4

Leadership Speaker Series: How to effectively communicate and manage teams during COVID-19

Our fifth Leadership Speaker Series event featured a presentation and open Q&A session with Sanjay N. Bharwani & Anita Widjaja, CEO & Co-CEO of Bester & Co and Lily Surya & Henny Purnamawati, Partners of Egon Zehnder Indonesia, along with participation from Roderick Purwana, Managing Partner of SMDV, and Pandu Sjahrir, Founding Partner of ACV & Managing Partner of Indies Capital.

The goal of this session was to share feedback and advice to startups on how to promote agility, manage headcount, and demonstrate effective leadership during the COVID-19 crisis.

Here are our key takeaways from the session:

The COVID-19 crisis has led to businesses undertaking layoffs and, in extreme cases, permanently shutting down. Many leaders are struggling to mitigate the impact of the pandemic, as demonstrated by the large-scale layoffs and liquidations. in global markets after just a matter of weeks. Although many companies have made attempts to reduce their headcount costs through unpaid leave and other incentives, some companies have resorted to undertaking layoffs for business longevity and sustainability.

This is an opportunity for Founders to prove that your organisation can be agile. Businesses today should make the most of their operations and find new ways to be creative. Startups could consider making changes in organisational structure, negotiating more favourable terms with suppliers, exploring new revenue streams, entertaining M&A opportunities, and more, in order to achieve flexibility and agility.

There are three main phases of crisis management – managing the crisis, surviving the crisis and building for the future. First, businesses must manage the crisis (e.g. protecting employees, implement new SOP) and explore strategies for liquidity management to survive (e.g. cost reductions). Then, focus should be on building for the future through restructuring and exploring new ideas, markets, and strategies. Entrepreneurs should remain resilient and maintain cost discipline, but also monitor market conditions to adjust scenario analysis and continue to place emphasis on the future.

During a crisis, leadership and empathy is essential to strengthen culture and maintaining positive morale. Just as a pilot would focus on navigating turbulence and look for safe landing, entrepreneurs need to focus on how to manage the short-term challenges for steadiness, and then focus on what’s next in growing the business.

Crisis management typically involves changing habits as well as conserving cash to weather the storm. On a weekly basis, businesses should monitor how they are changing both external and internal processes, as well explore new ideas. The focus areas should include resolving short-term problems, making decisions quickly, communicating with team members, providing early support and maintaining team morale.

The framework below will help guide your thinking in crisis management:

Layoffs are never easy. Airbnb’s CEO Brian Chesky demonstrates strong empathy, gratitude and clarity in communicating the bad news, which is a testament to effective leadership. Chesky focused on expressing gratitude, ensuring employees feel valued whilst emphasizing that their departure is not their fault. Refer to the principals below for further support on managing layoffs:

Stay focused on the future by transforming processes. Remember that this crisis is a process that you need to overcome, but also presents an opportunity to engage better with employees, build stronger bonds and improve morale. Touchbase with your team more often and encourage team members to interact in new ways to share ideas and concerns. Find new ways to connect with existing stakeholders, such as customers and vendors.

The only way to survive is to become agile. Crisis is out of our control, but how we transform and change in light of it, is the ultimate challenge. Netflix imbeds flexibility and agility in their culture, which helped them tweak its offering to what it is today, surviving crisis in the past over the last 18 years, and becoming a household name. Crisis can provide impetus and inspiration for defining new business models or a new way of delivering value to your customers.

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

1. Some businesses are navigating the crisis relatively better than others. Do you have any inputs to young tech start-ups on how they could manage the crisis as they continue to operate their businesses?

For early stage companies, the immediate concern is around business sustainability. Could you continue the business in its current state? If not, it’s time to focus on cash reservation by making changes in costs, to reflect a stronger runway. The goal is to first steady yourself (like a pilot would make attempts to steady the plane during turbulence) quickly and decisively and then move on to the next steps of changing internal and external processes to cut down on any other inefficiencies.

When you focus on building an agile mindset as a leader, you’ll get even better at making quick decisions and anticipating changes that are required to mitigate the impact of a crisis.

2. For companies do not have sufficient cash to pay for mandatory exit packages to employees, what is the solution?

In Indonesia, exit packages are expensive, as a result of current regulations. For some companies, paying 5x of current salary will hurt the company’s bottom line drastically. Companies could potentially explore giving unpaid leave, reducing salaries and incentivizing through ESOP, compensate in other creative ways such as health benefits or insurance, or even voluntary leave.

The key strategy is performance negotiation & influencing, to perform creative and empathetic communication to employees and intensively build an urgency to support the company during survival mode.

3. What’s the view on the “new normal”? Are you expecting that companies will continue to work from offices, or have their employees all work from home indefinitely (as implemented by Twitter)?

The work from home (WFH) initiative has made businesses all over the world realise that employees do not need to always be physically present in their workplaces in order to effectively do their job. We are forecasting more of a hybrid scenario, where employees could both WFH and work in offices with their teams.

What could potentially happen in the mid-term is a rotation of employees, allowing people to work from home for a number of days a week, and communicate and work remotely for the rest of the week. This would help companies cut real estate costs through exploring flexible rental fees or partnering with co-working spaces.

In light of this, there is no doubt that Indonesia has been pushed to embrace digital. For example, the banking sector has seen roughly a 30% decline in customers going to bank branches. Through this, banks now have the opportunity to digitize, automate and simplify banking services, as well as reduce real-estate and staff costs to maintain branches.

Although businesses today have to prepare to go digital, the human factor is still essential for tasks that involve brainstorming and team-work. While we anticipate more flexibility in the workplaces and appreciation for remote working, we expect that the human interaction will still be required to build effective businesses.

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. You presented the case of AirBnB and Netflix for their handling of crisis and agility. Do you have local (Indonesia or SEA) cases?

