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AC Ventures’ Adrian Li says Indonesia’s the most compelling market to invest in ASEAN [Q&A]

Original post by TechNode Global

Some say this is the best time for the startup ecosystem in Southeast Asia, especially the one in Indonesia, the largest economy in the region with the largest population and a rising middle class.

Indonesia’s sheer market size and potential make it the most compelling single market to invest in, in ASEAN, according to Jakarta-based AC Ventures Founder and Managing Partner Adrian Li.

“Being the largest in ASEAN and among the least developed, Indonesia’s market continues to represent the most compelling investment opportunity in Southeast Asia. This is proven with the growth of the successful local unicorn startups…such as GoTo, Traveloka, Bukalapak, Akulaku, etc… and the reliance on Indonesia by leading regional technology companies such as SEA Ltd, Grab, and Lazada,” he told TechNode Global in an interview.

Last month, AC Ventures had closed its Fund III with over $205 million in committed capital, bringing the firm’s total asset under management to over $380 million across its funds. The fund was oversubscribed and participated by renowned global and regional institutional investors, including the World Bank’s International Finance Corporation and Disrupt AD, Abu Dhabi Developmental Holdings venture platform.

Within months, between September and the end of last year, AC Ventures, together with two other Indonesia-focused venture capital firms – Intudo Ventures and Alpha JWC Ventures – had raised a total of $753 million for their respective Fund III.

These fundraisings come at a time when global and local investors are pouring funds into Indonesia in a bid to participate in the burgeoning startup ecosystem which saw the emergence of seven tech unicorns in 2021 alone.

The overall internet economy in Indonesia will likely reach $146 billion in value in 2025, growing at 20 percent compound annual growth rate, according to the report published by Google, Temasek, Bain & Co.

With more money chasing after startups, likely to boost their valuations, Li also shared his views on the matter.

“Given this enormous potential and that Indonesian winners are best positioned to be regional leaders at times, future growth is priced earlier than [other] companies in Indonesia, hence the higher valuation,” he said. “However, this accumulation of capital in the hands of the best team often reinforces a virtuous cycle, enabling the company to build additional value for its stakeholders quickly.”

With the COVID-19 pandemic accelerated digital consumption, drawing new internet users, and increasing consumer frequency, Li also noticed higher technology adoption to improve greater efficiency and access.

“In a broad sense, we will see digital technology ‘eat’ into every business industry in Indonesia as technology-enabled businesses enable greater efficiency and access. Hence there will continue to be opportunities within eCommerce, Fintech, MSMEs, and industries ‘disruptable’ through digital media (Health, Education, Entertainment),” he explained.

In the interview, Li also shared AC Ventures’ exit strategy, his views on the opportunities and trends he sees in Indonesia. He also gave suggestions on how the vibrant Indonesian startup ecosystem could further improve.

AC Ventures was formed in 2019 as a merger between two leading venture capital funds in Indonesia – Agaeti Venture Capital and Convergence Ventures. AC Ventures partners have been investing in the early-stage Indonesian technology ecosystem since 2014 and have a portfolio of over 100 companies across its funds, making it one of the largest Indonesia-focused early-stage venture capital firms.

Among its early investments, two companies, Indonesia-based payment startup Xendit and Malaysia-headquartered used car platform Carsome, have already emerged as unicorns. Its other portfolio companies include e-commerce firm Ula, logistics and warehouse aggregator Shipper, fisheries commerce startup Aruna, FinTech firm Buku Warung, among others.

Below is the edited excerpt of the interview:

As more foreign funds bet on Indonesia, has such a trend affected Indonesian startups’ valuation? Is it more competitive in deal sourcing? How will AC Ventures differentiate itself from others to ensure its competitiveness? What’s AC Ventures’ strength and competitive advantage?

At AC Ventures, we work closely with our founders and support them with research-driven knowledge, action-oriented portfolio support, a hands-on value creation team as well as our broad network and resources.

As entrepreneurs ourselves, having built several businesses in emerging markets, we understand the needs of founders and invest our expertise and resources to help grow our portfolio companies.

Our Value Creation Team, in particular, is an example of how we support the entrepreneurs in our portfolio. This team, comprised of experts with vast industry experience, will support talent operations, business development, regulatory, growth, and capital formation.

