DigitalxADB: Building Innovation Ecosystems in Developing Asia and the Pacific

Transcript

Linh Thai  00:10

Hello and welcome to this special Asian Development Bank talk show on startup ecosystems and innovation. I'm your host, Linh Thai. This topic is especially interesting to me, because I spent over 20 years in these ecosystems in the US and in Viet Nam. I've started a couple startups in the past. I currently advise young entrepreneurs through my EdTech venture at TVL Group. I'm an angel investor, and I'm also an advisor to Openspace Ventures. Today, we're going to explore startup ecosystems, and why they're so valuable for sustainable economic development. Then, we'll look at what the Asian Development Bank is doing, can do and will do to support their growth across Asia and the Pacific. Let's get started. I've invited five fascinating guests to chat with me today. The first of those is Stephan Kuester, Partner and Head of Ecosystem Consulting at the Think Tank Startup Genome. Stephan, we just had a great conversation off camera. Why are startups important? What's their role in economic development?

Stephan Kuester  01:16

Yeah, first of all, really the economic impacts. So you're creating with startups here. You're creating highly valuable, highly sophisticated employment opportunities for younger generations. The impact in terms of real job creation, that's a question every politician is asking us is fairly significant. You can see what's happening directly in tech startups. Particularly, as they start to scale. That's an important element. Secondly, the indirect effects. So, our studies show that for any job created in a startup, or in a scale up company, in a tech company, you create an average for additional jobs in the freelance economy, in the support economy, all the way to the coffee shops, etc., that are part of in the end, a tech cluster or tech community. Last but not least, sadly, cultural. Startups are fast-paced. They're allowed to try out ideas. Try to pivot very quickly if they don't work. So, it's a very different cultural dynamic but overall, again, contributes to the competitiveness of the city or region, even the state.

Linh Thai  02:14

Let's talk about when we have many startups in one area, when we have a startup ecosystem. Could you elaborate on the role of community and its impact on startups?

Stephan Kuester  02:24

Yeah, so let's have a look at the successful ecosystem model we've created as about 120 KPIs, eight dimensions. But some I personally find hugely interesting and many entrepreneurs helping other entrepreneurs, angel investors helping entrepreneurs, companies, executives, engineers, whoever they are from larger corporations, they're helping younger founders without any financial interest. That's the idea of giving back or paying it forward. We found a way to measure this concept, not only talking about it, but really to measure it and to say, what's the quality of the community that you locally have created? It's maybe from my perspective, one of the most important elements, particularly for younger ecosystems. If you're creating an ecosystem, you're fostering an ecosystem that the community and this country really want to strengthen their means of doing so. Statistically, it's interesting to know that all other factors equal. You have the same talent. You have the same funding. You have the same technology, knowledge, the same program as a new ecosystem. If you got a very well-functioning community, meaning local connectedness and our language and lingo is high, your startups will grow their revenue by a factor of 2.1x. Everything else is the same.

Linh Thai  03:33

That's interesting and it feels really natural to me. When I think about the value that these ecosystems bring to all parties involved from founders to corporates, I think people would naturally want to contribute to the growth of a startup ecosystem. However, with that said, in your research, what have you found that would stand in the way of this kind of a community?

Stephan Kuester  03:54

It's a fear of somebody running with my idea. I lose out instead of seeing the benefit of the other guy/the other girl might have a few ideas that are actually complementary to what I'm doing, it will make my model much more dialogue. It will make my model much more competitive.

Linh Thai  04:10

I think one of the roles the Asian Development Bank can play is to bring some of these lessons learned to very early-stage ecosystems that are still kind of figuring it all out. What other value can ADB bring as a connector of ecosystems?

Stephan Kuester  04:25

Global connectedness, also in very directly translates into a concept we would call global market reach that the ability to sell my product to a client, to a customer outside my domestic market in a different continent. Can I go as a European? Can I go to Asia? Can they go to North America? Can I successfully enter that market? What kind of connections do I need, what kind of knowledge, what kind of understanding in order to enter this market successfully? That's global connectedness and as a direct measure of global market reach, GMR. Again, the statistics are fascinating. So, an ecosystem that provides a high level of global connectivity, this exchange with entrepreneurs, investors abroad on average allows their startups to grow revenue by a factor of 2.5x in the global averages. And again, all other factors considered equal, same people, same business model, same funding, now began to choose the path community, shows what we can achieve. If you play the bigger we, sort of the us, and the ecosystem that really play this global fabric of sort of ecosystem connections and connectivity.

Linh Thai  05:31

But before you have global connectedness, young ecosystems have to lay the groundwork first, right? And this is especially challenging in developing markets. Is there a template of sorts that countries can follow to learn from those that came before them?