Yes, currently we are helping Manufacturing, Pharma and Financial Services companies that are trying to survive due to massive revenue reduction, long delayed customer payments and high customer churn. Thus, they have to manage their operational cost through creative solutions. Their board is now monitoring the company & people performance intensively during this time, on a weekly basis.

2. How would you suggest handling resistant employees?

The key here is to negotiate intensively, linking company performance to individual performance to ensure that enables the company to perform reward reductions. The employee will have to accept difficult conditions, as it will then also be a function of their performance. This is under the assumption that the company has a People Policy that includes performance-based rewards.

3. To what extent do you recommend sharing the extent and nature of the negative impact of COVID-19 on the business to employees? Is it better to be provide early warnings, or formalise communications from leadership until an event occurs, such as a salary reduction or layoff?

We definitely would recommend that it would be better to communicate the impact of COVID-19 on your business earlier, in order to set the expectations for the next couple of months for your organisation and employees. You could use published news to support your message. Communicating the company’s position early and effectively will put everyone on the same page and in alignment.

4. Remote working removes the ability to have signature on documents in real-time (which would typically allow for quick decisions and execution). Can you suggest solutions to this?

Based on our experience with clients, e-documents are still utilised, as long as there has been intensive communication through e-meetings or phone calls, prior to the document procedure. The key success factor here is to carry out consistent negotiation through intensive communication to influence well-scripted negotiation. Our clients faced these issues too, but what helped them become successful in delivering messages is consistent communication.

5. How do you recommended managing impact on decreasing employee morale due to a layoff event?

Layoffs will almost always negatively impact team morale. However, management accountability and attitude are essential to manage situations like this. Having clear and transparent communications is key to helping improve that well, as well as consistent engagement to continuously support employees if any concerns arise. Remind your employees that it’s what the organisation had to do in order to survive and is no fault of their own.

5

Leadership Speaker Series: Public and Private Sector Partnership in Managing COVID-19 Crisis in Indonesia

Our third Leadership Speaker Series featured a presentation and open Q&A session with Septian Seto, Deputy ad Interim of Investment and Mining Coordination to the Indonesia Coordinating Minister for Maritime Affairs and Investments and Jonathan Sudharta, CEO & Co-Founder of Halodoc, along with participation from Roderick Purwana, Managing Partner of SMDV, and ACV Partners Pandu Sjahrir, Michael Soerijadji, Adrian Li, and Donald Wihardja.

This session’s goal was to share insights on both the public and private sector’s involvement in building on Indonesia’s healthcare system and mitigating the impact of COVID-19.

Here are our key takeaways:

According to WHO, approximately 80% of COVID-19 patients will recover without requiring special treatment from hospital. This creates an opportunity for HaloDoc to help in managing the symptoms of these patients from home, preserving the capacity hospitals in Indonesia for those most at risk. Indonesia currently has 12 hospital beds for every 10,000 citizens, compared to China with 42 beds, or Italy with 34. HaloDoc facilitates the treatment of COVID-19 symptoms through their telemedicine consultation, e-prescription service and at-home medicine delivery. HaloDoc has also added more doctors into their ecosystem to reach more patients, and to strengthen the medical discussion communities around the region with the sharing of the latest developments on COVID-19.

HaloDoc’s adds additional support measures for managing COVID-19. In addition to telemedicine, e-prescriptions and medicine delivery, HaloDoc has also developed a self-assessment analysis tool via chatbot, as well as built Indonesia’s first drive-through rapid testing service for COVID-19. In the last month, HaloDoc has had 300K users on their platform (with a week-on-week growth of 300%), and now currently works with 500 hospitals in their joint mission to help Indonesia fight COVID-19.

In Indonesia, COVID-19 is classified into three segments – People under Monitoring, People under Surveillance and Positive Cases, as demonstrated below:

The Indonesian government continues to be proactive in further building on the country’s healthcare capabilities. The government is adding 17 labs for COVID-19 testing, as well as purchasing the machines required to increase test capacity to 17K samples a day. These laboratory facilities are essential, seeing that these testing machines been used by countries like China and Japan in the past, who have more relevant experiences in mitigating pandemics.

Indonesia is now experiencing a recovery rate that surpasses the fatality rate. Due to increase awareness, testing, and treatment, as of April 21 the recovery rate was at 12%, with the fatality rate at ~8.5%.

There are numerous activates that the government is doubling down on to continue to address the health impact of COVID-19. The key activities of focus begin with mass testing, which is currently targeted only to individuals presenting with strong COVID-19 symptoms. Once the testing capacity increases, individuals that are being monitored for mild COVID-19 symptoms will also be tested. After testing, the government will then focus on tracing positive test cases to understand who they have made contact with, and then test those individuals and provide treatment if needed. Positive cases with mild or moderate symptoms will be monitored and recommended to self-isolate at home. The next priority for the government is to improve healthcare facilities by acquiring more ventilators, protective equipment and increasing ICU capacity.

Indonesia has chosen to implement a large-scale social restriction over a lockdown. These restrictions include mandatory work from home (WFH), except for sectors such as healthcare, food production and logistics. School facilities will remain closed, with classes moved to online learning platforms. The government has limited public transportation operations and has placed a mandatory 14-day self-isolation period for those that travel from red zone areas. According to the Oxford Policy Stringency Index, Indonesia’s current restrictions in place are on par with Singapore and South Korea, as demonstrated below:

Indonesian’s are aware of COVID-19, with data to suggest that public awareness for the pandemic is high. On a national level, 97% of Indonesians believe that COVID-19 is infectious, and 92% believe that COVID-19 is deadly.

Although Indonesia’s main priority is to contain COVID-19, it cannot adopt the same government policies adopted by developed markets. To mitigate the impact of the pandemic successfully though social distancing and self-isolation, social assistance has to be adequate, for those who are losing daily income. Indonesia’s stimulus package is aimed at strengthening the economy, but more importantly, maintaining financial stability, with IDR 110T going towards the social safety net.

