Make no mistake, the secret is out. The tech market potential in Southeast Asia (SEA) has been realised and the region is now the global hotbed for tech startups. Renowned global investors are chomping to enter the market and the digital payments sector in Indonesia is a testament to that.
OVO, an Indonesian digital payments company backed by Grab and Dana (an e-wallet provider backed by the financial arm of Alibaba, Ant Financial) have agreed to merge with the aim to compete against Gojek, who counts Facebook and PayPal amongst its investors.
Given that digital payments only constitute a portion of the tech industry with other sectors such as lending and insurance, the diversity and size of investors serve as validation of the fact that the region is where the next major growth will occur. However, the investing lenses have been over-focused on only the key economies such as Singapore and Indonesia.
Therefore, countries in the Mekong sub-region such as Laos, where the startup ecosystem and support is not as developed, have yet to catch the attention of institutional investors. Given the growth potential their domestic market offer, they represent hidden gems in a regional market where the world is opening its eyes towards.
Hidden gems
Countries in the Mekong sub-region represent what angel investors term, “Frontier Markets”. Consisting of countries beginning to see early signs of economic prosperity and great growth potential, they have flown under the radar when we discuss economic growth prospects in SEA.
Laos, in particular, has escaped this limelight. Research by the World Bank has shown that in the decade to 2015, the Laotian economy grew by an average of 7.8 per cent per year, with annual growth never dipping below 7.0 per cent.
Consequently, GDP per capita increased from US$476 in 2005 to an estimated US$1,812 in 2015. Hence, it is no surprise that Laos ranks among the fastest-growing economies in Asia.
Not without hurdles
However, the startup ecosystem in Laos is playing catchup with others in the region. Research by the Emerging Markets Consulting shows the private sector development in Laos is often impeded by three main obstacles. Complex business registration, difficulty in accessing financial funding and skill gaps in the labour force.
By analysing each of the above steps, we would be able to understand why startups are far and few in Laos and the ecosystem is not currently thriving.
Red tape
Bureaucracy is often cited as the key pain point for would-be entrepreneurs. It is commonly opined that formulating the idea is the easiest part of the business journey while implementation is the hardest. The Laotian regulatory body for enterprises does little to aid budding entrepreneurs in this aspect. Simply registering a business involves visits to at least three different ministries.
While there have been efforts to streamline the process in recent years, many still complain about the complexity of these procedures and the time it takes to register a business. Therefore, the administrative burden of registering a business serves as a clear disincentive to formalise the business and execute it.
Given registration is usually the first hurdle that entrepreneurs face, they often give up due to the sheer amount of effort required to just legalise their business.
Funding
For the few determined entrepreneurs that made it through the tedious registration process, they would face their next big obstacle, securing financial support. The lack of financial support impedes startups from achieving their optimal operating model given they will not have the necessary financial ability to invest in R&D or expand to achieve economies of scale.
Given that lack of cash is often cited as the top reasons for startups failing, it is small wonder why Laos has not seen its startup ecosystem excel even when the economy is expanding. Upon exploring the issue at a societal and institutional level, we can unmask these issues.
On the ground, Research by the Asian Development Bank to study the correlation between financial literacy and awareness of fintech development has shown that even though Laos has a relatively high financial literacy rate per capita income that is on par with Vietnam, the level of awareness and adoption of financial services and technologies to potentially secure funding for their businesses is low.
As for financial institutions, they are not inclined to supply loans given the low collateral young entrepreneurs possess and the difficulty in repossessing them if there is a default. However, actions have been taken to address this issue. The World Bank will conclude its Small and Medium Enterprise Access to Finance Project in 2020.
With the main aim to provide long-term funding sources for local banks, World Bank hopes these banks, in turn, can provide long-term credit to small and medium enterprises. Even though we are yet to be able to fully ascertain the initiative’s full effectiveness, it is nonetheless heartening to see changes being implemented to reduce financial barriers of entry for entrepreneurs and give them greater opportunities to succeed.
Human capital
Recruiting the right talent is one of the key factors for startups to succeed. Given the lean operating structure, startups adopt, it is paramount that everyone on the team has skillsets that enable them to achieve high levels of productivity. This where the quality of the local labour force matters.
Unfortunately, Laos does not perform well in this aspect. Through analysing the labour market, we will realise the root cause behind the lack of skilled labour is the local education system and skills training framework. On a tertiary educational level, there appears to be a mismatch between what students are studying and what employers are looking for. There is a surplus of university graduates with business degrees and a shortfall of technical vocational graduates such as engineering.
The lack of student demand for vocational training most likely reflects the low status of vocational training and blue-collar jobs, as well as the lack of high-quality vocational training in the country. Therefore, the labour market is highly saturated with plan makers (businessmen) but lacking in executors (engineers).
Ultimately, without the right talent and skills, business ideas would remain as thoughts on paper rather than concrete solutions in the market that address a problem.
But there is hope
Given that the overall SEA startup ecosystem is thriving and the influx of large tech companies investing in it will be the new normal, it is a matter of time before Laos and other countries in the Mekong sub-region catch up to the rest. For that to become a reality, reforms must be done on a governmental level.
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Policies should be streamlined and educational systems need to be upgraded and linked to the future demand of the local economy to produce the required talent. Realistically, it will take a decade or two before we are able to fully assess the efficacy of such initiatives.
With the hope by then that the local startup ecosystem will be thriving together with the region, who knows? Laos might be home to a unicorn.
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