Stephan Kuester  05:45

You can characterize four phases of ecosystem development all the way from activation, a very young ecosystem that has certain characteristics and certain measures that would help us grow all the way to what we would call integration, when really attracts foreign talent, attracts foreign investment, etc. The New York's to loans and so forth. Important to know, as somebody who looks after an ecosystem, where do I stand compared to who are my peers in the same activation ecosystem, that I can measure, that I can compare myself. Secondly, to understand that there are very distinct policy initiatives, measures initiatives required to move from one phase to the next as the ecosystem starts growing and maturing. So, very young ecosystem activation, ecosystems that they need to look at their community at organic growth, there's no point in trying to attract foreign venture capitals, and Series B plus. It's not going to happen. But really to look, what do I have? What are my local strengths? What can I work with? What's an integrated ecosystem? It's all about global connectedness, exporting to the world and attracting the best and brightest of talent to read visa policies, the right tax incentives for late-stage investments, etc. But that's a completely different place. It's important to notice these differences. And to really have the right roadmap, the right strategy that's in tune with the maturity phase of ecosystem.

Linh Thai  07:03

Okay, I see. So, I assume one strategy would be clustering, right? So, let's say, my country has these specific natural resources and these specific traditional industries. So, it makes sense to focus my ecosystem in these areas.

Stephan Kuester  07:16

It's a highly debated concept. We can go back to Michael Porter in the industrial cluster strategy and places he put forward, highly debated and startup ecosystems. We, at Genome, and based on our research data we see, we believe clusters have a point. And why is that so? There's about the density of like-minded people with similar skill sets. So, we would look at an ecosystem and say, is this somebody in the industry even in traditional industry has a certain skill set in a particular industrials sub sector? So, if I want to build robotics, as an example, to have a manufacturing environment, we have people that have the mechanical skills, the engineering skills, even traditional engineering skills that would help me build a better robotics model? Secondly, would I have an industry environment where I can test my development, my robots or robotic solutions in a real world setting? So, all these factors play into why clusters seem highly effective. And then, as a policymaker, you obviously have to ask yourself, do I make an investment into an ecosystem overall? Or do I want to make a distinct investment into certain sub sectors? That's where the debate on typically starts and the different interest groups typically having have to argue and see, understand the different arguments. But overall, in conclusion, we would say, particularly for smaller environments, smaller ecosystems, the cluster strategy so far has proven conducive to developing faster, developing more competitive, more interesting models and being overall more successful.

Linh Thai  08:52

Alright, thanks, Stefan. Let's turn now to Thomas Abel, ADB's Chief of Digital Technology for Development. Thomas, we were just talking with the startup Genome, Stefan Caster. He believes that this development strategy for each startup ecosystem should be tailored market by market. Do you agree?

Thomas Abell  09:10

Well, this is the interesting thing about it, that there really isn't a template because the landscape changes so quickly. And you really have to bet on things that you can't be completely confident in. And that's one of the reasons why this is a very interesting area that the ground is shifting so quickly. Countries are always looking to upgrade their current strategies based on the latest and greatest thinking whether it's new fintech innovations or new cloud computing opportunities. There are many things that can really spur a startup ecosystem to a success. That's really dependent on the current situation in the country we're speaking of and dependent on the region that they're participating in. And, yeah, really have to try a lot of different things and when something doesn't work just kind of move on. Because there's no kind of guaranteed formula.

Linh Thai  10:08

That must make your work really challenging. I mean, it seems like ADB really has to take a differentiated approach in every country that you're working in. Are there any things that ADB can do at the regional level to support startup innovation?

Thomas Abell  10:21

Well, we are fairly new in this area, we've been doing knowledge products and workshops and TAs probably for the last couple of years. And we have seen success, you know, the most successful event we had, it was a week  workshop, where we had 15 member governments attend, where we all went to Korea, and looked at the successful startup ecosystem there. And I think the lesson there was that Korea has been working on this for 50 years or more in terms of trying to turn their economy into a technology leader. And they've tried everything. And if you look at anything that's happening there, there's probably some government support somewhere behind it. But it's a wide range and huge mix of different programs. And they have generated tremendous success. Now, they have the largest cell phones and semiconductor manufacturing, and they really have core technology leadership in many areas.

Linh Thai  11:26

I know that for Korea, as well as other countries such as Singapore, universities are vital components of those ecosystems. Is that a key takeaway for developing countries? Does there need to be a Nexus connecting entrepreneurship and higher education?

