Consumer-focused startups in South-east Asia need laser-sharp focus to attract funding

STARTUPS selling consumer goods in South-east Asia must be laser-focused in their strategy and marketing if they are to attract funding in this tough market, investors and consultancies told The Business Times.

With ever-changing consumption habits, companies need to consider values that resonate with consumers – such as sustainability, affordability and personalisation.

“The consumers of today are being more particular about the brands they buy,” said Sameer Mehta, investment director and head of South-east Asia at DSG Consumer Partners (DSGCP), a consumer-focused venture capital (VC) firm covering South-east Asia and India.

Increasingly, younger consumers are voting with their wallet for brands that align with their value system, he added. DSGCP sees opportunities for new brands that offer social value on top of fulfilling basic needs.

Venture funding for startups in the consumer goods and services sector in Asia-Pacific has fallen in the last two years, from US$43.5 billion across 2,913 deals in 2021 to US$9.1 billion across 1,135 deals in the first nine months of 2023, data from professional services firm KPMG showed. This represented a 79.1 per cent decrease in funding.

The decline in Asia-Pacific mirrored global trends – venture funding for consumer startups fell from US$96 billion across 8,387 deals in 2021 to US$22.7 billion across 3,591 deals in 9M 2023, according to KPMG data. This represented a 76.4 per cent drop in funding.

A pivotal reason for the fall in consumer deals in the past two years is rising investor interest in the digital capabilities of fintech, especially for software-as-a-service technology platforms, said Stephen Bates, partner, head of deal advisory and head of transaction services at KPMG Singapore.

“This trend is not surprising considering that companies with such tech capabilities achieved significant valuation increases… significantly higher than that of their consumer markets’ counterparts,” he added.

In addition, consultancies said the consumer field is very competitive.

“In South-east Asia, margins tend to be reasonably good; but you need scale to generate the absolute profit in any market. You need to go to a leadership position, (which happens) only when you are very, very focused on a particular market,” said Praneeth Yendamuri, partner at Bain & Company.

This means competition from larger fast-moving consumer goods companies can pose a challenge for consumer startups here. “It’s like a tug of war for market share,” he added.

To compete, said Dymfke Kuijpers, senior partner and global leader of retail at McKinsey & Company, brands need to reshape their social and environmental footprint.

This can be done by promoting diversity, equity and inclusion; or adopting regenerative agriculture, she added.

Affordability is also vital for consumers in the current economic climate. Brands can consider expanding their “essentials” range to feature competitively priced yet high quality products, said Kuijpers.

Yendamuri said brands must also tailor their growth strategies to each market segment.

South-east Asia can be particularly challenging as it is made up of heterogeneous markets. For instance, the silver economy is important in the ageing economies of Singapore and Thailand. Consumer spending power also varies from one country to another, said Yendamuri.

He added that companies could take advantage of advances in artificial intelligence that have made personalisation easier. Chatbots can support customer service and recommend products and services, for instance.

In addition, despite the increasing popularity of digital channels such as social media and e-commerce, physical outreach is still important in countries with a large number of traditional trade stores, such as Indonesia and the Philippines, said Yendamuri.

In spite of the challenges consumer startups face, however, investors and market watchers remain optimistic of the opportunities for venture capital here.

“We are in the sweet spot of the consumer world for future growth,” said DSGCP’s Mehta. South-east Asia has one of the world’s youngest populations, and is also at an inflection point for per capita income – discretionary spending will rise exponentially in the next few years, he added.

The VC firm in October announced the final close of its fourth fund at US$114 million, with 95 per cent of current limited partners (LPs) returning and making up 72 per cent of the capital.

“(This is) the best test of commitment – whether your existing LPs come back,” said Deepak Shahdadpuri, managing director and founder of DSGCP.

The exit environment for consumer brands in South-east Asia is becoming more dynamic, with heightened investor interest from private investors and multinational corporations, added Kuijpers.

“A successful exit strategy depends on many factors such as timing, negotiation acumen, and market conditions,” she said.

“As South-east Asia’s consumer market continues to grow, exit opportunities remain viable for brands demonstrating value and potential.”