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The evolution of VC in Indonesia: An eyewitness’ perspective

Published on July 12, 2021

Jakarta downtown skyline with high-rise buildings at sunset

Original Post by The e27


“So much has changed in the local VC ecosystem since I first started working on a fund in 2014. Here is my take on where it is going,”
Adrian Li, Co-Founder and Managing Partner of AC Ventures


The Indonesian Venture Capital landscape has evolved dramatically in the past ten years, creating enormous opportunities. In a podcast with IndoTekno’s Alan Hellawell, I shared 15 years of my experience in technology entrepreneurship and venture investment from China and Indonesia’s markets.

So much has changed in the Indonesian VC ecosystem since I first started working on a fund in 2014. From an investor’s perspective, among the most apparent challenges previously was finding entrepreneurial talent and significant downstream funding risk.

But back then we were pioneering and starting venture capital as an asset class in Indonesia along with several other players in the market.

However, entrepreneurs faced bigger challenges than just securing funding. The entire market for the online space, payment, and logistics infrastructure was still very nascent. Smartphone capabilities were also far from where they are now, and of course, without the penetration of Gojek, Grab, and Shopee, consumer confidence was much lower.

Just seven years on, things have entirely changed. The majority of consumers do not think twice about buying online given the prevalence of online shopping apps.

In addition, the hardware used in smartphones is far better, including all the supporting infrastructure for e-commerce, payments, and logistics.

When it comes to the talent ecosystem, we’ve also seen extensive recycling of talent, not just promising returnees; but also early team members who have graduated from Tokopedia, Gojek, Grab, Shopee and decided to start their own businesses. And this has fuelled the growth of new companies in the ecosystem.

Now, while Indonesia still is some ways away from receiving the capital attention that a market like India has received; nonetheless, we’ve seen multiple funds raised, successive funds, as well as top-tier global investors plugging this gap in both Series B and Series C and onwards.

So, the environment and ecosystem investing in venture businesses are far more mature than several years ago.

Focus on growth over monetisation

When looking at Indonesia, VC cites many superlatives about how significant Indonesia’s potential is as the fourth most populous country in the world.

However, the question that then arises is whether this large market can be monetised?

For me, it’s important to understand that while tech companies often take time to monetize, they are often disrupting traditional incumbents through their better and more efficient models. So, the potential revenue cake or monetisation potential can sometimes be seen in their conventional counterparts.

If you want to understand in the future how big that pie is and how big these technology companies can become, you can look at some of the traditional incumbents they are seeking to disrupt.

For example in the banking industry, BCA is one of the most valuable businesses in Indonesia and Southeast Asia. Meanwhile, if we look at the consumer category (FMCG), there are companies such as Indofood or Gudang Garam. These companies are among the largest publicly listed companies worth multibillion dollars.

And so we can see from the traditional counterparts, whether we’re tackling fintech or e-commerce, that it is possible to build companies of this size.

However, like China, and many other markets, at the early stages of many technology-enabled businesses, their focus is on adoption and growth instead of monetisation.

Most companies, certainly prior to Series C businesses, are much more focused on their growth trajectory than monetisation.

The most promising investment opportunities

One sector that we have a vast amount of confidence in is MSMEs or micro, small and medium enterprises. However, it’s pretty hard to drive meaningful subscription revenue from these small-medium enterprises on a SaaS (software-as-a-service) basis from what we’ve seen so far.

And because of their small size, they also have a low willingness to pay for software or tools that they may be using. So this is one area that’s yet to see some solid monetisation.

If we talk about how big this market is based on reports, there are over 63M MSMEs in Indonesia that employ over 97 percent of working adults.

Clearly, there is a massive market here as well as multiple ways of monetising in the future, in particular through the quality collection of data to provide financial services to the unbanked and underbanked.

Comparison between Indonesia and China

There are several similarities when talking about the Indonesian and Chinese markets. For example, China is a large, homogeneous market enabling massive scaling of technology-enabled businesses. This is the reason why we focus on Indonesia, not ASEAN or SEA.

We believe that founders in this region should start through building in the single largest market in SEA and not think regionally too early. Almost all of Indonesia’s billion-dollar tech companies focus exclusively on the Indonesian market.

The second thing, as we’ve seen in China, there’s the massive importance of localisation. Even though we’re identifying disruptive; proven disruptive business models that we see in markets, such as India or China; it’s not a simple copy-paste.

On the other hand, there are some clear differences. For example, in China, certain industries are highly regulated such as search and social media. Hence in China can see the emergence of companies such as Baidu and Tencent.

But in Indonesia, this is not possible because of the open market. So you’ve seen the dominance of Facebook, TikTok, and global players take dominant market share in these areas.

The second thing is the role of government. The Indonesian government has worked in a very inclusive and proactive manner to support the growth of the digital economy.

We can see this very clearly in terms of how the Indonesian government has approached regulation in fintech compared to how it happened in China.

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