asia, which represent 99 per cent of all of the region's business establishments.

More than 80 per cent of 370 middle-market firms across the region recently surveyed by EY plan to increase investment in "transformative technologies" over the next three years. Unsurprisingly, the region's startup ecosystem is gearing up to leverage this opportunity

Early successes include Indonesia's Warung Pintar, which helps traditional businesses digitise their business and Vietnam's Kiotvet, a leading cloud-based store management software and one of our portfolio companies.

To be sure, this broader and deeper list of opportunities in developing markets does not make it easier to pick winners. That is because there is heightened execution risk in these complex operating environments.

This means that certain key considerations to identifying and making successful investments are different from developed markets. For example, investors must closely evaluate whether the developing market gap that an idea seeks to close is the right one to focus on first, if the solution necessarily needs to be a local one and most importantly, if it is the right team and timing to solve the problem.


Research suggests that most businesses fail because of leadership challenges and a lack of capital. Given that the talent and capital pools in emerging markets are still developing, it makes sense for VC investors to focus more resources on fewer opportunities to increase their chances of success.

To be sure, it's too early to say if emerging market VCs are defying the 80/20 rule. But given the market gaps and opportunities we see, the time is coming, and soon.

  • The writer is co-founder and managing partner of Jungle Ventures, a South-east Asia focused venture capital firm.

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