VCs have new online faves—social commerce, q-commerce score big in Southeast Asia

Published on January 25, 2022

Original post by The KEN

 

If 2020 was the year we were all forced to shop online, 2021 was the year we all started enjoying shopping online. And in doing so, Southeast Asian shoppers have formed habits that VCs are lapping up. But how sustainable are these investments? That’s a tricky question

Shopping will never be the same again. Right from one’s daily grocery buying habits to a sudden splurge on some fancy pet accessories, quite a lot of shopping happens online now. And the significance of this shift is most evident if you follow the money.

So, let’s look at who’s getting investor love.

• In December 2021, 15-minute quick commerce startup Astro—started by former associate vice president of Tokopedia, Vincent Tjendra—raised a US$30 million Series A round led by Accel and Sequoia Capital. Other notable investors include Rocket Internet’s VC arm Global Founders Capital and Lightspeed Venture Partners.
• Indonesia-based social commerce company Evermos, which promotes Halal products, raised US$30 million Series B led by UOB Venture Management’s Asia Impact Investment Fund II in September 2021.
• Another social commerce player, Super—which wants to be Indonesia’s answer to a “ digital Walmart”—raised a US$28 million Series B led by SoftBank Ventures Asia a few months prior.
• Also, Indonesian social commerce app KitaBeli—which we’ve written about before—raised a US$10 million Series A round led by Gojek’s Go Ventures in March 2021.

While this list is far from exhaustive, it signals a clear area of recent investor interest in Southeast Asia—niche e-tail. Be it social commerce—or buying that happens via social media—or quick commerce, where delivery is guaranteed in a short time frame, more and more startups of the sort are seeing VC money.

And why wouldn’t they. In 2020, almost overnight, a lion’s share of Southeast Asia’s purchasing behaviour was shifted online. E-commerce saw the equivalent of 10 years worth of adoption in three months globally. Today, there are over 440 million people online in Southeast Asia, of which 80% have made an online purchase at least once, according to a report by Google, Temasek Holdings and Bain & Company.

The habit is locked and loaded, all that investors need to do is pool enough funds to make new forms of online commerce more seamless. As Alvin Cahyadi, Vice President of Investment at AC Ventures, puts it, “Essentially, people who are already purchasing online would like a better experience, so this is where we see the value can be unlocked.”

And where are people making these purchases online? Given the amount of time Southeast Asia spends on social media—the Philippines and Malaysia rank in the top 15 globally for usage and time spent—Facebook and Instagram have become natural shopping hubs.

So, of course, social commerce investment is only growing. As per data compiled by The Ken, at least ten funding rounds were closed in the sector in 2021, a substantial rise from the four social commerce deals in 2020. “Social commerce showed more resilience in 2020 and we saw some dollars going there in 2021,” said Michael Lints, partner at Golden Gate Ventures.

As for quick commerce—that’s a whole other niche pandemic fallout. Two years ago, if one ran out of medicines or other household essentials, one would rush to the nearest store. In the post-pandemic world, that’s no longer a given. Movement control may mean you need to stay put. But that doesn’t mean the customer is happy to wait—and suddenly, online grocers are being expected to deliver in 30, 15, or even 10, minutes.

Food delivery giant foodpanda—as we’ve written recently—is on a quest to become Southeast Asia’s quick commerce leader. It currently promises to deliver groceries in under 30 minutes.

“The first thing that quick commerce relies on is a greater impatience with people in waiting for things. If you have been used to receiving an item in three days, then one day, then a few hours, why can’t I get it in 15 minutes? So that is one thing that is pushing it forward. The other thing is just laziness,” said Vishal Harnal, global managing partner at 500 Global. 500 Global—previously 500 Startups—invested in Singapore-founded instant delivery startup RaRa’s S$1.2 million (more than US$830,000) seed round in 2020.

But trend investing isn’t for everyone. Especially not when these forms of e-commerce are enabled by a never-before pandemic—not exactly the poster child of sustainability.