Thomas Abell  11:42

Well, universities are sort of the raw material for tech startups, because that's where you learn the latest and greatest technologies, certain programming techniques, or what's the latest cloud platform. And people coming out of the universities, naturally, want to start their career and build up their skills very rapidly and it's sort of a standard model for startups. And I think that's the most important, but we're also seeing a change where the digital economy is coming along, and enabling people to participate without having a university education. You have influencers. You have even just digital advertising, enabling small and medium enterprises that maybe are lower skilled to get into the digital economy.

Linh Thai  12:35

Okay, one final question. I understand there's no template for ecosystem development. But if you were to encourage governments to focus on one or two areas of policy, what would those be?

Thomas Abell  12:49

Sure, yeah, I think that the especially you're right in education, that people can learn skills, without going through a four-year university degree. And this is something countries can foster, when we've seen, for example, these coding boot camps. Many of them are quite successful in picking people with the right level of skills and in a very short time, turning them into a viable software programmer, software engineer. I think also just building the infrastructure, so that you can have universal internet connectivity really would help a lot. Because a lot of people, most of our countries in the region are just around 50%, internet penetration. And that is not enough for many people, they just don't have access, aren't able to understand that these opportunities are available.

Linh Thai  13:47

Thanks a lot, Thomas. Now, let's get a client perspective. I'm here with Theresa Mathawapan, Chief Strategy Officer with Thailand's National Innovation Agency. Teresa, can you tell us a little bit about the NIA?

Theresa Mathawapan  13:59

Thanks. So, the National Innovation Agency, it's a government agency, but in a way, it's a kind of semi-autonomous agency, the one that have our own kind of regulations. So, the role itself or the mission is to basically push forward mechanisms in order to build up innovation capabilities of the country. By doing that, then they have several mechanisms in order to support the country in terms of the organization's startups or SME or large conglomerates, or even researchers or innovators in a way, right? And we work a lot with the private sector. So, we have mechanism what we call like groom, grant and growth. Grooming, meaning that you're grooming innovators from university maybe or college students up until like corporates and business people. And granting is that we have innovation fund. We give fundings. It's a matching fund. In a way, in order to build up innovation, so we call Innovation Fund. It's not, it's a next step of R&D funding of the government. So, we work a lot with the private sector who owns that technology or research and development, and then they want to move forward that trying the market, doing the piloting, commercialization of it. Growth, groom, grant and growth. Growth, meaning that we try to business matching and help them in the next stage going up with that innovations and moved on to a bigger market or international market, and also matching it with investors. So, that's in the nutshell of the organization.

Linh Thai  15:45

As I understand it, you've been pretty successful with that approach. How have you seen the Thai startup ecosystem evolve over the years?

Theresa Mathawapan  15:52

I think that in the past five years, including what NIA has been doing. The graph is really shooting up in a way, and that comes together with different factors. I think that the government itself in NIA as a big part. They have this mandate, and they understand, we understand that startup, let's say, okay, startup is maybe the key. And it's part of the ecosystem that we need to build up. So even five years ago, we starting to education doing advocation, and knowledge distributions on this, and gathering people.

Linh Thai  16:32

Alright, let's talk about some of the challenges. What are some of the headaches that Thailand has faced in growing its ecosystem?

Theresa Mathawapan  16:39

First of all, government budget. I wouldn't say it's not at the point that we even, it's like, whatever we get them, okay, we use it at the optimal level. But human capital, or skilled labor, in a way, no skilled labor in the sense that people with technology background, and we need to build up those capability of our own people, even people in the region. And I think that's still a major issue like how new company startups cannot get resources in terms of human capitals. They don't know how to grow further or go internationally. And that's still, I think, an issue or challenge that we need to help.

Linh Thai  17:27

Looking at Thailand, a lot of the economic activity is concentrated in Bangkok. Is that true for the startup ecosystem as well?

Theresa Mathawapan  17:34

For the past years or two, we're starting to understand that, hey, Thailand is not only Bangkok. Thailand is everywhere. And even when we talk about region, it's not only one country. So, we need to look at things in the more broader perspective in order to build up the innovation capability. So, we need to go outside of Bangkok and that's how we starting to build up the nodes we call like innovation nodes. One is in, of course, major city like Chiang Mai, or Con Can, not Eastern, or even the South. We are one of the agencies that go to the like, kind of down South of Thailand. And so, with these, we will say regional hub. Then, we try to match all these mechanism and put it there and putting people there and working with the people in the region being the size power in the region, the infrastructures, the government or the municipalities, the people in the local area in order to help with social innovations or bringing in mechanism in order to support and build innovation-driven enterprise, or startups over there with their technology, with their problems in the areas.

