Amidst tech winter: Indonesian market shifts toward maturity
Published on October 13, 2023
Tech startups in Indonesia have been struggling to secure funding due to cautious investor sentiment amid global macroeconomic challenges and the country’s anticipated economic slowdown. Meanwhile, domestic demand is normalizing following the post-pandemic surge.
The number of startup funding deals in Indonesia dropped by over 50% year-on-year in the first half of 2023, while the funding value experienced a sharp decline of more than 70%, falling from US$2.3 billion to US$592 million.
On a recent episode of Indonesia Digital Deconstructed, Leighton Cosseboom and Adrian Li of AC Ventures discussed the duration of ASEAN’s “funding winter” and how investors perceive the Indonesian market today. They also explored the market’s transition toward a more mature landscape.
Leighton pointed out that the funding winter shows no signs of thawing in Indonesia. Indeed, in the third quarter, the decline was even more pronounced compared to the previous months. Total funding into local fintech startups fell by a staggering 94% to US$21 million, compared with US$352 million in the third quarter of 2022, according to a market intelligence platform Tracxn. Further, no new unicorns were created and no initial public offering took place in the Indonesia tech sector in the third quarter.
Southeast Asia’s tech startup ecosystem raised a total of US$835 million in the third quarter, a 74% drop from US$3.2 billion raised in the second quarter of 2023 and a 66% decline from US$2.5 billion in the third quarter of 2022.
The sharp decline was primarily due to the absence of later-stage investments, although the downward trend was also noted in seed-stage deals. While highlighting the potential of Indonesian startups, Leighton questioned whether the prevailing pessimism is exaggerated. He said, “The fundamentals are still here. There are still great companies and entrepreneurs who are solving real problems.”
More efficient business
Adrian suggested that Indonesia is reverting to a more sustainable pace of financing, with the current levels closer to 2019 rather than 2021. “If you look at the chart of financing, it peaks going up to 2021, and then it comes back down again. I think that means we’re entering a healthier stage of the market when it comes to investing,” he said, adding that excess capital can lead to less efficiency among entrepreneurs in terms of building businesses.
Adrian pointed out that in the past, total funding amounts were often exaggerated or biased toward large financing rounds. “There’s certainly not a lot of late-stage financing going on right now as well, but there’s a lot that we believe is, and can see, happening under the hood,” he explained.
Adrian added that local and regional players have raised reasonable amounts of capital over the last couple of years. He suggested that perhaps some of these investments they made have simply not been announced, and as a result, have not been reflected in the news yet.
The right time to invest
Overall, Adrian believes that now is a great time to invest, as the entire funding ecosystem has matured, and companies have the opportunity to secure financing at every stage of their growth journeys. Additionally, Indonesia is on course to become one of the top ten economies in the world by 2030.
Satu Kahkonen, World Bank Director for Indonesia and Timor-Leste, mentioned that, amid global uncertainty, Indonesia has seen steady improvement in many areas that are critical to its long-term growth, particularly macroeconomic stability, public sector governance, and infrastructure. Moreover, inflation is declining more rapidly than initially anticipated, thanks to the drop in global oil prices and government interventions to alleviate supply bottlenecks.
According to Tracxn, Indonesia led as the highest-funded region in the ASEAN startup ecosystem in the third quarter, followed by Singapore and Vietnam. It also ranked second in terms of total funding in the region year-to-date in 2023.
Part of a cycle
Although some players question whether the exposure of limited partners to China would shift toward Southeast Asia, Adrian believes that this has not materialized.
“I think the reality is that many LPs were overexposed leading up to 2021 and are now in a risk-off mode. It’s unlikely that they’ll allocate additional funds to another emerging market,” he said, adding that in the face of global uncertainties, investors are more inclined to turn to developed countries like the US.
He further emphasized that the current funding slowdown is a natural part of the investment cycle, and the Indonesian market remains well-capitalized to support the next wave of innovation. Given the quality of companies emerging in the region, there are many attractive opportunities for investors.