Traversing the legal maze of Indonesia’s digital economy
Published on November 3, 2023
Navigating Indonesia’s legal landscape can be a daunting task, as regulations are continually changing and evolving due to the country’s rapid economic growth. Tech startups often find themselves at a crossroads, having to choose between sophisticated yet expensive legal services or opting for a low-cost solution, which may compromise quality.
Natasha Nababan, the founder of local law firm NABS & Partners in Jakarta, established her company to bridge this gap by providing affordable and high-quality legal advice for companies of all shapes and sizes. On a recent episode of Indonesia Digital Deconstructed by AC Ventures, Natasha and host Leighton Cosseboom discussed the dynamics of Indonesia’s legal landscape and the primary challenges that startups face.
Natasha mentioned that while startups need to address legal issues promptly, finding a high-quality service provider is sometimes difficult. She pointed out that companies often end up receiving “cookie-cutter service” without much consideration of their unique needs. She made an analogy, saying, “It can be kind of like needing a car but then getting a boat.”
She went on, “That can be very dangerous because if the foundation is wrong, it takes a lot of time to clean it up, especially if you’re still a small team, and you need to focus on business development.”
A struggle to get foreign capital
Speaking of how the archipelago’s legal landscape differs from that of other countries, Natasha explained that in Indonesia, a significant portion of capital often originates from offshore sources. To own a business in Indonesia as a foreigner, entrepreneurs typically need to establish a foreign investment company (PMA).
In practice, this means that when foreign funds arrive for a local business, the company must be converted into a PMA. To achieve this, there is a specific set of requirements to fulfill, such as a minimum amount of paid-up capital and a minimum of two shareholders. According to Natasha, due to this factor, capital access for smaller businesses can be limited when foreign funds are involved. She noted that in Singapore, there is no distinction between a foreign company and a local company regarding access to funding.
In recent years, Indonesia’s government has been encouraging more foreign investors to put money into the local economy. “In the past three years, the government has been issuing various omnibus laws to make breakthroughs in investment,” she explained, thus making it easier for foreign entities to own and operate local companies.
This trend has also been evident in other industries, such as healthcare. Consequently, there is optimism that the government will introduce more nuanced regulations for foreign financing of startups in the future.
Natasha explained that building the right fundamentals early on is crucial for business success. She advises Indonesian entrepreneurs to set objectives for the next few years and to consider which legal actions are needed to address them.
She also underscored the importance of keeping a company in order because it sends signals to existing and potential investors, similar to how a person’s home speaks about them. She said, “If the company is well-established, your value grows. If you have a small business and you run it well, people will have more trust in you.”
Additionally, how a founder deals with minor issues reveals their general approach to problem-solving, said Natasha. Leighton added that, in today’s economic climate, basic governance hygiene and housekeeping in early-stage ventures can ultimately decide whether a company can raise its next round of capital.
Natasha said that complying with regulations is particularly important in Indonesia’s booming fintech sector, which has seen the number of players increase six-fold over the last decade, per a recent report by AC Ventures and Boston.
Natasha explained that evolving laws reflect how the government responds to developments in the market. “These days, many people are positioning themselves on carbon credits and I think that’s a smart thing to do because it’s not yet fully regulated,” she said, emphasizing that the sooner a company starts in a blue ocean sector, the less likely they are to encounter regulatory roadblocks as time goes on, and may instead just be “grandfathered in” after regulation takes effect.
Natasha and Leighton looked into the regulatory landscape from the perspective of investors. To assess prospects, Natasha advised funders to examine how founders and management approach legal issues and whether there is a strategy in place at all.
“Just observe them for a while and see how they behave,” she advised. This way, if there are certain patterns in how the company treats employees, shareholders, or clients, it won’t come as a surprise. She warned that small problems are likely to grow into bigger problems. More capital does not instantly solve said issues, which is why it’s crucial to identify red flags early on before making a deal.