“Trend investing could be fashionable, but is not the best way to drive the best returns over long periods. Because if you’re investing in something trendy, it is probably expensive. You probably get people who are not that serious, but instead follow trends, doing the projects,” said co-founder and managing partner of Monk’s Hill Ventures, Peng T. Ong. “VCs are supposed to be investing in things that are going to be significant five years, ten years from now,” he added.

That said, not only are these hot new e-commerce sectors getting funds, but their growth is also funnelling funds into payments gateways—Nium and Xendit, for instance, went so far as to becoming unicorns in 2021! “The number of transactions and the dependency on payment gateways have been huge since 2020. If you look where the money went, fintech has clearly been a winner in terms of receiving the investment dollars,” said Golden Gates’ Lints.

Let’s take a closer look at what got them there.

Look me up on Insta

Social commerce is moving forward with all guns blazing.

In the first half of 2021, social commerce orders and gross merchandise value (GMV) leapt 102% and 91%, respectively, as compared to the same period last year, according to an annual report by Taiwanese AI-based customer engagement platform iKala.

“People want to buy wherever they are. If I see someone wearing something fancy on Instagram, why should I first go Google it to search for what this person is wearing? You want to be able to click, buy, and then have it delivered to your house as soon as practicable,” said 500’s Harnal.

500 Global invested in Indonesian social commerce startup Dagangan in June 2021. As did Monk’s Hill Ventures—it led Dagangan’s US$11.5 million Series A round in September last year. Platforms such as Dagangan target Indonesia’s lower-tier cities as e-commerce adoption is relatively low in these areas due to expensive shipping. But social commerce is easier, conversational, and the buyer can often talk to the vendor directly.

“We have Tokopedia, Shopee, Bukalapak and other e-commerce companies serving primarily in Tier-1 cities. But then there are also smaller cities. And that’s where we see social commerce companies trying to tackle the issue of logistics,” said Cahyadi of AC Ventures. “Essentially, how can we distribute better for the people that don’t really have good access to logistics?”

But Monk’s Hill, said Ong, isn’t interested in Dagangan for social commerce. “The supply chain for lower-tier cities is pretty bad. So if you live in a Tier-2 city, you are paying more for your goods because the inefficiencies of the supply chain are not automated. It’s very manual, very bits and pieces. So the goal of [Dagangan] is to help…people living in Tier-3, Tier-4 cities [access] the availability and [lower] costs in the main cities like Jakarta.”

That said, Indonesia expects to see millions of new internet users from rural areas come online every year, and social commerce could help these users gain access to online shopping.

Four social commerce startups that The Ken has spoken to said that they are growing by double digits every month—RateS by around 30%, Chilibeli by 30-50%, while KitaBeli grew by 2X each month in 2020. Super declined to go into specifics.

“We predict that social commerce will rise as a percentage of overall e-commerce, similar to what has evolved in China over the past decade,” an analysis published by Golden Gate Ventures reported. The analysis further projected that social commerce GMV will cross US$10 billion by 2026, and US$100 billion by 2030.

But investors don’t necessarily see it as a reliable investment.

“Overall, social commerce hasn’t really been a sector we’ve been that excited about. It can be difficult to gain traction. We [invested] in an early-stage startup that was in the fashion space, and which ended up not going anywhere,” said Jussi Salovaara, co-founder and managing partner of Asia at Antler, without revealing the name of that startup.

While social commerce has been the lead-back-and-shop-mindlessly end of the neo e-commerce coin, the lean-forward-and-anxiously-wait segment, quick commerce has had more naysayers than not.

Be there in 15!

Ong of Monk’s Hill Ventures scathingly called quick commerce “more of a first-world trend where you are paying a premium for the convenience”.