PERPPU no.1 is the foundation of regulation to help Indonesia take coordinated action towards mitigating COVID-19. This includes the issuance of government bonds, tax incentives for corporates, a national recovery program, and on the banking side, supporting banks, OJK and the financial system to help maintain stability.

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

1. What measure can be taken to resume work, especially for business sectors that suffer the most from closing, if the virus hasn’t been eradicated?

Based on the data that is available, there is no yet a clear indication as to when work and social activities can resume, as it is difficult to assess when the peak will take place. Based on several models, there are assumptions that the most optimistic case is that the peak will occur in the middle of May, whereas the pessimistic case is that the peak will take place in July. We need at least 60 days after the peak to witness the curve flattening. Regardless, social distancing is essential in ensuring that less individuals get infected.

2. What would you like to see to see in order to feel comfortable with removing large-scale social restrictions (PSBB)?

For the government to feel comfortable in lifting social restrictions or PSBB, we would have to see indications of the fatality rates decreasing, as well as recovery rates increasing. Additionally, we need to see a flatter curve, or indications that the number of new cases is decreasing every day. Once the government has comfort, through strong signals that COVID-19’s condition is improving, then perhaps PSBB can get lifted. Furthermore, we may have to wait for a vaccine, which is currently under clinical trials, to completely eradicate the virus.

3. Are there any challenges in providing social financial protection to people?

The challenge is reaching out to individuals that are difficult to find, especially since they tend to need it the most. Currently, the government is targeting the group in the lowest 40% of the population in terms of income, to provide social assistance. These households might not have clear names and addresses, but the government is currently crunching numbers to build a database, to effectively provide them with support.

4. Since we are low on hospital beds, what is the ideal number for hospital beds for Indonesia?

The ideal number is relative, the question is more around how we can optimize healthcare facilities so that we can approach the pandemic effectively. The issue at hand is that viral infections like this cannot be avoided, so the key here is to ensure that the public has confidence in the healthcare system. Governments must also stay open to public and private partnerships, to help mitigate this pandemic, and the next.

5. What’s key learning from this pandemic?Is it different from other countries?

One of the key learnings is that, the demographic of a country will help indicate the level of infection spread. For example, having a younger population will reduce the number of people that die from COVID-19, as 70% of individuals who are COVID-19 positive and die are those over 51. Another key insight is that countries with a mandatory BCG vaccine are experiencing lower fatality rates that countries that do not. Another key learning is that to truly eradicate COVID-19, participation from all citizens of the country is required.

6. How is the government collaborating with the mainstream media to keep reinforcing the importance of social distancing?

At the moment, the government is working on campaigns and have partnered with the media for programs to help prepare people on the dangers of COVID-19, and the health and safety protocols that should follow, particularly for the low to middle income areas for continuous education and support.

7

Leadership Speaker Series: How to manage the economic impact of COVID-19 in Indonesia

On April 13th, our Leadership Speaker Series featured a presentation and open Q&A session with M. Chatib Basri, Indonesia Minister of Finance 2013-2014 and Donald Wihardja, Partner at ACV, along with participation from Roderick Purwana, Managing Partner of SMDV, and ACV Partners Pandu Sjahrir, Michael Soerijadji, and Adrian Li.

This session focused on the latest insights and expectations on the economic impact of COVID-19, particularly in the banking and multi-finance sector in Indonesia.

Here are our key takeaways:

We have seen the number of COVID-19 cases escalate rapidly in Indonesia. Indonesia has ~4.5K total cases, with 48% of cases concentrated in DKI Jakarta, as of April 13th. The Centre of Mathematical Modelling of Infectious Disease predicts that there are 70K undetected cases on March 24th. On March 20th, Oxford Clinical Research Unit forecasts that Indonesia may reach 71K cases by end of April. According to Badan Intelijen Negara, Indonesia will reach its peak of COVID-19 cases on May 2020.

The Indonesian government has implemented changes to mitigate COVID-19, however, these initiatives will likely have a severe impact on businesses. The rapid increase in cases has resulted in several changes such as travel restrictions, extreme social distancing, rapid testing, and postponement of credit repayment; and these changes have in tern led to severe outcomes for business. Retail sales have already decreased significantly, and will continue to decrease, potentially by as much as 30-60% in 2020 from the previous year. Lebaran, which typically results in an increase in monthly revenue for many businesses by 1.5-2.0x, will likely not provide any significant increase to baseline monthly revenue. Due to this fall in consumer demand and revenue, we will likely witness further layoffs for staff, as companies fail to cover their expenses. On the banking side, financial institutions are estimated a 30-50% decrease in lending collection.

Despite the challenges, some sectors are experiencing growth, due to COVID-19. Although we have seen reductions in top-line for sectors such as travel, ride- sharing, and retail F&B, there are some sectors that have grown because of COVID- 19. Given businesses and schools have been forced to work and study from home, EduTech platforms have increased their revenue by ~70%. Video-streaming and gaming have also increased their engagement by ~60%, as a result of people staying at home and maintaining social distance. Medicine and food delivery have also experienced rapid growth, increasing by roughly 60%.

Many tech enabled companies have helped other businesses maintain “business as usual”. eCommerce platforms and marketplaces have allowed SMEs to continue to have a market and audience to sell to, facilitated by eLogistics and digital payment platform that reduce the need to leave home to purchase goods, or pay with cash. By the end of 2019, eLogistics were facilitating ~5M in parcel deliveries a day. In 2019, eMoney transactions reached US$10.4B, and in February 2020 alone, eMoney transaction were already at US$2.2B. FinTech lenders also help support businesses, by providing lending capital for financial support. As of February 2020, FinTech lenders had US$1B in loans outstanding. Despite providing the right kind of support for the current times, these tech companies are not yet profitable, and therefore would significantly benefit from continued government support.

