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Nestled between Vietnam, Laos, and Thailand, Cambodia has been quite discreet so far in the seemingly insatiable Southeast Asian startup race. The small country of 17 million people has been carving its own path, at its own rhythm, and displays a resolute desire to gain a seat at the “startup nation” table.

The country boasts promising demographic macros, with their similarity to now buzzing startup hubs such as the Philippines and Indonesia warranting Cambodia a strong potential for startup activity. Growing internet connectivity, a very young population (a heritage of its tragic history), and a routine Southeast Asian yearly GDP growth of around 7% give the country the right cards in hand.

“By early 2022, the number of “internet users in Cambodia has increased to 13.44 million of the 17.06 million population, with 74.9 percent live in rural areas,” according to Simon Kemp, chief analyst at DataReportal, an online resource that explore evolving digital behaviors.” - Kiripost

The country has a plethora of internal sectors to improve and optimize through tech startups, such as its reputable high-quality and fertile agricultural sector. Other evident opportunities, stemming from the population’s increased use of smartphones, encompass the traditional fintech, e-commerce, and health tech trifecta.

The local startup scene, so far

It is difficult to pinpoint the exact commencement of the Cambodian startup ecosystem. Some sources cite the opening of Phnom Penh’s first co-working space in 2010 while others credit the business competition held by the National University of Management in 2006 for planting the seeds of the local startup scene.

That fact isn't necessarily of utmost importance. What’s more interesting to note is that the ecosystem and the desire to develop it have been consistently growing over the past couple of years, leading to the inception of a myriad of initiatives mirroring that goal. The number of co-working spaces and so-called ESOs (Entrepreneur Support Organizations) has consistently increased. As a result, the number of startups has also ballooned, which is not reflective of their quality but is reflective of a national yearning for such undertakings.

“Tech startups start emerging in Cambodia in the early 2010s. They have grown remarkably since then, increasing in number from less than 50 in 2013 to possibly as many as 300  by 2018. At the end of 2021, around 90 startups registered under the Cambodia National Programmes. According to another source, around 150 startups that completed impacts Hub Programmes are still active and in operation.” - Khmer Times

It is nearly impossible to find consolidated numbers of the amount raised by Cambodian startups, as the ecosystem’s data reporting is still weak. However, a couple of notable startups have made a splash, including Groupin, an entertainment/e-commerce startup that raised $5M in 2019, Azaylla, a supply-chain startup that raised a pre-Series A in 2022, and Pilltech, a health tech startup that raised $500K in 2022 as well. Recently, startups such as Tenbox and Sala have shown promising early-stage activity.

Other than a couple of fundraises such as the aforementioned ones, the ecosystem is still in its very early days. Most startups are still in the prototype phase, with many founders having no previous startup experience. In a clear marker of the ecosystem’s youth, international development organizations are heavily involved in many of the initiatives taking place. Compared to its neighbors, the Cambodian ecosystem is not on every investor’s lips yet.

“But to be honest, not many people talk about Cambodia because of our market, our media, and as an investor because my role is regional, we network. Mostly, I don't see a lot of my network from Singapore, from other countries talking a lot about Cambodia. They often refer to Indonesia because of the mid-market, and Vietnam, a new rising star.” - Khieu Suntheng, Investment Manager (Asia) of Incofin Investment Management

Investor and founder = chicken and egg

In a study published by the Cambodian government, 67% of surveyed founders stated that they lacked funds to develop their startups. The scarcity of startup funding in the ecosystem is evident, exemplified by that statement and my difficulty to find actual data about such funding.

The problem and the difficulty to kickstart the local angel/VC scene seem to be twofold, stemming from a traditional chicken and egg problem.

On one hand, founders claim that local investors aren’t familiar with startup investing, which implicates operating at a loss for many years to acquire market share. Founders complain that they have to not only pitch their idea but also a whole new way of investing to potential funders.

“One of the most common questions that I get whenever I meet investors, angel investors, is how do you operate the business without gaining profit. We are in tech, so somehow we still need time to close our traction. We still need to do things like growth, so there are a lot of things to do. We have a huge plan to scale our business into the regional market. There's still a gap on that. We hope there are programs that can support building the investor mindset, especially to the tech [startups].” - Khun Pisey, CEO and founder of Workingna

This claim makes sense and is a problem faced by other embryonic startup ecosystems, whereby money is available but local potential angels have a hard time wrapping their heads around the principles of startup investing. Unfortunately, there’s no shortcut to this but investor education.