Linh Thai  18:53

Thanks, Teresa. Now, let's turn to Dominic Mellor. I first met Dominic when he was leading an ecosystem building project, providing technical assistance in Teresa's region, the Greater Mekong subregion called the Mekong Business Initiative. And now he's principal investment specialist with ADB Ventures. Welcome, Dominic. From your work with an ADB operations, what do you think are some of ADBs more valuable ecosystem interventions across the region?

Dominic Mellor  19:23

So, that there are different approaches, and all of them are important and complimentary. So in terms of more ecosystem type of approaches, ADB has supported angel investor networks. So of course, governments in the region also have an important role to play in building the ecosystem. For example, providing resources to universities, business incubators to commercialize intellectual property, helping those great inventions to take them to market. And sometimes there might be policy priorities in terms of specific sectors specifically verticals that governments are interested in. So across the region, we've been providing business advisory support to governments in East Asia, Southeast Asia, Central Asia to help them develop their innovation ecosystem programs.

Linh Thai  20:14

Okay, let's talk about ADB Ventures. Where did the concept come from and what are the gaps you're trying to fill?

Dominic Mellor  20:20

Yeah, so the ADB Ventures falls under our private sector operations. And we're essentially the Venture Capital Arm of Asian Development Bank, and we provide direct equity investments to early-stage companies have got really great board solutions, solving the biggest development problems in the region. We currently have a focus primarily on addressing climate change and gender inequality. There are a lot of great technologies out there. Many of them have already gained traction in a more developed market ecosystem. But they've yet to penetrate and scale widely across our developing member countries. We are also interested in gender inequality. So specifically, we apply a gender investment lens to all activities. It's not just about the ownership. And the management, although we do consider that we want to make sure that we're gender neutral, essentially. But we also interested in natural market. So from a perspective of those do what products and solutions can actually reach women, females, particularly low income groups, women that are vulnerable to the adverse effects of climate, and so forth. Critically, we also are looking to crowd in private sector capital. So, we often co-invest. We do measure our success also by how much private capital we leverage. So, the majority of investments we do, were co-investing with other angel investors, sorry, just angel investors, family offices, impact funds, VCs and corporate. So, that's a really, really important indicator for us as well.

Linh Thai  22:03

Okay, so within those categories, what is ADB Ventures looking for in the companies you invest in?

Dominic Mellor  22:08

So, we believe that commercial returns and impact returns or impact size are very closely correlated, first of all, because if a business doesn't scale, and it can only have impact at a smaller local level, not to say it's a bad business, there are a lot of great businesses having very important impact at a local level. But as I mentioned earlier, we're trying to address regional problems, pain points that are not just relevant to Viet Nam or Cambodia, or China, but solutions that can be scaled across multiple geographies and multiple clients and therefore have large impact. So by definition, if they were to scale and have that impact.

Linh Thai  22:57

Okay, great, thanks, Dominic. ADB Ventures is a new and innovative development model. Let's dig a little bit deeper. It appears as if ADB support for startup ecosystems is growing and quickly evolving. Our last guest today is Cleo Kawawaki, who chairs ADB Digital Working Group. Cleo, could you tell me a little bit about your background and your experiences? And what has led you to the work you're doing today?

Cleo Kawawaki  23:22

So, I joined ADB 20 years ago. It's been quite a while. Well, before that I was an investment banker covering ADB. Within the 20 years, it's been a quiet. I mean, the incredible thing is that ADB gives you so many opportunities to do things that I didn't imagine when I entered. I mean, I was just a co-financing officers doing guarantees. And then, of course, with my background, I went into privatization because I had privatized the UK electricity companies before and then, becoming an energy specialist and an energy director, and now, the Deputy Director General of Southeast Asia and now on to the Central West. So many opportunities, so many durations of, and I guess the thing that I love most is that the ADB is willing to let you try things.

Linh Thai  24:22

Okay, you're in the Central West Regional Department. And we just spoke with Dominic Miller in private sector operations, and also Thomas Abell in Digital Technology for Development. Now, these experts in ecosystem building projects are spread all over the bank. So, what's the connective tissue? And how is ADB ensuring that the knowledge and lessons are shared between them?

Cleo Kawawaki  24:44

I think the connective tissue, as you say, is the client. What can we do for the client? What is best for the client? How can we support the client to do things better, faster, and well, frankly, cheaper? Why not try something that works somewhere else. I mean, we can lead the countries or we can support the countries to realize that there's different solutions. And then, for instance, we like doing pilots and piloting an idea, getting together, and then that pilot spreads to other countries.