From a FinTech perspective, the impact of COVID-19 varies depending on sector. On the lending side, OJK has anticipated that non-performing loans (NPL) will increase to 17% for banks. Banks have already experienced a 30-50% reduction in lending collections, however due to the current market conditions, more SMEs and consumers will likely require new or extended credit lines and capital bridging to improve their working capital position. Institutional and P2P lenders will be able to provide this form of finance, however they are encouraged to take caution and monitor their NPLs and loan collections. The payments segment of FinTech has so far seen a significant increase in activity due to the growth in eCommerce transactions, and this will likely further facilitate education and future adoption of eWallet payments. Payments for bills via online platforms have also increased by ~30%, as individuals can no longer use offline payment agents and mitras to pay facilitate bill payments. On the investing facet of FinTech, we estimate significant growth, due to new users looking for new avenues for financial returns, leveraging on market volatility. For insurance, this timing provides a good opportunity to sell health insurance, and bundle other insurance, whilst staying wary of the risks.

Tech companies are doing their part in supporting Indonesia during this challenging time. From helping distribute essential items to consumers, to delivering test kids, to providing lending capital to SMEs and consumers, we are proud to see Indonesia’s ecosystem of tech-enabled platforms playing an active role in mitigating the health, social and economic impact of COVID-19.

Although the government is playing a proactive role in containing the pandemic, Indonesia is not fully ready. Like many other countries, Indonesia ‘s infrastructure is under-developed if to fight a pandemic of this significance. Java has the highest number of hospitals and doctors, nonetheless, Java only has 1 hospital and 1 doctor per 1,000 individuals. This is why the government has to invest heavily to fund COVID-19 mitigation, which will go towards hospital and medical resources.

Unlike the global financial crisis, the impact of this Black Swan event has hit both demand and supply side. On the demand side, we’ve seen declines in travel, exports, retail sales, and overall purchasing power. However, we also experience a negative impact on the supply side, through local production cutbacks (as social distancing leads to factory closures) and disruptions in global supply chains (as China played a significant role in global production). During the 2008 crisis, Indonesia still maintained ~4.6% economic growth, as local production helped fuel production and consumption. The impact of both facets of the spectrum is what makes this crisis to unique, and far more challenging.

The likely impact on banking and market risk is that there is a high risk of default. The risk of default is high, as many companies will be unable to pay their debts due to worsening market conditions. As a result of this, NPLs will increase, which could then lead to banks and multifinance institutions putting a temporary halt on providing lending capital. If they instead choose not to maintain credit lines, businesses in Indonesia will collapse, leading to lay-offs and bankruptcy. The solution to this is that the banking sector should continue to take risks and provide credit lines, with the support of the government. Today, the banking sector is still healthy and liquid. The bigger issue at hand at the moment is the likelihood of a credit crunch. To facilitate this, Indonesia has launched an Emergency State Law (PERPPU), with articles on ideas of how they can support businesses.

There is no doubt that COVID-19 is responsible for this economic crisis, which is why mitigating COVID-19 should be the top priority. COVID-19 was the culprit of the global recession. A recent example is that the uncertainty resulted in foreigners selling Indonesian bonds and stocks, which lead to the depreciation of the Rupiah. MoF predicts a -0.4% – 0.25% GDP growth in Indonesia for 2020. Until the pandemic gets contained, the economic and financial sector will continue to be under pressure. Monetary and fiscal policies will help provide a foundation for the economy, but the pandemic must get contained first.

The government should focus its agenda towards containing the virus, as well as providing social protection. Notwithstanding that a vaccine needs to be made readily available in order to put COVID-19 behind us, for the time-being, the government should focus on flattening the curve of new COVID-19 cases in Indonesia. In order to do this successfully, social distancing is required, to keep people at home and stop the virus from spreading. In Indonesia, if people are to put work on hold and close their businesses, they need to be provided with a form of social protection. Whilst Indonesia’s social protection program is designed to protect the lowest income groups, it is not yet designed for low to middle income groups (e.g. UMKM, GoJek drivers, minimum wage workers).

The next focus area should be towards supporting local businesses. Today, companies are under financial pressure due to the decrease in consumer demand and supply chain disruptions. The government should work closely with financial institutions to facilitate the provision of lending capital and credit lines to businesses that are at risk of default. Another opportunity that arises in the light of COVID-19, is the potential for Indonesia to become a larger participant of global production. Focus for global production and import will likely shift towards Southeast Asia, as an alternative to importing from China.

Indonesia should stay open to receiving international support. Currently, the cap on budget deficit is set at 3%, with discussions of now increasing that figure to 5%, as of March 23. This would be ideal, as Indonesia will need resources from abroad to support COVID-19 mitigation plans. The goal should be to work with other countries to initiate support and to further facilitate foreign direct investment into Indonesia.

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

1. This crisis is not just a financial crisis like the global financial crisis in 2008. All the policies to boost liquidity by major central banks around the world is merely a relief effort to support the social safety net. What is the best way to re-start the economy with confidence, balancing between health vs economic vs the risk of a second COVID-19 attack?

As of now, that would depend on when the vaccine is made available in Indonesia, as this would be the final solution to the pandemic. While we wait for that, the government needs to focus on flattening the curve and getting the outbreak under control, which requires facilitation of social distancing. This will have a wide economic impact on people that rely on work and business to support their everyday lives, hence, the government should put in place strong social protection policies to facilitate social distancing, allowing people to stay at home. The order of focus should be: containing the virus and protecting health through social distancing, then providing social protection to facilitate it, and then continuing to support businesses going forward.

2. What is your view towards Indonesian stimulus package with regards to COVID-19? Is 2.5% of nation’s GDP sufficient? For instance, countries like Singapore and Australia have set aside 10% and 11% of GDP respectively for fiscal stimulus.

Yes – our stimulus package appears to be low in comparison to other markets such as Singapore and Australia. However, the issue is not about the magnitude or figure, but more around how we choose to allocate that funding amount. Once again, the government’s focus should be towards health, social protection, and supporting businesses at risk. Once these issues are covered, stimulus package funding can subsequently be increased to 5%, potentially 6%, depending on what the government can afford after considering inflation and other factors.

