Leadership Speaker Series: How startups in Indonesia can navigate the impact of COVID-19

Published on June 16, 2020

Weathering the Storm: How startups in Indonesia can navigate the impact of COVID-19, featuring Andre Soelistyo (Co-CEO of GoJek)

AC Ventures (“ACV”) and SMDV have come together to launch a Leadership Speaker Series for portfolio Founders & CEOs, featuring presentations and Q&A with top industry leaders, successful entrepreneurs, government representatives and thought leaders in Indonesia’s startup and venture capital ecosystem.

On April 6th, our first Leadership Speaker Series event featured presentations

by Andre Soelistyo, Co-CEO of GoJek and Pandu Sjahrir, Founding Partner at ACV, discussing global and local macroeconomic expectations of COVID-19, as well as providing practical advice on how startups should respond to the impact.

Here are our key takeaways:

COVID-19 is a global humanitarian crisis; and one that will likely lead to an economic crisis in Indonesia. Although Indonesia has previously experienced the 1998 Asian Crisis and the 2008 Financial Crisis, this current crisis is providing early indicators that the impact could be far worse. Indonesian government estimates a growth rate of 2.4% for Indonesia GDP in 2020, down from 5.1% initially forecasted by World Bank. Under a worst-case scenario, Indonesia’s GDP could decrease by as much as 0.4% in 2020 from 2019. In line with this, the IHSG (Jakarta Composite Index) dropped by 30% between December 2019 and March 2020, which became the lowest level since 2015. The value of the Rupiah has depreciated dramatically by 18% since January 2020, and is reported as Asia’s worst performing currency.

Source: Press Conference Langkah Penguatan Perlindungan Sosial dan Stimulus Ekonomi Menghadapi Dampak COVID-19, World Bank, Badan Pusat Statistik, Yahoo Finance, internal estimates

We can already see the effects of the pandemic locally. Travel activity (defined as airline and hotel bookings) has declined drastically, with an estimated 90% reduction for the month of March. Bali, by example, saw close to 0% occupancy rate for hotels in this month. Similarly, service and leisure activities have reduced by approximately 80%, with several hospitality companies halting operations temporarily. Sports and Media businesses have also experienced slow operations, as content businesses are stunted due to inability to go out and create content. In the financial sector, OJK predicts that non-performing loans (NPL) can reach as high as 17% among banks. Taxi services are also estimated to experience an approximate 70% decline, due to employees working from home and practicing social distancing.

Most sectors are negatively impacted, with some performing worse than others. Taking the US market to understand this better, sectors such as fashion, sports, media, electronics, travel and more are seeing declines of at least 25-50% in stock market performance. Although sectors such as SaaS, gaming, eCommerce and streaming are performing better than the market (Nasdaq dropped by roughly 25%), these sectors are still experiencing decreasing figures in performance. Out of all the sectors, healthcare is the only one growing by roughly 13%.

Source: Dealroom.co, Google Finance
1) Note: Nasdaq and S&P 500 dropped roughly 25% in the same period.

In order to mitigate the impact of COVID-19, governments must respond with a robust blueprint. An effective response from the government will have to address three key areas: Social Security & Stability, Political Stability and Economic Stability. On the social facet, several markets have already created provisions for cash pay- outs, food security, medical insurance and credit lines to struggling SMEs. From a political perspective, the safety of the population is the priority, and thus necessary measures must be taken to contain the pandemic. Economically, central banks have been cutting interest rates and creating stimulus packages to mitigate the fall in economic activity, currency markets are experiencing fluctuating exchange rates, and labour markets are experiencing rising unemployment.

The Indonesian government has shown a strong response for economic recovery. Indonesia’s government has set aside IDR 150T (~US$9B) for COVID-19 impact mitigation, with 37% of the funds set aside for national economic recovery. Although further details of use of funds are still under discussion, the government has demonstrated a strong intention to focus financial support to SMEs and corporate enterprises.

