When it launched in Southeast Asia in 2014, the early stage venture capital company 500 Startups called its investment program “500 Durians,” after the pungent fruit, “precisely because it really was an acquired taste,” managing partner Vishal Harnal told Rest of World. “It was for a few rare connoisseurs that were looking at getting access to this market called ‘Southeast Asia.’ Many people thought [we meant] India.”

500 Startups’ idea was that the region, with a combined population of more than 600 million people, including several of the world’s fastest-growing economies, was on the same track as other emerging markets like China, already a world leader in innovative e-commerce and payments models. They decided to target entrepreneurs who were tackling hyper-local problems based on business models that had “thrived” in other parts of the world, said Harnal.

Over the next eight years, the fund, which this year rebranded to 500 Startups Southeast Asia, backed some of the biggest names in Southeast Asian tech. The fund typically cuts relatively small checks of up to $500,000, but it has consistently picked winners: Companies in its 250-strong regional portfolio have gone on to raise a total of $20 billion from other investors. 

The firm’s early investments included ride-hailing company Grab, e-commerce platform Bukalapak, and classifieds site Carousell, all of which exploded into unicorns — as did health-tech company Prenetics, fintech company FinAccel, and used-car site Carsome. All except Carousell have announced plans to go public this year or next. 

The IPOs mark a “golden moment” for the region’s tech, as the first generation of players reach maturity, Harnal said, but there is a new generation of companies hot on their heels — fifteen of 500 Startups Southeast Asia portfolio are valued at more than $100 million. 

Rest of World’s Peter Guest spoke to Harnal in Singapore. This conversation has been edited for length and clarity.

You’ve mentioned that 500 Startups likes to invest in business models that have been proven elsewhere. A lot of people would assume that means adapting models like Uber’s or Amazon’s.

We actually see that, especially in the larger markets like Indonesia and Vietnam, founders or portfolio companies are no longer necessarily looking to Silicon Valley for inspiration. Instead, you’re looking at what are the new models of commerce that are coming out in markets like China. There are something like 260 unicorn models in China, and a very large percentage of them are various types of e-commerce, with great applicability in markets like Indonesia and Vietnam. 

The way people live in the U.S. is so completely different in many, many ways from how you’re living in emerging markets, so it may not be the best source of inspiration. Over the last few years, I’d say that’s really what we’re seeing — entrepreneurs really looking at what’s happening in China and India, and seeing whether they can apply those models here. 

The best example I can give from India is the Meesho model, basically taking mom-and-pop stores online, right through all of the bookkeeping, accounting, and supply chain. In Indonesia and Vietnam, there must be at least 10 companies doing something similar to that. That sort of chain reaction is starting.

Many people ask, “Where is the innovation in copy and paste?” which I think is such a fallacious argument. It’s so condescending to think that all that is required to launch a business is to look at a model and replicate it in another market. It’s really not that easy. 

The innovation is the execution: adapting the model to fit, understanding the local needs. I mean, look at Uber, right? They had to sell their Southeast Asia business to Grab.

Big investors have been playing an outsized role in shaping the current crop of unicorns. Is that model — using financial firepower to squeeze out competition — likely to persist?

These obvious unicorn models tend to require more capital to grow, because you’re really paying for customer acquisition and marketing. You’re paying to subsidize usage on your platform, really, to get market share. 

And that’s where firepower comes in. The idea is, eventually, you hit some degree of profitability at the end of that rainbow, somewhere. 

One of the benefits of hindsight in Southeast Asia is that investors have seen how these models scale in other markets, and they’re more familiar with the unit economics, because many of these companies are now publicly listed. And you can apply some of the lessons in Southeast Asia to actually build a better generation of companies than what exists in the U.S. or China. 

I think your first batches of companies had more of the “obvious unicorn” to them, and over time, as the market is maturing, they’re getting more capital-efficient. But there’s also this new range of companies that relies on a very, very different way of using capital for growth. 

We call them “sleeper hits.” They tend to be in B2B or software-as-a-service. They’re very capital-efficient, and the amount that you need to spend on acquiring customers doesn’t scale along with the growth of the business — it’s actually reducing over time.

These unicorns are now virtually incumbents. How dominant are they in the tech market? Can they actually be quite stifling for innovation?

When we started investing in Southeast Asia, the big comment was: There’s no innovation in Southeast Asia, no one’s going to build startups. It’s not a thing. Then people start building startups and they get some traction. 

Then they’re like, no one’s gonna invest in the later stage rounds of these companies, there’s no follow-on capital. Then follow-on capital comes in. 

“It’s like having a hero and a villain: If you have one, you’re gonna have the other.”

Then they’re like, yeah, but these Silicon Valley companies are gonna crush these buggers. Then, Grab acquires Uber and that gets disproved. 

Then they’re like, how big can they get? They become unicorns, decacorns. Then they say, but what about exits? So, then the exits are happening, and they’re like, oh, there’s no room for any new startup. Because these big companies are gonna kill all of the little ones off now. 

This is always the narrative. It’s like having a hero and a villain: If you have one, you’re gonna have the other.

What are the next big themes guiding your investments? How do you discern signal from noise?

We’re looking at five themes. The first is sustainable cities. That creates opportunities in electric vehicles, electric mobility, battery, technology, waste management, you know; biodegradable materials, energy efficiency, alternative proteins, which all stem from changes in behavior. 

The second is rural digitization. The story of Southeast Asia so far has been the story of cities, but that narrative is changing. 

The third trend that we’re investing in is what we call, very broadly, the all-commerce ecosystem. E-commerce implies something that is done online, on the internet through a browser to you, but the way people consume is very different. Now it’s almost omni-channel, linking the offline experience and the online experience. 

The fourth one is human and machine productivity. We’ve never ever seen a large adoption of SaaS software in micro, small, and medium-sized enterprises, which is what drives most of the GDP of Southeast Asia. Covid-19 has made it very obvious to businesses that they have to find more efficient ways of competing. It’s pushing them to digitize ordering, procurement, supply chain management, and HR.  

And the last one is healthcare, but with a focus on self-care. I think it even stretches into things like upskilling yourself, self-actualizing through education. Investing in yourself to make you a better person, a more holistic person is the theme of our age right now. And I think it’s going to create a lot more opportunity.

We’ve had to think a lot about whether this behavior is elastic or inelastic. Will people revert to not caring about their mental and physical health and wellbeing in a post-pandemic universe? Highly unlikely. Will companies not care about adopting technologies to compete better? Highly unlikely, because once you’ve made the switch, it’s hard to go back.