3. In your opinion, which country has mitigated the health and economic impact of COVID-19 successfully so far? What can we learn from them?

China and South Korea has managed to flatten the curve and reduce the number of new COVID-19 cases successfully. In terms of economic impact, most countries are still faced with economic challenges and are still in the process of implementing solutions.

4. Do you have any idea of what action OJK is taking to save the banking system?

At this stage, the banking sector appears to be liquid; perhaps small banks and lending institutions will struggle more. Indonesia’s emergency state law (PERPPU) has an article that mentions potentially supporting banks through consolidation.

Nonetheless, the most significant impact is on the non-financial sector, as they will struggle the most due to working capital challenges from demand and supply shocks. If banks become risk adverse due to volatility of market conditions and stop providing lending capital to businesses, then the economy will experience a credit crunch that will affect the non-financial sector the most.

5. Do you think that the tax relaxation can be provided to all or most industries? The latest regulation only covers certain sectors. Do these industries have to pay tax for last year’s profit, even though these industries currently have working capital challenges?

At this moment, it is still unclear, however we could expect tax relaxation extending to more sectors, and this will most likely still be for last year’s profit.

6. We know that government has issued the first batch of pandemic bonds and successfully raised an amount of funding. What’s your view on this as in whether a) the country is at liquidity risk, or b) this bond is issued as a liquidity reserve to stimulate national economy? What will be the impact to investors?

At the moment, there is a risk premium. Going forward, the risk premium will only be higher, especially in the next couple of months. Thus, issuing bonds at this point in time is an optimal solution. At the moment, our debt to GDP ratio is low, which means that the government is not at high risk or highly levered (even with a deficit of 5%). As long as growth is higher than our interest rates, then the debt to GDP will stay low.

7. For the non-financial sector, especially for SMEs (UMKM) that are receiving their loans from P2P fintech companies as opposed to conventional banks, what kind of regulation do you think the government should impose to continue lending activities? As many companies have started to experiences decreases in revenue and are now engaging in layoffs and shutdowns, what can the government do to ensure that they survive and pay back their loans?

The current expectation is that the bigger banks will not have a liquidity issue, but the smaller lenders such as multifinance and P2P lenders could experience liquidity challenges. As borrowers might not be able to pay their instalments, the government’s role should be to further support lenders, by working with lenders to help provide guarantees for their NPLs through subsidies that will enable risk- sharing. Ideally, the Central Bank could help support smaller financial institutions to help lower the cost of capital, in order to facilitate the provision of credit lines. As the lending capital is still provided by the P2P FinTech (or their lenders), the risk of moral hazard should be limited.

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. Currently, the President has declared “Corona is Bencana Nasional”. If this means Force Majeur, we can expect to see impact to all industries in Indonesia. With the latest Government Bond, do you think that our government could overcome this pandemic?

Financially, we are in a good position to overcome this. Nonetheless, the priority falls on containing the virus first, before any fiscal/monetary policy can be effective.

6

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

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?

9

There’s Never Been a Better Time

Written By Adrian Li 

Original Post by Forbes

July 21, 2019

There’s never been a better time for entrepreneurs, investors and society in Indonesia. This statement was true 5 years ago when the current cohort of digital giants started gaining momentum but is also true today as the next wave of entrepreneurs start their businesses.

In the past 5 years Indonesia has seen a veritable explosion in the growth of the digital economy creating no less than 4 multi billion US dollar local technology companies including Gojek, Traveloka, Tokopedia and Bukalapak. If we include regional businesses whose valuation depends on their growth in Indonesia that number rises to 6. Given this remarkable growth some may say that the golden opportunity to create highly valuable digital businesses has come and gone.

The initial cohort of digital unicorns started and grew in spite of a challenging early stage environment.  Several key factors including, low accessibility to the internet due to poor mobile internet infrastructure (lack of 4G roll out, low adoption and poor quality, high cost smart phones); friction arising from limited last mile logistics, poor payments infrastructure as well as low trust in online commerce.

But in the past 5 years we have seen significant improvements to each of these challenging factors which supported the growth of these unicorn businesses. The cost of a smart phone has dropped 42% between 2012 to 2017 while speed and features grew rapidly. 4G broad band now covers more than 72%of Indonesia’s population with data costs being among the lowest in the region. ECommerce parcel delivery reached 260M in 2017 and the presence of Gojek and Grab and numerous last mile logistics companies have enabled food delivery to cleaning services on demand. Yet challenges still remained stemming from the available supply of growth stage financial capital, talented human capital and poor payments infrastructure.

Now, most recently we have also seen a change in these remaining restraining factors. Mobile adoption and connectivity have reached a tipping point in access. Over half the population is connected with smart phones with 133M internet users in 2018 and almost 100% of the middle class is online. A confluence of factors including the influx of stronger entrepreneurial talent as well as managerial staff with digital experience have entered the market. There is far more downstream venture capital now with several US$100M regional funds focused on Indonesia and billion dollar global funds making direct investments.  Robust local platforms such as Gojek, Tokopedia and Traveloka are investing in payments and platforms creating frictionless environments on which to scale new and exciting businesses. In this way the next 5 years represent an extremely exciting time for technology and internet enabled businesses

To win in the next 5 years it is necessary to identify long term structural trends which will upend multiple industries. Three of the most disruptive changes will be a move to a cashless digital economy, the shift to a ubiquitous cloud connected environment through the emergence of 5G technologies and the emergence of artificial intelligence and automation in many aspects of our lives.

On the back of these structural changes many long standing Industries are ripe for change. At the same time these trends will solve a great many societal problems such as greater financial inclusion and ubiquitous access to education and health care.

There’s never been a better time to be an entrepreneur and to harness technology to drive positive change and benefit for society. In particular, the next wave of disruption will move past focusing on improving convenience for consumption and create greater equality for the broader population.

1

Understanding the Lending Models of Indonesian Fintech Startups

Written by Alvin Cahyadi

Originally published here by Bisnis.com.