This discussion wouldn’t be fair without having the investor's point of view. Indeed, a couple of regional and local VCs invest in Cambodia, including Uberis Capital and Insitor Partners. Often made up of investment professionals, these firms have no problem understanding the principles of startup investing. Rather, they claim that a large majority of Cambodian startups simply aren’t ready for investment.

The youth of the ecosystem inevitably means that a consequent number of local founders are first-time founders, and thus susceptible to making a number of mistakes. Investors cite multiple factors that make them reluctant to invest, including a lack of international ambition or lackluster financial and administrative management.

“Investors have claimed that the tech startups did not provide their complete financial reports, as well as lacking a proper accounting system and lacking knowledge with regards to financial statements. It should also be noted that investors were also reluctant to invest in startups that were unwilling to formally register themselves. In addition, startups that based their business model on a long sale cycle created inherent difficulties for investors to provide support and investments.” - Tech Startup Ecosystem in Cambodia 2022

The third actor in this story, filling the void for the lack of funding, are international aid organizations or so-called “development partners”. As I analyzed in this piece, their presence is now a constant in incipient startup ecosystems in emerging markets. Their presence can help fund the first incubator/co-working initiatives in the country, but their involvement in startup funding is questionable.

As their KPIs and underlying expertise are far removed from the hyper-growth, tech startup world, founders taking their funding can end up accumulating unnecessary burdens and reporting requirements. From my work on the Palestinian startup ecosystem, the proliferation of “mentorship” programs can end up having a mediocre impact, especially when the relevance of such mentors is dubious.

The need for knowledge and regulation

The Cambodian startup ecosystem is still trying to get the basic tenets of a healthy ecosystem right before taking off. On the founder as well as on the investor side, a substantial amount of knowledge production will be required to get all of the ecosystem actors to date. An interesting model to follow in that aspect is FiveOne Labs, an incubator located in Iraq that produces great content helping to demystify startup best practices in both English and Arabic.

This need for relevant startup knowledge will also complement one of the ecosystem’s other deficiencies: human capital. Indeed, around 40% of surveyed Cambodian startups say they struggle to find team members with adequate skills to take their startups to the next level. This requires an effort from both ESOs and superior education institutions to help local talent upskill. This will also simply improve as a function of time, as more and more founders raise money, gain experience, and share that experience.

In a well-mediatized attempt to acquire such knowledge, prominent members of the Cambodian ecosystem recently traveled to Israel to meet up with Israeli local startup actors. Interviewed on the Rising Giants podcast, one of the Cambodian delegation members stated that what he thought the Cambodian government could take away from this trip was a change of mindset, especially relating to failure.

“In Israel, a government official told me that the startup grant is given to 50% of applicants but that 95% of the companies that receive it end up failing. I asked him if that wasn’t a net waste of government money, but he said that a company that fails means one more experienced founder added to the ecosystem’s human capital pool and is thus a long-term win.” - Paraphrased from Chy Sila’s podcast

Talking about the government, the Cambodian one has signaled a clear desire to develop the local startup scene through initiatives such as the Startup Cambodia National Program, designed to act as a meeting point for startups and entrepreneurs in the ecosystem. The launch of the Cambodia Digital Economy and Society Framework seems to be the umbrella initiative for new business-related legislation, such as intellectual property rights, R&D support, and regulatory sandboxes.

Despite the displayed enthusiasm, a lot remains to be done to get the country’s regulations up to standard. Some of the ecosystem’s investors have recognized that the high cost and complexity of regulatory compliance were still a potent impediment to the country's startups.

Conclusion

Lagging behind its regional counterparts, the Cambodian startup scene seems determined to catch up. The ecosystem is experiencing normal growing pains, as both investors and founders try to decipher a common language and best practices to work together.

The country’s demographics are favorable, but any relevant startup success will imply a regional and/or international expansion as a result of the small market size. It’s encouraging to see ecosystem actors proactively seeking advice and guidance from ecosystems that have done just that.

The ecosystem still hasn’t experienced any breakthrough exits/success stories, depriving it of the virtuous “mafia effect” that kickstarted ecosystems such as Colombia or Mexico. With founder persistence, regulatory support, and investor appetite, that time should come.

Bonus: For a macro overview of the Cambodian ecosystem, its main actors, and its most relevant trends, feel free to check out this memo created by the fantastic Rising Giants podcast.

The Realistic Optimist provides weekly, in-depth analyses of the most relevant stories in our now-globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with your colleagues :)

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