Source: Goldman Sachs, Press Conference Langkah Penguatan Perlindungan Sosial dan Stimulus Ekonomi Menghadapi Dampak COVID-19

The major impacts of COVID-19 will initiate under two contexts, the first being social distancing and the second being a possible lockdown. Businesses have to comprehend that social distancing will significantly decrease the amount of demand for, and consumption of, offline goods and services. In Indonesia particularly, there is also an associated disruption to social and cultural norms due to a lack of freedom of movement. In the more advanced scenario of a lockdown, although not currently under implementation in Indonesia, it would result in compulsory closure of all non-essential businesses, resulting in zero revenue potentially for non-essential products and services which can potentially lead to defaults on service contracts and loan facilities. The logistics sector will also be heavily impacted, as existing logistics channels are put under immense strain and pressure to fulfil online consumption demand, while border closures may lead to cross-regional supply chain disruptions.

In responding to the impact of COVID-19, start-ups should focus on preserving cash, as those who survive will come out winning. The “Black Swan” crisis could last as long as 12 months, therefore in order to survive this period, startups should ensure their business plan can allow them to operate for at least the next 12 months, although 24 months would be ideal. If the market recovers sooner and opportunities arise earlier than forecasted, startups can reassess their business plans to align to the improved economic climate. Additionally, due to currency fluctuations, it is essential to effectively understand how changes in the Rupiah will impact your business, and to factor for this in to your COVID-19 adjusted forecasts. The key is to focus on stability – this is not the time to spend dollars on chasing growth. Founders need to place emphasis on business continuity and earnings, versus growth and market-share acquisition. In order to effectively implement the aforementioned, the Starup Survival Kit below provides more guidance:

Do not underestimate the pandemic – prepare your business response plan and SOPs accordingly. The existing infrastructure of some startups may not support a rapid transition to a work from home (“WFH”) operation, however, creating robust SOPs to support employees while they begin to work remotely is essential to ensuring the safety of all employees. To support this transition, startups should create and implement SOPs to address frequent digital-conference catchups, how to working from home effectively, how to respond if an employee is experiencing potential high-risk health symptoms, how to manage the mental health of employees and more. All response procedures are essential to providing employees with comfort and guidance, as well as reminding them that despite the separation, they shouldn’t feel that they are alone.

You are not alone – lean on your support network during this time. Today, everyone is feeling the impact of COVID-19 in full-force, in one way or another. As entrepreneurs and leaders, we understand the immense pressure that is on your shoulders during this difficult time. The key is to utilise your stakeholders around you as support channels – especially your investors. Entrepreneurs should feel that they can rely on their investors to give you guidance on policy, financial planning, and other forms of support.

You still can make a difference. As a citizen of this country and member of Indonesia’s startup ecosystem, this is a defining moment. Most of us have the opportunity to help others, outside of support through the donations of time and money. We can help empower the partners we work with, such as SMEs or freelance workers, to provide them with better terms of payment, referrals, and more. One example is the GoJek Partner Support Fund, established to support their drivers, merchants and other partners who rely on their platform for their daily income. During difficult times such as this, each individual can play a role in shining some light on those around them. Indonesians strongly believe in gotong royong (mutual cooperation), so let’s continue to stay enthusiastic, support each other and work together, both in the good and bad times. #SelaluSemangat

Here are some questions from our audience to our speakers and Q&A participants:

1. Besides efficiency on the human capital side, which area of costs do you believe we should focus on to survive during this tough time?

The toughest call to make is managing human capital, as people’s livelihoods rely on their jobs. Other costs that could be cut are marketing subsidies, and discount promotions. This idea of “buying your growth” is not applicable during a time like this. Only invest in activities that have a clear ROI.

To put this into practice, take a look through your OPEX, line by line and assess the importance of other line items such as infrastructure/IT, marketing, and general & administrative costs. Some examples may include asking your teams if they are using the subscription IT programs to the same extent as before? Can you redirect amounts previously allocated to travel budgets? Are there ways you can reduce or postpone rental payments? Every small saving is important. The key is to extend runway to 12-24 months.

2. If we have less than 12 months runway, what funding options are you seeing as available to us in market right now?

Depending on the size of the business, you can work with existing shareholders to explore bridge round financing. Another option is to explore the possibility of M&A with your industry peers – this will create a more compelling story for future fundraising, as investors see the value from market consolidation and synergies.

If you do intend to raise a bridge round, it is essential to have a plan on where those funds will take you. For example, do you see that this round will take you closer to a merger? Do you have clarity on what the business will look like 18 months from now? Having a concrete plan on your use of funds is essential to giving investors comfort in investing during these uncertain times.