Coming from one of the large global retail banks and having learned about risk management and consumer products in particular, it has been exciting to see the growth of the fintech sector. Approximately a month ago, our Managing Partner, Adrian Li, wrote about how fintech lending can boost Indonesia’s lackluster growth. After reading this, my team and I thought it might be useful to elaborate on this and illustrate how we are seeing the various ways fintech lending players in Indonesia are going after this space.

Let’s first recall the opportunity that fintech lending presents. Indonesia’s finance authority (OJK) estimated approximately US$74BN in unmet financing needs in 2016 due to the lack of credit data of loan applicants – a critical gap that is largely served by unlicensed offline lenders (aka loan sharks). Further to this and as we have seen, Indonesia’s sizeable market opportunity for alternative lending has generated a myriad of financial technology companies in the past several years. Indonesia’s Fintech Association’s latest data indicates 134 fintech companies have been fully registered as per April 2018, more than doubled from only 55 in 2016.

 The various existing fintech lending players can be categorized based on i) the recipient and ii) purpose of the loans as well as iii) the source of lending capital. Below is table of some of financial technology startups in Indonesia categorized according to the financial product they offer based on our study.

Fintech startups can either lend to individuals or businesses. It’s important to note that being a lender for individuals does not prevent the startups to lend to SMEs, and vice versa. Generally, the key differentiating factor is the product offered by the startups. For the ones targeting individual borrowers, the products commonly offered as depicted above, include special purpose loans (mortgages, car financing and education loans), payday short term loans, pawnshop services, multi-purpose consumptive loans and payroll financing loans. On the other side, those who lend to businesses (SMEs) offer SME invoice financing, SME long term financing and equity crowdfunding. Startups offering all of the above will take the inherent risk of each type of loan and generally, manage this risk by balancing interest rates against their projected non-performing loans. 

Taking it one step further, we can also categorize based on where the startup sources their lending capital.  While there are essentially 3 models based on sources for lending capital, startups also can combine multiple models. Below are the variety of models we can identify today.

1. Crowd-lending or P2P Model:

P2P lending model is a model where the fintech startup acts as a connector between borrowers and lenders- essentially becoming a marketplace for loans service. On top of being a connector, the fintech company also runs a risk management platform to assess credit worthiness for the borrowers and to assign interest rates to borrowers’ financing request. The lenders can see the risk level for a specific loan request and make a decision based on that. In the P2P lending model, the lenders are usually individuals who have access to money and the borrowers could be an individual who needs consumptive loans or a SMEs that needs additional working capital. Usually the platform will pool money from multiple lenders to fully satisfy the funding requirements. Due to the platform only mediating the borrowing process, default risk is being carried by the lenders. Fintech companies using this model generates revenue by charging service fees which is usually deducted from the loan disbursed to the borrowers. The interest payments from the borrowers would all be given to the individual lenders for the project. Examples of startups with this model are Modalku, Koinworks, and Investree.

2. Balance Sheet Model

What is the definition of Balance Sheet model?

The financial technology startups that use this model essentially use their equity financing to fund loans or take on lending capital from other financial institutions. The fintech companies assess the risk and assign interest rate for the financing needs and then disburse loans from their own pocket (balance sheet) for the projects that fit their risk criteria. Naturally, since the fintech uses its own money to disburse the loan, the default risk as well as the interest income are being given to the fintech company. An Example of a startup that works with this model is UangTeman.

3. Institution-Backed Lending:

Startup with this model partners with banks as their funding source. In general, the partnership formed could be one of the 2 models below:

I. Pure Institution-Backed Model:

Pure Institution-backed model means the startups directly disburse from third-party institutions’ pocket to make loans, thus the lender is basically the institutions. In this model, the fintech startups act as a lead generator of credit worthy borrowers whereby only the borrowers that pass the fintech startups’ risk assessment would be sent to the financial institution. Since the loan is generated using the institutions’ money, the default risk is assumed by the financial institutions as well. In this model, the fintech company makes revenue from commission fees out of the loan disbursed.

II. Hybrid Model:

In the hybrid model, the startups borrow money from financial institution to make loans and hence the startups incur cost of funds for each loan disbursed. In this model, different from pure institution-backed model, the fintech companies are still being the lenders and therefore assuming the loan default risk. The startups in this model generates revenue from both origination fees and interest income. An example of a financial technology startup that use this model is Julo.

Indonesia’s fintech lending landscape is heating up, and we are excited to see the impact of it in the near future. Nevertheless, it is important to note that fintech lending cannot grow alone if it is to maximize its potential in Indonesia. Strong payments and remittance systems are mandatory to ensure the lending facilities are able to capture the entire population across the archipelago. Fortunately, we have seen similar patterns of development in these sectors which gives us a strong reason to be hopeful for fintech disruption.

2

Paying Attention to Liquidation Preference and Its Implications

Written by Adrian Li & Gary Khoeng

One of the most important terms every entrepreneur needs to pay attention to from a term sheet is the liquidation preference. This term is especially used to specify who gets paid and how much they get paid during a liquidation event of the company, such as through a sale or Initial Public Offering (IPO).

What is Liquidation Preference?

Based on Brad Feld’s book, Venture Deals, liquidation preference’s language is typically as the following:

“In the event of any liquidation or winding up of the Company, the holders of the Series A Preferred shall be entitled to receive in preference to the holders of the Common Stock a per share amount equal to [X] times the Original Purchase Price plus any declared but unpaid dividends (the Liquidation Preference).”

That is an example of actual preference. Based on that, a certain multiple of the original investment per share is returned to the investor before the common stock receives any consideration. Typically, investors ask for this as a form of protection given the risk of an early stage investment. Most term sheets will include such a term, however the actual multiple (1X, 1.2X, 2X) could be something that is negotiated by the investor.