Linh Thai  25:24

Okay, so is supporting startup ecosystems going to continue to be a growing area for ADB operations?

Cleo Kawawaki  25:31

Absolutely. If we look at my region, the Karak region, I mean, only 6% of the population have digital access. I mean, so, if we're thinking about the future of digitization, they have to have the infrastructure. They have the regulatory. They have to have the innovators that come in, and all of this, you know, can be facilitated by the government. I mean, we do infrastructure, of course, that's very easy. We can support government, the private sector can concentrate on what is profitable in the urban areas. And if the government wants to spread out to the rural areas to cut that digital divide, the rural urban divide, we can support through our financing, or through our guarantees, or through the various instruments. I mean, we have all the products under one roof, so we have the freedom, the government has the freedom to look at our one menu and say, like, oh, that's appropriate for this situation.

Linh Thai  26:42

How are ADB clients, in other words, government leaders and ADB member countries receiving your advice? Do you find yourself having to convince them that this is the right way to do things?

Cleo Kawawaki  26:53

So, we never take the position that this is the right way of doing things. Because we tried to do that you're trying to fit a round peg in a square hole. So we got, we always say like, it has to be individualized. It has to fit your country, your region. So, we have a lot of examples. And we have a lot of analysis to say, well, this is the analysis. This is the way that you see things. So what do you think? I mean, they all have their digital strategy. They've all been thinking about this. So we're not trying to drag anyone to one set of standards are saying, okay, look, there are so many options, and there are so many things that you can do. Come on, let me know what you want to do. Let me know what your objectives are. And let's get together, talk about it with your regional peers and see where there's a match of your objectives and where the best standards are, and to have it as a regional standard, or will for a country standard.

Linh Thai  28:00

Okay, so let's say you've supported a client with their digital agenda, how do governments sustain and maintain what you've helped them build?

Cleo Kawawaki  28:09

Well go to the next step. And that's where a fair taxation comes in for things that are going well. Well, you gave the tax break in the first place, then there has to be the next step of having the reliable revenues from that innovation or from the industry that you've created. So, things are so new. There are no tax laws at the moment. So, what ADB could do was to support developing a taxation system for something like e-commerce or other aspects of the digital revolution to make sure that the governments can keep on doing the work that's too risky for the private sector to go into.

Linh Thai  28:59

Okay, so how will you continue to support governments create pilots and to test new ideas?

Cleo Kawawaki  29:06

So for some of the pilots, it's really simple, you pass it over to the private sector, and they go on and make money. For some of the sectors, like regulations, like the infrastructure systems, that may not be so well lucrative or financially viable, economically viable, but not financially viable. Government has to keep the funding going. And that's where the importance of fair taxation comes in. So, we have to create a new regime. Because some of these areas, it's never been done before. So, we can support the governments to come up with a way of sustaining innovation by reliable domestic resource mobilization, and fair taxation. So, that's where I think that the sustainability has to go. Because you have to pay the fair share to continue with the innovation, to continue improving the infrastructure, the ecosystem that allows for more innovation. That's the responsibility of the government to come up with and implement and we're every bit as much committed to supporting that sustainability.

Linh Thai  30:31

Okay, great. Thanks, Cleo. This discussion has highlighted the need as well as the complexities involved in the growth and maintenance of a startup ecosystem. Building ecosystems for startups and innovation has clear economic development impact. It means valuable sophisticated employment opportunities for young talent. And for every tech startup job created. There are four additional jobs created elsewhere in the economy and that's great. But building a thriving innovation ecosystem is a long-term process. Korea, one of the leading examples in the region, has spent decades building their ecosystem. It takes patience. And most importantly, it requires a unique approach in each country and each region, a context aware approach that accounts for that country's competitive strengths, and unique business and policy environments. ADB clearly has a role to play in this arena. The bank can share best practices, provide technical assistance, finance, digital infrastructure, and much more. And the exact mix of those tools is something that needs to be identified through dialogue, partnerships, and an iterative approach that produces unique but well networked ecosystems. I want to thank my guests today, Stephan Kuester, Thomas Abell, Theresa Mathawaphan, Dominic Mellor and Cleo Kawawaki. If you've enjoyed this program, be sure to check out ADB's ongoing video series, Climatic. Each episode on Climatic will highlight a different high impact sector. You'll see me interview the innovators who are reducing Asia's carbon footprint, the entrepreneurs who are making the Asia-Pacific more resilient to climate change, and the corporate leaders who are partnering with startups for impact. Check us out on the Asian Development Bank's YouTube channel. I'm Linh Thai. And that's it for today's program. Keep growing. Keep innovating. Keep resilient.