Source: TechInAsia

In Southeast Asia, we’ve reached peak consumer tech.

The most valuable companies in the region all cater exclusively to consumers: Go-Jek offers Indonesian users an entire ecosystem of goods and services; Grab is fast becoming the ubiquitous transportation app for Southeast Asian consumers; consumer internet company Sea (formerly Garena) rocketed to success due to its exclusive distribution rights to League of Legends; Indonesia’s Tokopedia and Singapore’s Carousell are leading peer-to-peer marketplaces, while Reebonz found its own niche in the exchange of luxury goods.

Consumer tech reserves the lion’s share of funding in Southeast Asia, and company formation in the vertical continues unabated.

Enter deep tech

If consumer tech startups are run by nerds, then deep tech startups are run by nerds on steroids. The clearest difference between the two is that most consumer tech companies rely on technology that is commonly available. Deep tech startups, on the other hand, are built around differentiated, unique intellectual property that is either protected or very difficult to reproduce. A startup that uses a public voice communication API is a technology startup; a startup that relies on proprietary manufacturing processes to produce a network of space-faring satellites is considered deep tech.

Why does this matter?

Well, the problem with commonly available technology is that… it’s commonly available. Companies reliant on this technology can continue to grow and innovate, but only within the boundaries of existing technology. Deep tech companies, on the other hand, break those boundaries through the creation and focus on new products or services. At its most extreme, multiple consumer tech companies wind up providing the exact same product or service and differentiating or innovating only on the fringes (customer use cases, a particular product-market fit, or even pricing).

Take, for example, sharing economy startups. Since 2013, the biggest—and most profitable—disruption was in the sharing economy. This is especially true of Southeast Asia, which saw a meteoric rise in sharing startups in the last three to four years—from shared houses, vehicles, trips, bikes, to even pet sitters.

Sharing economies disintermediate the layers between buyers and sellers, creating a liquid marketplace capable of securing and facilitating all possible transactions. The technology is not the key differentiator, the liquidity of the marketplace is.

Many investors have turned to investing in deep tech, hoping for the next big thing.

However, once a vertical like the sharing economy reaches a critical mass of saturation, as Uber head of rider growth Andrew Chen explains, “[it] gets much, much harder to grow new products or pivot existing ones into new markets.” This is true of all consumer tech, which often targets verticals most vulnerable to intense competition and limitless pools of capital.

As such, many investors have turned to investing in deep tech, hoping for the next big thing. A report by CBInsights shows that the new capital invested into deep (or “frontier”) tech spiked from US$144 million in Q3 2014 to US$671 million the following quarter, before climbing to an even higher US$1.3 billion the quarter after that. While we haven’t seen a dramatic shift in Southeast Asia just yet, the highly publicized launch of Europe’s biggest deep tech incubator, Entrepreneur First, in Singapore may be the first step toward a funding reorientation in Southeast Asia.

Even the Singapore government has seen the writing on the wall and has been spearheading a dramatic push into deep tech. In 2016, the newly launched SGInnovate revealed a budget of US$3.3 billion, mandated to support transformative technologies in health, financial services, and energy. This is an unapologetically deep tech focus that puts it at odds with the outsized number of consumer-friendly startups populating the region.

Will this harm consumer tech?

Hardly.

Consumer tech is here to stay. Southeast Asia has just barely scratched the surface of its potential. According to We Are Social, there are 339 million internet users, but that only represents just over half of the region’s 644 million people. Active social media users and mobile users stand at 305 million and 273 million, respectively, but those too represent less than half of the total population. And yet in spite of this, there are only about 24 million online shoppers, representing a total market value of US$5.6 billion. That’s a sizable market now, but more importantly, that’s an enormous potential market.

In short, more people are still coming online, shoppers are spending more online, and consumers are looking for services and products that cater to their rapidly maturing tastes.

Consumer tech and investment are—for the foreseeable future—here to stay.

More interestingly, consumer startups are innovating and becoming more like deep tech companies complete with proprietary intellectual property, irreproducible technologies, and specially guarded patents.

At Golden Gate Ventures, we’re increasingly seeing relatively simple consumer tech offerings with radically advanced technology under the hood. That’s like boarding a taxi only to discover that it’s a self-driving Tesla.

What are examples of this?

The financial sector is one vertical that’s seeing this disruption. Even major banks are looking up and taking notice. Alternative lending startups like Kredivo and Funding Societies are leveraging deep tech within their crowdfunding vehicles and peer-to-peer lending offerings, creating predictive credit scoring models.

Even industries as consumer-oriented as elderly care has dramatically evolved. We recently made an investment into elderly care platform Homage, which matches elderly patients with licensed practitioners. Matching patients to relevant caregivers involves calculating several permutations and possible matches to arrive at an optimal choice. The company processes 40 unique coefficients, aggregate and quantify demographic and professional information, and then relies on a patent-pending algorithm to parse through different data points to determine the best possible combination.

Another example is NuTonomy, the only self-driving startup based in Southeast Asia. Founded by Karl Iagnemma and Emilio Frazzoli, it secured partnerships with transportation startup Lyft, Jaguar Land Rover, and Peugeot. The technology behind NuTonomy cannot be easily dismissed even when compared to more notable self-driving companies like Google and Waymo. Despite having raised a relatively humble US$20 million in funding, the company is distinct in the commercialization and adoption of real-world self-driving technologies.

These kinds of companies—startups that bridge the gap between accessible consumer tech and cutting-edge deep tech—are fascinating. They are simple to understand from the outside, but deeply complex underneath. We have seen this before and expect this trend to continue well into the future. Southeast Asia benefits from sitting at the intersection of two important and significant trends: the rapid digitalization of its consumers and the irrepressible spread of deep technologies across the region, both in terms of expertise and knowledge dissemination.

We have already seen that consumer tech and deep tech need not be mutually exclusive. If anything, we expect these two seemingly divergent strains to converge, and we’re excited to see what amazing new technologies Southeast Asia is capable of producing.