Before moving forward to understand deeper about liquidation preference, we need to understand first the definition of a liquidation event. According to Venture Deals, liquidation event is a merger, acquisition, sale of voting control, or sale of substantially all of the assets of the Company in which the substantially all of the assets of the Company in which the shareholders of the Company do not own a majority of the outstanding shares of the surviving corporation shall be deemed to be a liquidation.

Different Types of Participation

The next important component of the liquidation preference is participation. There are typically 3 types of participation; full, capped and no participation.

Full participation indicates that the investors will get their liquidation preference first and then have the opportunity to participate pro rata with the common stock. For example, if an investor invests $10 in a company with 1X Liquidation Preference, during a liquidation event, the investor will receive its 10$ capital invested first then the remaining assets shall be distributed ratably to the holders of the Common Stock and the Preferred on a common equivalent basis.

Another variety is called Capped Participation. This type indicates that the stock will share in the liquidation proceeds on an as-converted basis until a certain multiple return is reached. Sample language is as follows. The “Cap” sets a limit on the multiple of return on investment amount that a series of Preferred Stock can receive before its participation feature is cancelled.

The provision commonly reads as follows:

“After the payment of the Liquidation Preference to the holders of the Series A Preferred, the remaining assets shall be distributed ratably to the holders of the Common Stock and the Series A Preferred on a common equivalent basis, provided that the holders of Series A Preferred will stop participating once they have received a total liquidation amount per share equal to [X] times the Original Purchase Price, plus any declared but unpaid dividends. Thereafter, the remaining assets shall be distributed ratably to the holders of the Common Stock”

The last one is No Participation where the investors will receive the gain based on the ownership percentage of the company times the amount of liquidation event itself. This is the most straight forward and least aggressive position for an investor to take.

Case Example

The founders of a tech startup called ABC Company held 1,000,000 shares of common stock that they paid at $1 per share at incorporation, this means a total of $1 Million. Afterwards, a venture capital firm invested $2 Million to buy 500,000 shares of preferred stock at $4 per share. Now the founders own 66,7% while 33,3%. For simplicity, let’s round it to 67% and 33% and assume the company is sold for $10 million.

  • Full Participating

Investors taking participating liquidation preference are seeking the most protection. Preferred stock with a participating liquidation preference will get their liquidation preference first and then have the opportunity to participate pro rata with the common stock. Given the case example above with 1X Participating, the investor will receive its investment amount of $2 Million liquidation preference, then they are allowed to participate in receiving their pro rata share of the remaining $8 million. The remaining $8 million will be divided pro rata between the common stock and the preferred stock as if the preferred stock had converted to common stock. In this example, the investor will receive $2 Million plus 33% of $8 Million ($2,64 Million), or a total of $4,64 Million

  • Capped Participation

The second type or variety of a liquidation preference is capped participation. If we use the same example with 2X Cap, then the investors would be entitled to either $4 Million — 2X the initial investment, or 33% of the total proceeds. At a sales price of $10 Million, the investors would choose the first option of $4 Million rather than the $3,3 Million.

  • Non Participating

If the preferred shareholders do not convert their preferred shares into common stock, they will receive their liquidation preference of $2 Million. However, they have the right to convert their shares into common stock and participate in the gain out of the liquidation event. By converting all their preferred stocks to common stocks, they are allowed to receive their pro rata share of the $10 million along with all the other common stock. Therefore, the investor will receive 33% of $10 Million, or $3,3 Million.

It is important for entrepreneurs to properly understand the impact of these terms. Typically for early stage investments the standard is to have simple 1X non-participating preference shares. The problem with more protective provisions is that every investor in the future will want to get at least what the previous investor received, and sometimes may even get more protective which ultimately may make the liquidation preferences very onerous for all the founders.

Photo credit: family-company.com

3

Why Timing is Everything

Original post by e27

Written by  Maliekah Harjani

You know what they say, timing is everything; in love, in life and particularly, in business. In many ways, timing is difficult to define. It remains a mystery; you can’t control it, yet it represents one of the greatest make-or-break points in a start-up’s life.

The hard truth is that 90% of tech companies fail. No doubt, there is no single solution that can protect a start-up from this outrageous death rate. Timing, however, is one factor that business leaders describe as having a strong contributing role to a start-up’s success.

Serial entrepreneur Bill Gross of Idealab points out that timing accounted for 42% of a start-up’s outcome. CB Insights did an analysis of 101 start-up post mortems and also found that lack of market need was the top factor that resulted in failure. As investors, we also attempt to anticipate market readiness and timing when forming a thesis about a company or sector.

Riding the wave

Picture the perfect business: there’s this incredible idea, an intelligent group of individuals that can execute, a viable business model and strong financial support from investors. Scenerio 1 is where you launch too early, which means that your customers are not ready for what you offer. Scenario 2 is where you’re too late, which entails that you may not be able to squeeze in to get a piece of the pie. In either scenario, early or late, you’re left with an unfavourable outcome.

The trick is that you need to ride the wave, not surf against it. Oftentimes, tech entrepreneurs have ideas so advanced that consumers are not ready to adopt it. Sometimes, the current infrastructure that a product would need to rely on is not strong enough. Frequently, we also see companies that enter the market too late, with established and well-financed incumbents that have already created a strong customer loyalty.

Above were some examples of what the wrong timing could result in. The good news is that timing can work in your favour, but only if you understand what makes timing right. Let’s call them “triggers”.

What are the triggers that can help identify market readiness and opportunities, you ask? To help explain this further, we are going to apply the Critical Mass framework developed by Pete Flint of US-based venture firm NFX. Once again, you may not be able to control these factors, but it can certainly help identify opportunities in different sectors, business models and offerings.

Considering enabling technologies and market trends

According to the framework, the first trigger of market readiness is the pre-existence of technologies that are already available. Without the development of the smartphone, we wouldn’t have ride-sharing services like GoJek and Grab.

In Indonesia, developments in network infrastructure creates opportunities in consumption of streaming media, healthcare and education content. To ensure that your product can stand tall, you need the right tech infrastructure. Entrepreneurs that know this are knowledgeable about the pipeline of emerging technologies as well as past technology developments and how to leverage on it.