“Most of the time, I don’t need something in 15 minutes. There will be a small segment of things such as FMCGs or food where you want to have at your door in 15 minutes. And maybe this is how e-commerce companies differentiate. I don’t see this as an emerging market problem. I think we have got a lot more issues to solve before we get to how you can get in your snacks of the night,” he added.

But like it or not, quick commerce is the door towards which most of foodtech is currently rushing. Grocery delivery companies like United States’ Gopuff and India’s Blinkit and Zepto headlined news last year, with 10-minute deliveries and millions of dollars of funding raised (as we’ve written here).

“Quick commerce was one of the interesting things we saw at the end of 2021,” affirmed Cahyadi. One of  AC Ventures’s portfolio companies is the q-commerce favourite Astro, mentioned above.

Players like foodpanda and Astro are creating the need for groceries to be delivered as fast as possible. But how many foodtech companies—or even cities and their infrastructure—are equipped to deal with this newfangled demand for lightning-speed deliveries?

Southeast Asia has some of the most densely populated nations in the world, and the addition of last-mile transport will only worsen current traffic and carbon footprint issues. But platforms like Grab and foodpanda are setting up their own dark stores—local fulfilment centres where orders can be picked up from—across geographies to minimise delivery time.

Salovaara of Antler noted that while Berlin-based ultra-fast delivery service Gorillas became Europe’s fastest unicorn to date, it “created this craze where investors are chomping at the bit, throwing money at these companies”. It could be only a matter of time before investors who have a share in Europe’s and US’ q-commerce boom set their sights on Southeast Asia.

But profitability could still be an issue. “I haven’t seen much to suggest that there’s a viable, sustainable business at the end of the rainbow. It’s extremely capital intensive, and then you have Grab and others going to move into it. It could potentially work in this region but overall unit economics are going to be a bloodbath. The model is much better suited for a dense, urban environment,” added Salovaara.

An opportunity for some

Be it social commerce or q-commerce, there’s one winner who’s having the cake and eating it too. Digital payments.

“Essentially, [digital payments] becomes that SaaS layer to really optimise the payment experience so that you wouldn’t lose any sales, but also at the same time, what they’re improving is also the checkout experience,” said Cahyadi.

AC Ventures was an early investor in Jakarta-based unicorn Xendit—we’ve written about it before—which refers to itself as “a Stripe alternative build for Indonesia and Southeast Asia”. Its US$150 million Series C round in September 2021 saw its valuation bumped up to US$1 billion.

And before Xendit turned unicorn, Singapore-based Nium was there—the first to become a unicorn in B2B payments in Southeast Asia in July 2021.

For the payments sector, things just keep looking brighter.

“There’s so much opportunity there in different ways to create [alternative] solutions in this industry that has, for decades, made insane amounts of money for a simple action like transferring money,” said Salovaara.

But then again, it only makes business sense when there are large numbers of transactions or high transaction values flowing through. “Payment gateway margins are not that high, so you have to crank up the GMV (gross merchandise value) of the transaction which makes it a bit hard to do this business,” said Ong.

Besides, there’s always new fintech around the corner. “The business is extremely sticky and with sufficient scale, it is very difficult to disrupt given the network effects they have from payment method and merchant integration. At the same time, it will be interesting to see how DeFi (decentralised finance) can disrupt payment gateways especially in cross-border with much more cost-efficient solutions. This reminds me of the classic adage of Jeff Bezos: “your margin is my opportunity”,” said Salovaara.

For now, though, growing e-commerce sectors continue to rely on gateways. And there’s a lot of growing left to do.

Online grocery delivery, for instance, is still a largely underserved and underpenetrated market in Southeast Asia—just over 1%, compared to 8% in China and 9% in the US, Russell Cohen, group managing director for operations at Grab had said.

And while foodpanda pushes on, with Grab expanding its grocery delivery service across Southeast Asia—it acquired Malaysian supermarket chain Jaya Grocer last year—for q-commerce hopefuls, there’s a lot of ground left to cover.

Venture capital could help cover some, though.