3. What are the practices GoJek has put in place to support the mental health of your employees?

Although there is no silver bullet to guaranteeing the positive mental health of GoJek’s employees in all 6 countries, the company does their part in providing on- going support to employees through team participation in virtual games, online yoga and meditation, virtual exercises and more. On certain days, teams gather together over Zoom conferencing to enjoy virtual drinks and socialize with each other.

GoJek also provides professional consultation services for employees who feel anxiety and other mental health challenges. The HR team continue to create robust SOPs and best practices to support employees during these challenging times.

4. There have been couple of short-term business opportunities that emerged for us at this time that will help us make a quick buck, what do you think about this?

If you are leveraging on existing capabilities and resources to create something impactful and generate short-term revenue, then it might be an interesting opportunity. However, if you need to invest to generate that short-term growth, it may not be the most suitable strategy. Every resource you have right now is very precious, thus, it is imperative to think about maximizing ROI before making investment decisions.

5. Other than cash, what other forms of support can we ask for from our investors to help us in this situation?

Your investors are your business partners – they are the best channels of support. Their role is to provide advice, consolidate information and support you during this crisis. Investors tend to also have more experience in managing unprecedented situations like this, so utilise their expertise, network and resources, and actively reach out for support and guidance.

6. How would companies operate in extreme conditions such as a lockdown situation?

Indonesia is unique from developed markets, in the sense that people depend on economic activity to sustain their livelihoods. There is a large proportion of the population that live week-by-week or day-to-day, meaning that they do not have reserves of cash to depend on if they are not earning an income. The government understands this, which is why they have not imposed a strict lock-down like in other markets.

At the moment, Indonesia is in Phase 1, where we’ve seen social gatherings and non-essential activities temporarily cease, but people still can commute. If we get to Phase 2, we can expect that borders will shut, and public transportation will be unavailable. It is essential to assess the impact of your business in both scenarios, and once again, ensure you have significant runway in case we get to a lockdown or Phase 2.

Here are some additional questions from our audience that we unfortunately didn’t have time to respond to during the session however we’d like to share our responses with you now:

1. Do you think it is necessary for your company to recreate a new budget from all departments that suits the situation, although we don’t really know how long this will last?

An exercise that is helpful is to do a zero-budget approach and start adding all the essential expenses until you think you believe you can operate the business with what you have. Once again, carry the assumption that the current situation will last between 12-18 months.

2. With the current condition, do you think fundraising is not an option as well? Should businesses should postpone their fundraising series?

It depends on the current stage you are in. If you have an adequate runway but have the opportunity to fundraise and extend that runway, then that is a favourable outcome. If your current runway is insufficient, feel free to discuss your situation with your shareholders so they can advise you and provide meaningful support.

3. So far, online shopping in the beauty sector seems to remain strong. However, with the possibility of a lockdown, our fulfilment and shipping process will be negatively impacted. How likely is Indonesia going to go on lockdown in the next 2-3 months?

There is a possibility of a lockdown, and it could happen in the next 2-3 months. Our guess for this is there’s a 50% chance a lockdown could take place. However, regardless of whether a lockdown is imposed or not, our advice is to prepare for it and ensure you have alternative plans to mitigate the impact.

4. How do you balance business continuity of company vs. impact of cutting cost or reducing staff? What are the difficult decisions you have to make?

One of the biggest challenges you will face is ensuring business continuity while managing the morale of your team. It’s essential to maintain clarity and purpose behind the business and understanding your end goal. Communicate clearly and effectively to your stakeholders, and they can be your best mentor and champion of your actions.

Here are the poll results from a sample of 43 Founders/CEOs from AC Ventures, Agaeti Venture Capital, Convergence Ventures and SMDV’s portfolio:

1. By how much has your revenue gone down?

2. By how much do you think business will go down?

3. By how much have you reduced your overall burn rate?

4. By how much have you reduced your headcount for your BCP (business contingency plan)?

5. How much pay cut have you given for your C-Level members?

6. When do you think business will be normalised?

7. When do you think the market will be conductive again for fundraising?

8. What is your view on Indonesia’s government stimulus package?