Another thing to strongly consider is economic trends – this creates opportunities. A common example – the 2008 financial recession in the US created the sharing economy. Investors passed on Airbnb, thinking that individuals would never rent out their rooms to strangers. What they did not catch is that during the recession, people needed extra income and the stigma of sharing homes with strangers was no longer applicable. Uber also launched around the same time, where drivers needed to find new ways to grow their income.

Similarly, Indonesia saw an increasing number of SMEs struggle to expand their market reach, an opportunity that eCommerce marketplaces (like Tokopedia and Shopee)and FinTech SME lenders (like KoinWorks and Modalku) seized. Now forecasted to be US$55-65B market in 2022 (McKinsey, 2017), eCommerce has triggered interesting opportunities in logistics & fulfilment, omni-channel management, and other eCommerce enabling technologies.

Ultimately, it comes down to customer behaviour.

The last, and one that I believe is the most applicable to Southeast Asia is cultural acceptance and customer behaviour. The way we interact with technology changes at the light of speed. This may be difficult to explain, but it’s one of the most vital elements to timing. Culture shifts lead to change, which then affects adoption. With the presence of Friendster, users were habituated to utilise social media, which then helped Facebook grow as behaviour was already semi-shaped.

In the same way, horizontal eCommerce has set this behaviour and precedence for shopping online, providing the right consumer mindset for vertical eCommerce (more niche, specific platforms like Sorabel and Dekoruma) to thrive. With the widespread adoption of mobile digital devices and online consumption, we’re seeing fascinating social trends.

According to WeAreSocial, the average Indonesian now spends 8 hours 30 mins online daily, of which 3 hours 30 mins are used on social media. Indonesians love to share content, stay connected to peers and also interact with new people online. This unlocks opportunities in social-commerce, video streaming and e-sports. Similarly, with more individuals transacting online via smartphones, we see the array of financial services that can be offered to individuals including lending, wealth management, personal finance management and insurance.

These new opportunities are “triggered” by a shift or movement. The right timing, determined by technology, economic and cultural trends can help assess whether a start-up can flourish. Very often, it is not just one trigger, but rather a combination of factors that give birth to a phenomenal opportunity.

As an entrepreneur, your job is to identify these triggers and ask – are your customers really ready for your product? Do the current economic conditions and existing technologies, supported by the right customer mindset champion it? Is this what your customers truly need at this point in time or the near future? Are your customers preconditioned to behave in a way that will encourage adoption? Is there a market in which current incumbents are unable to address pain points successfully? If your answer to any of the questions are a no, then perhaps that timing is just not right.

My perspective is that timing is about precedence and precondition. We love entrepreneurs that are visionary, forward-looking and experimental, but it’s crucial to consider the current external landscape. It’s something you can’t control, but it affects your business tremendously. In order to be successful, you must ride these trends. Just like the waves of a beautiful Balinese sea, determined by the Earth, Sun and Moon, you could swim against the current or surf the high tide. I’d go for the latter; I hear the view’s great.

10

Enough of product-market fit. Let’s talk about founder-market fit

Written by Adrian Li

You’ve probably heard about product-market fit and its importance to getting rapid market traction. But what about founder-market fit?

In the early stage of the market, each competitor is probably achieving similar rates of traction. Consequently, early-stage metrics will rarely predict who will be the eventual winner. Hence, for all early-stage ventures, we believe that the most important ingredient to success is the team. For us, founder-market fit is a way to assess how one team may be better suited to a particular opportunity than another.

There can be many criteria for founder-market fit, but for our evaluation, the three most important are experience, passion, and purpose.

Experience

Experience is quite self-explanatory. Founders who have direct industry experience will have more knowledge and understanding compared to those who do not. They’ll have identified problems in the industry or may have a unique perspective, having spent many years in it.

Experience can be easily defined by how many years the founders have in an industry, what their significant achievements have been, and also how extensive their network within the industry is. If the founders do not have significant direct experience, we ask if they have built up a strong advisory board in this area or have gained other connections into this industry.

Generally, a team with more experience in the industry they are building in should be able to execute better—other things being equal.

Passion

Passion is harder to measure, but at CV, we define passion as a measure for how much the founders are in love with the business that they are starting. It is in some ways a proxy for resilience or the determination they will have in the business.

As the late Steve Jobs remarked, “The only way to do great work is to love what you do.” So, we believe that the only way for anyone to endure and go through the challenges and hardship of successfully starting a business is to be passionate about their work. This way, “work” is no longer work, but rather a part of life and what they wake up every morning excited to do.

Clearly, a team who is passionate about their industry will have more determination than one that is not. Passion is hard to define, but we can see it from the way a founder talks about their industry. What drives them? How detailed do they know their business? How much do they care about the product? Do they work late into the night to build their business? All of these are signals of someone who is passionate about their business.

Purpose

Purpose is the answer to why the entrepreneur is starting the business. What got them started and what triggered them into taking this on as a mission?

We often ask entrepreneurs to tell us their “story;” what aspects of their life led them to build their company? Through powerful stories, we can sometimes learn the underlying purpose or motivation for the founders.

There’s no right answer to this, but while we’ve heard many interesting reasons for starting businesses, the one answer we don’t want to hear is “because it’s a huge market opportunity.” To us, this implies short-term thinking and a greater likelihood of money being a core motivator. When times get tough—and they inevitably will be—the temptation to quit and take a well-paying job will be too hard to resist.

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So, when you’re meeting with us, don’t be surprised if we spend a good amount of time talking about you and the founding team. We want to know why you’ll be the best team in Indonesia to execute, why you collectively have the best experience, why out of all the things you could be doing, you have decided to pursue your startup, and how you came to start it.

Often times, great conversations which build our conviction in the founders are the ones that will lead us to the next step in our due diligence process.

Original article here by Tech In Asia.
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