April 21, 2014, 10:59 AM PDT
By Joe Medved, Partner, SoftBank Capital
When it comes to global expansion for U.S.-based companies, Europe often jumps out as a natural choice. Europe’s business and social cultures, as well as its tech-savvy consumer population, are relatively familiar to companies accustomed to the North American market. However, that doesn’t mean it should remain your first choice.
With its advanced mobile infrastructure, Asia ranks as one of the leading mobile markets, especially for companies that have a strong foundation in advertising, gaming and commerce. Even though English might not be the native language, a strong prevalence of English in many Asian countries means that many software companies don’t have to localize their products immediately when bringing them to market.
At the same time, even proven businesses can struggle in Asia, since their markets operate differently than the U.S., and cultural differences abound in how products are used and how business gets done.
What you will find in Asia are quality partners and strong distribution potential — offering an exciting mix of opportunities for later-stage startups, despite what many believe are insurmountable hurdles.
If the growth of your business has led you to consider Asia, here are a few different reasons why expansion there may be the next logical step:
Asia’s high-spending population has grown consistently over the past decade
Consumers in Asian markets tend to lead the world in technology and mobile spending. According to a December report from App Annie, Japan led the world in mobile app store revenue in 2013 — surpassing the U.S. for the first time by almost 10 percent. For comparison, the U.K., which was fourth in monthly app revenue (behind Japan, the U.S. and South Korea), had less than a fifth of Japan’s monthly revenue.
China is also seeing explosive consumer growth, and is expected to continue as a force in the global app economy for years to come. Former Android product manager Hugo Barra highlighted the growth of the Chinese technology consumer market during December’s LeWeb Conference in Paris
. As he pointed out, Chinese disposable income has tripled since 2004, and China’s Internet penetration rate is up 50 percent since 2009. What this means is that hundreds of millions of connected individuals now have the income to spend on innovative technology products and services.
Markets full of eager partners
Despite its wired and fertile market, successful expansion in Asia requires the right partners to break in — Asia’s cultural and regulatory barriers can be daunting. Many Asian firms are exploring international partnerships to bring technology innovations to their countries, and unlike in Europe, you don’t have to deal with a myriad of different languages. This makes for an attractive opportunity, particularly in the advertising world, where budgets are often controlled on a country-by-country basis.
Notable examples of successful Asian partnerships include Yahoo Japan, which led an investment in BrightTag and also participated in the SoftBank Capital-led Series D investment in Criteo. Meanwhile, Alibaba aligned itself with Quixey and ShopRunner, and Tencent provided numerous capital resources, including a covert investment in startup darling Snapchat. (Full disclosure: Both Yahoo Japan and Alibaba have invested in SoftBank Capital funds.)
Many Asian firms also see partnerships with U.S. startups as a way to gain a stronger foothold in North America. If a firm has a large U.S. audience, it can be just as enticing to potential partners in Asia, and the possibilities to reap mutual benefits from an expanded relationship are real and commonplace.
What types of startups should consider Asia expansion now?
Any way you slice it, expansion overseas is challenging and involves many unique considerations. For example, Japan has widespread use of NFC for small payments (under $30) for such things as trains, convenience-store items and fast foods. As a result, credit cards are not used for these purchases as often as they are in the U.S., so product pricing and the addressable market need to be factored in accordingly.
Other businesses are well positioned to enjoy the tremendous potential of Asian markets. Based on our experience with investment in that region, here are several categories most likely to see long-term growth:
Big exits and bigger valuations
- Hardware/devices: The recent launch of the iPhone on China Mobile made headlines, but mobile consumers in Asia are also adopting innovative American hardware products beyond Apple’s beloved smartphone. We’ve seen American hardware products from companies like Fitbit, Pogoplug and Orbotix (creators of the Sphero robotic ball) distributed through mobile carrier stores in Japan. We can expect to see wearable technologies proliferate as the market matures, leading to increasing partnerships in manufacturing, distribution and development. Japan has a rich history of hardware development, and its consumer base has maintained a great affinity for cutting-edge devices. Tokyo’s Akihabara district has one of the highest concentrations of electronics stores in the world. Ushered in by the iPhone a few years ago, more and more American products are gaining distribution on Akihabara’s shelves.
- Ad tech: As the number of Internet users in Asia continues to soar, local firms are eager to maximize their online advertising reach. Paris-based Criteo has already undergone massive Asian expansion, driven in large part by its partnership with Yahoo Japan. In its most recent earnings announcement, Criteo cited a 183 percent growth rate in net revenue for its Asian business for 2013, adjusted for currency fluctuations. The region now accounts for 19 percent of the company’s global revenue. As Asia’s base of Internet users expands rapidly, ad tech should continue to explode in Asia in 2014 and beyond.
- Commerce: Several Asian commerce companies, including Alibaba, have become global players already, but there is still plenty of room for Western firms to establish a major presence. We see more specialized e-commerce businesses (rather than those trying to compete with established giants) as having the most potential for growth. These companies benefit from working with local partners, much like fashion flash-sales site Gilt, which entered into a successful joint venture with SoftBank to grow its market position in Japan. Another example is Japanese e-commerce giant Rakuten, which led a $100 million investment round in Pinterest in 2012, based on Pinterest’s e-commerce potential. They also recently announced their acquisition of Las Vegas company Viber for $900 million.
- Mobile/social: Along with Viber, homegrown social/messaging apps like Line, WeChat and KakaoTalk are taking the place of Western social behemoths like Facebook and Twitter in Asia. As Facebook loses its appeal among younger demographics, there is a growing opportunity for other social media companies to nip at its heels. This follows a reverse-adoption strategy of many other popular U.S. consumer apps, including Foursquare, Instagram, Soundtracking and most recently Frontback, which attracted a significant portion of their user base in Japan before focusing on localization. I think we should expect to see continued consolidation among some of the top players in the messaging space over the next 12 months as competition heats up to acquire new users.
While many European companies have struggled to remain relevant, the number of new $100 million and billion-dollar tech businesses in Asia has increased steadily over the past few years.
In January, Chinese online retail giant JD.com announced plans for a $1.5 billion IPO in the U.S. this year, and China itself is set for its biggest IPO year ever, after the recent lifting of a 13-month moratorium on Chinese IPOs.
IPOs in Japan have also reached their highest number since 2007: 60 companies went public in 2013, with the vast majority trading above their opening prices. Asia’s influence on U.S. startups continues to grow in significance, as shown by business-collaboration company Box and its recent $100 million Series E round and $2 billion valuation, led by strategic Japanese investors.
With increasing collaboration between U.S. startups and Asian investors, we should continue to see a spike in M&A activity, as well as companies on track for IPOs.
While Asia expansion is not suited for every startup, it needs to be given serious consideration. Yes, cultural barriers exist — but for the right company, with the right partners, heading to Asia can translate into huge dividends.
Joe Medved is a partner at SoftBank Capital, a venture group affiliated with Japan’s SoftBank Corp., which acquired Sprint in 2013, and remains one of the largest and most profitable mobile carriers in the world. SoftBank Corp. is also a large shareholder in Alibaba and Yahoo Japan.