Our firm has deep sourcing networks. Across our funds, we have over 200 active founders. They are deeply integrated into founders’ networks and regularly refer to high potential deal flow. The long-standing presence of our partners and firms in the technology space in Indonesia (over 10 years) means that we are top of mind of new entrepreneurs seeking funding or advice.

What is your view on the overall valuation for Indonesian startups? Do you see crazy valuations in certain sectors? How is the overall VC, startup ecosystem in Indonesia as compared to other countries within Southeast Asia?

Being the largest in ASEAN and among the least developed, Indonesia’s market continues to represent the most compelling investment opportunity in Southeast Asia. This is proven with the growth of the successful local unicorn startups (such as GoTo, Traveloka, Bukalapak, Akulaku, etc…) and the reliance on Indonesia by leading regional technology companies such as SEA Ltd and Grab, and Lazada.

Given this enormous potential and that Indonesian winners are best positioned to be regional leaders at times, future growth is priced earlier than companies in Indonesia, hence the higher valuation.

However, this accumulation of capital in the hands of the best team often reinforces a virtuous cycle, enabling the company to build additional value for its stakeholders quickly. Overall, Indonesia’s sheer market size and potential make it the most compelling single market to invest in, in ASEAN.

Where are the opportunities AC Ventures see in Indonesia? Is there any sector AC Ventures prefers or prioritizes? AC Ventures focus on early-stage startups, (up till pre-Series A)? Will AC ventures expand to other stages for its latest fund? Why and why not? Are there any ticket sizes set?

The COVID-19 pandemic accelerated digital consumption, drawing new internet users and increasing consumer frequency. In a broad sense, we will see digital technology “eat” into every business industry in Indonesia as technology-enabled businesses enable greater efficiency and access. Hence there will continue to be opportunities within eCommerce, Fintech, MSMEs, and industries “disruptable” through digital media (Health, Education, Entertainment).

In particular, sectors such as eCommerce and logistics saw massive growth throughout 2020-2021.

The maturing consumer and infrastructure open up the opportunities and differentiated models such as social commerce and grocery verticals that help create better access to new customers and the delivery of new products.

FinTech is another industry that has seen fast maturity, especially in the lending sector where regulatory-driven bank consolidation is driving partnerships between tech and traditional banks to create Neo Bank plays and the very offline traditional sector of insurance.

MSME software saw faster, earlier adoption rates driven by the pandemic. These sectors were historically slow in embracing the digital segment of the Indonesian economy. Still, we saw significant adoption uptake as digital and technology-enabled solutions were relied on to cut business costs, improve sales and increase productivity.

Exit strategy: Would like to know more about AC Ventures’ exit strategy – how many years would you hold an investment? Any preference between IPO and trade sale? What kind of return are you expecting from Fund III? Similar to previous funds? higher or lower?

We are long-term investors as we understand that great companies take many years to mature. Hence, our fund is a ten-year fund that enables us to invest patiently and help better support our founders to compound their growth and subsequent value.

Ultimately, an exit will depend on the unique circumstances of each company and the preferences of the founders and other stakeholders. Our Fund III is indicating very strong early returns with a Multiple on Invested Capital (MOIC) of 1.94 times in less than two years since the first close; hence we believe there is the potential for incredibly strong returns on this fund.

Are there any tech trends or tech startups you see elsewhere that you think should be brought into Indonesia or Southeast Asia?

There are several areas where proven models demonstrate the strong product-market fit and have yet to be built in Indonesia. At a broad level, we still see much potential in B2B marketplaces, Health and Wellness, Real Estate, InsurTech, and Mobility.

For Fund III, is there any other country AC Ventures is looking at besides Indonesia? How substantial will the investment outside of Indonesia be?

AC Ventures Fund III  focuses on Indonesia first and will continue to do so. Our platform is also built around an Indonesia strategy where we deliver the most value to entrepreneurs.

Any suggestions/advice on how the ecosystem in Indonesia can be improved? (for government, startups, investors)

The ecosystem for technology has developed remarkably in the past ten years and is barely recognizable compared to 2012. However, more can always be done to support the ecosystem’s growth. This generally comes down to the availability of talent, financial capital, regulatory transparency, and community.

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AC Ventures is a leading venture capital firm investing in early-stage startups focused on Southeast Asia. We are a generational partner to founders driving positive environmental, societal, and economic impact. If your institution seeks to deploy smart capital in the market, please get in touch.  

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