Over the last decade as an Asia-based VC investor, I have spent considerable time working with portfolio companies on building partnerships and strategic relationships across the region.
While the popular sentiment in the West seems to treat Asia as a single market, the obvious reality is that the region is incredibly culturally, socially, and economically diverse. Business and social norms in any one country rarely hold true across the region, and operators often struggle to navigate this complex landscape.
So why expand into Asia in the first place?
In 2030, the population of Asia Pacific will reach 4.5 billion people. According to the Bookings Institute, Asia could represent 2/3 of the global middle-class population by that time. Why does this matter, especially for growth-hungry startups? Asia’s middle class comprises a large and dynamic group of consumers, which could collectively spend an astonishing $65 trillion by 2030. In a shift from historical norms, this emerging group of spenders is acquiring houses and flats, paying for their children’s tuition, as well as their own medical insurance.
Asia is also undergoing a technology transformation. The region has transformed itself from a tech imitator to an innovation leader, made evident by the dominance of Alipay and WePay in China. Now, with China’s significant investments in Artificial Intelligence, molecule development and driverless cars, the region is no longer limited to incremental improvements, but is capable of leading the world in development at a different scale and pace of innovation. This innovation is not limited to China, but is also clearly evident in Singapore, Indonesia, Japan and Korea. These significant behavioral changes, coupled with raw middle-class growth, combine to present massive opportunities for venture-backed startups.
Planning an expansion into Asia is quite simply a waste of time and money if companies do not carefully consider their strategy and plan for the inevitable challenges.
Companies looking to capitalise on this opportunity must first ask themselves which markets make most sense for expansion. When most western founders think of an Asia expansion, they first look to China. China’s massive population of 1.3 billion makes it an understandably alluring opportunity for foreigners. In light of China’s emerging technological dominance, as well as a regulatory environment that often makes it challenging for outside entrants to compete, foreign technology is no longer needed to the extent it once was. Instead, the opportunity is generally limited to partnering with Chinese companies for global expansion. When I think of expansion into Asia for our portfolio companies, China is likely the last country that I would suggest for launching a product or service. We encourage our companies to look to Japan, the Phillipines, Singapore and other (but still significant and rapidly growing) markets that are often overlooked.
When are companies ready to expand globally?
Planning an expansion into Asia is quite simply a waste of time and money (and a massive headache) if companies do not carefully consider their strategy and plan for the inevitable challenges of doing business in this region. I strongly believe that before companies can expand globally, they need to make sure they have first proven product market fit in their primary initial markets, and I am incredibly wary of those that consider expansion overseas because of a lack of traction at home. Expansion into Asia is challenging enough as it is, and if coupled with a need for significant product modifications, can lead to confusion and even reputational risk. Though establishing product-market fit in a company’s home market is critical before expansion, companies should also assume that the product will need to be localised for Asian markets, particularly if consumer facing. This localisation might include updated mobile layouts, payment methodologies, delivery options or other modified product choices and functionality. For B2B, localisation might not be as important, but customer interaction and follow up can alter the pace of adoption.
In addition to product considerations, the importance of recruiting the right team members and partners to execute on an international expansion cannot be underestimated. Companies must prioritise the recruitment of a senior local team member that can both understand the needs of local customers as well as effectively communicate with headquarters back home. This hire must be able to gain the respect of the product managers, engineers, and other key stakeholders, and also be able to articulate the compelling opportunity at hand in this new market. Decisions on product modifications, new sales channels, and alternative business models must all be informed by a nuanced understanding of conditions on the ground, and a full-time, local representative can often provide these insights much more effectively than an international team member flying in and out of the new market. Although local investors can be extremely helpful in this regard, they are not a substitute for hiring a local leader. Use your investors to help recruit talent to access the initial market opportunity, but don’t expect them to assume an operational role on your behalf.
While navigating new markets in Asia is enormously complex, the potential rewards make it worth the effort. Investors should consider that those companies that are thoughtful about which markets to target, have proven product-market fit, and are determined to find and support the right local partners will have the best shot to capitalise on the opportunity in Asia.