SMEs — The sleeping giant for Tech

There is a sleeping giant in Southeast Asia that needs to be awoken. That giant is estimated to have 70 million SMEs driving the economies

There is a sleeping giant in Southeast Asia that needs to be awoken. That giant is estimated to have 70 million Micro, Small and Medium sized enterprises (MSMEs) that account for 99% of all businesses in the region (likely an underestimation). The impact this segment of enterprise makes on both employment and the economy is significant. The potential to unlock is even more significant.

Technology provides an opportunity to do just that an unlock this potential and awaken the sleeping giant. Increasing scope and reach of economic opportunity, driving exports, expanding employment, the list of economic benefits to be gained from MSMEs is extensive. But, this segment has lagged behind on technology adoption historically and is not without its challenges.

The High Level Trends

There are a number of opportunities and challenges for Tech deployment for MSMEs.

1) According to a report produced by the International Federation of Accountants, “A major part of the ASEAN economy consists of the SMEs, accounting for between 89% and 99% of total establishments, and between 52% and 97% of total employment in the ten ASEAN Member States (AMSs). These SMEs contribute to each AMS’ GDP between 30% and 53%, with export contribution between 10% and 30%. SMEs make real contribution to income and employment generation, gender and youth empowerment through their diverse business participation, and their widespread presence in non-urban and rural areas.”

2) MSMEs generally do not have the resources to make investments in technology but the disruption caused by the pandemic has made them realize how adopting to digital can help them take advantage of opportunities in today’s changing environment.

3) Governments across Southeast Asia are pushing initiatives to digitalize the MSME segment.

• Malaysia — there is the Keluarga Malaysia (Malaysian Family) Digital Economy Centre (PEDi) and recently RM200 million has also been allocated for the SME Digitalisation Grant Scheme.

• Indonesia — the government is active in incentivizing the digitalizion of MSMEs and the Ministry of Cooperatives and SMEs has set a target of integrating nearly 30 million MSMEs into the digital ecosystem by 2024. But tech companies are also racing to target this segment as well. Grab, Bukalapak and Emtek launched Kota Masan Depan, while GoTo has launched BangkitBersama.

• The Philippines — there is the Digital Transformation Initiative which has programs targeting MSME run by the Department of Trade and Industry (coincidentally both with DTI abbreviations). There are also several private sector and non-profits that are pushing similar initiatives, like SIKAP (sikap.com.ph).

• Vietnam — their Ministry of Planning and Investment has a programme to support digital transformation.

4) Only 16% of MSMEs in Southeast Asia are truly digital, according a a Bain & Company study. The Economic Research Institute for ASEAN and East Asia determined that 56% have a basic level of digital adoption (i.e. email, computers, mobile phones) but only 10% have an advanced level (i.e. analytics, automation, bank card readers).

For tech startups targeting this segment, there is a clear impact and market size opportunity. However, due to the sheer volume and the diversity of the pool of MSMEs, there is a targeting difficulty to be able to reach and onboard these MSMEs efficiently and at scale. There are related challenges in skills and other barriers that have long existed to the digitalization efforts, which are not new. However, we have been pushed by the pandemic and this when coupled with efforts and support in the public and private sectors are showing beams of light.

The Indelible Ventures Approach

Indelible Ventures looks for companies that are able to demonstrate a clear value proposition to customers and build a focused, repeatable sales model that can scale in multiple country markets.

People-First — We are firm believers that it takes incredible people to scale a start-up. Building a company from the ground up is one of the most challenging things a person can undertake and we look for Founders with the growth-mindset and resilience to endure and adapt with the fast paced market.

Process — We know that scaling a product requires agility. The early product-market fit that is experienced may evolve as you scale or shift with customer segments. We always look for companies that are building internal and external feedback loops to ensure that they are rapidly collecting feedback (whether from customers or other stakeholders) and quickly processing, understanding and adjusting based upon the feedback. The more effective the feedback loops we see, the higher level of comfort-level that a company will be capital efficient in their growth and be able to achieve a fast-pace to scale.

Product — No assessment is without a deep-dive into the product and we want to know everything from your roadmap to how you have established (or are currently) the product market fit validation, and what your go-to-market strategy is. We often look at assessing the commonality of needs in the “problem you are solving” across markets and look at the barriers and competition that you face. We want to know what differentiates you and how you are going to be Indelible in your segment.

Opportunities and Interests

It is an impossible exercise to attempt to make a durable prediction on where the opportunities are with any level of specificity. However, we will outline a non-exhaustive list of a few areas in which we are looking at.

Supply Chain and Logistics — Enabling MSMEs to compete on a broader scale against larger enterprises will require improvements in the supply chain and logistics. There are a number of start-ups that are focusing on improving Sourcing, Pricing and Reliability of the Supply Chain to enable MSMEs to be more competitive. An example from other markets, one such start-up enables small grocery stores and convenience stores to group orders to take advantage of volume discounts to compete with the larger chain stores on pricing.

• Sales Channels — While B2C eCommerce platforms are the most commonly known, B2B platforms have been growing and developing vertical strengths. The key enablement is to expand the target market opportunity for an MSME by providing them access to buyers that they would otherwise not have had easy access to.

• Financial Services — Most MSMEs are not connected to the traditional financial services ecosystem and struggle with simple business problems like working capital financing or even accepting payments. There is an opportunity to delve deep in creating more inclusiveness for financial services by disrupting the barriers that have kept traditional financial institutions away.

• Business Operations — Improving the efficiency and effectiveness of the way MSMEs operate day to day is a huge feat with a number of challenges, but with an opportunity to empower them to compete against larger enterprises in a cost-effective manner. A key challenge to the viability of most MSMEs is cash flow management, here there are many opportunities from basic bookkeeping to cash flow optimization analysis to working capital loans. There are other tools that have been developed for industry specific operations.

The MSME market is highly fragmented and difficult to target. This is an area that is not without contenders that have sought to solve these problems. The key is solving the Go To Market strategy in order to be able to capture a sufficient market share of the MSMEs in order to make the economics work.

This is just scratching the surface of the category. Reach out to us to if you have a startup in this space or if you just want to discuss a little deeper.