Figure 1: Statista, World Bank
1.) Small home market size and notion of ‘far away’ makes the journey to achieve scale tougher
⇒ Australia is a developed country with a respectable GDP and economic track record over the past decades. However, its small and scattered population for this massive country (land size wise) makes for a humble ~0.3% of the global population2. As a result, there is a concrete ceiling on the scalability of the Australian startups for most industries if they only focus on domestic business. This coupled with Australia’s (distant) location to other major markets makes the journey of scaling a startup even longer as there is a notion of ‘far away’ associated with it (which also implies issues such as time zone differences). As per World Economic Forum’s Enabling Trade Report, Australia ranks 127 out of 136 countries in foreign market access rankings, based on aspects such as trade barriers and margin of preference in destination markets3. This gives some flavor of the challenges faced by conventional Australian businesses in general when it comes to accessing foreign markets and adds to the notion.
⇒ Even if one would argue for the selective lucrativeness of the Australian markets, e.g. startups in mining/METS that are targeting and catering to Australia’s mega-mines have potential to do fairly well domestically without having to rely much beyond the Australian borders, there is a growing focus away from resources and such startups should also look at building more use cases with their capabilities in mid to long term. And those new use cases may not have lucrative markets within Australia and will sooner or later also feel the need to internationalize to achieve their true potential. This view can have applicability to other startup areas too – after all we live in a globalized world! Therefore, apart from fueling growth, scaling up beyond Australian shores is always healthy from a risk diversification perspective too.
2.) Lack of funding pushes many startups into the valley of death
⇒ By developed world standards, Australia is considered quite risk averse4 as a country unlike its counterparts such as USA where startup culture is celebrated and VC investing is quite common (and fashionable) – especially early stages. The risk averse behavior can also been seen from the proportion of investment received by early stage companies as compared to more mature/established counter parts5 (see figure 2). As per a survey shared on StartupDaily, more than 70% of the VCs in Australia said that their average deal size in 2019 was in excess of A$ 1 million6 which reflects the graveness of the situation in especially in early stages. If we look at macro indicators, Australians are quite wealthy by global standards7 but probably the inherent conservatism has led them to make investments in more conventional asset classes such as real estate which has worked well for many in the past and that is possibly why angel / early stage funding is not as common as it ideally should be. Also, focusing on Government sources such as grants may not be the ideal answer to address this issue which primarily requires private participation and risk taking. This is the issue from the ‘supply side’ of early stage capital
Figure 2: Australia Bureau of Statistics
⇒ If we also evaluate this from the other side i.e. ‘demand side’ of the capital and look into the type of Australian startups and compare with the Silicon Valley, there is a higher percentage of “integrator” type startups8 (Integrator startups most frequently attack existing markets by providing a product that is cheaper than the alternatives) – which are usually considered “safer businesses” compared to the ones that challenge the status quo. Unfortunately, “integrator” type businesses have lower scalability than the “challengers” provided they ‘get it right’9 (see figure 3).
Figure 3: Testingsgblog
⇒ To corroborate the risk averseness further, as per a report titled Silicon Beach: A study of the Australian Startup Ecosystem, entrepreneurs in Silicon Valley explore new opportunities/markets 15% more frequently than Australian entrepreneurs, while entrepreneurs in New York seek new markets 12% more often8.
⇒ For both investors and investees alike, such factors impact the overall VC ecosystem and can especially dent early stage investing (later stage is relatively ‘safer’ since one can gauge the KPIs more realistically) which pushes startups in the valley of death and probably unknowingly killing the potential unicorns of tomorrow. At the end of the day, startup ecosystems run on a pyramid structure where the failure rate is surely high but if funding is not adequate, then the base of this pyramid will shrink (less startups) and hence lowering the chances of reaching the top of the pyramid i.e. scaled up success stories (irrespective whether a unicorn or not!).
3.) Limited knowledge / readiness for international markets results in selective internationalization
⇒ In our experience, some key factors that make startups successful are identifying the right issue(s) to solve, understanding the dynamics of the environment (3Cs), having a game plan (strategy; including internationalization) – and of course, a solid execution (apart from conventional aspects such as funding etc.)! In this competitive world, whether one is a B2B or B2C startup, internationalization and scaling seldom hurts anyone. In the larger scheme of this journey, building a startup and trialing/POCs in an Australian state can be compared to going to high school, expanding across Australia is like going to a university, and scaling internationally in complex (also less understood markets) outside one’s comfort zone is no less than attaining a PhD in that analogy! A general on-ground observation is that several startups aspire to go to USA and Europe (probably because of a comparable ease of doing business, notion of immediate market size and initial comfort etc.) and put other growing markets (as appropriate) on the back burner (e.g. Japan or ASEAN) which require more thought on aspects such as localization/product-market fit and also overcoming wider cultural barriers. But the journey can be worth the pain – whether through the lens of potential first mover advantage, risk diversification, geo-politics (at times) or with intent to uncover full market potential. For example, Japan continues to be one of the largest economy globally and ASEAN bloc is the 5th largest economy of the world10. Despite being a trading bloc (and a rapidly growing one), based on many on-ground conversations, Japan and ASEAN are not the first ‘port of consideration or entry’ on many startups’ lists. The common reason cited is lack of market understanding, language barriers and (perceived) market complexity of these markets! Generally speaking, even many listed Australian businesses and their leadership may not be ‘Asia ready’ but that may be where the next wave of opportunity lies for many11 (see figure 4)
Figure 4: AsiaLink BusinessUsing healthtech as an example, Australia is considered to be quite promising in this sector. Healthtech startups in Australia addressing issues relating to aging or infertility can evaluate potential markets based on commonality of issues and long term potential rather than just immediate attractiveness. For instance, several markets such as Japan could be potential markets as they face aging and fertility issues too12. Another example can be in the agritech space, where some problems being addressed by Australia’s agritech can have applicability to some ASEAN markets and we see prominent Japanese companies making investments in similar spaces in countries such as Vietnam13. There is scope for Australian startups to turn to those markets, attempt to localize and engage in the race either directly or via partnering locally (there can be many ways to penetrate a market and we strongly believe it can’t be a “cookie-cutter” approach especially in Asia).
Kohki Sakata Chief Executive Officer +65 81682503 email@example.comRachit Khosla Country Manager – Australia +61 414 433 572 firstname.lastname@example.org This material is intended merely for reference purposes based on our experience and is not intended to be comprehensive and does not constitute investment, legal or tax advice. This should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of IGPI. Information contained in this material has been obtained from sources believed to be reliable, but IGPI does not represent or warrant the quality, completeness and accuracy of such information. All rights reserved by IGPI.
Since the country began opening up its economy in the late 1980s, Vietnam has been an attractive destination for foreign investors. In 2019, data from the Foreign Investment Agency (FIA) shows that Foreign Direct Investment (FDI) reached USD38.2 bn an increase of 7.2% compared to the same period in 2018. Japan has been highly active in the field of M&A as illustrated in the chart -below. In 2019, total Japanese inbound M&A deals amounted to more than USD 450mn in Vietnam with 12 deals*. During the same year, Japan was the 3rd largest contributor of foreign M&A deals in Vietnam in terms of deal value after South Korea and Singapore.Source: Mergermarket, IGPI analysis * For disclosed deal value to be greater than or equal to USD 5 mn and / or the target’s turnover/revenue is greater than or equal to USD 10 mn
• Information and data analytics: farmers and producers are able to plan their production according to accurate data patterns; • IoT and automation: technologies that help in automation of farming processes (such as monitoring the crop field with the help of sensors (light, humidity, temperature, soil moisture, etc.) and automating the irrigation system); • Marketplace platforms: platforms that aid in connecting small scale farmers with larger consumer markets; and • Agronomy and agricultural biotechnology: innovate inputs for crop and animal agriculture (such as seeds, pest control, seeds with new genetics) with the use of scientific tools and techniques.There are many technological opportunities throughout the value chain as illustrated in the below chart: