Opinion: Indonesia Needs More Scale-Ups, Not More Startups
Venture capital for tech startups in emerging markets like Indonesia can be a poison. Early-stage investors in this part of the world routinely spray small amounts of money – usually just a couple hundred thousand dollars at a time – into the market and pray that one of their tech investments will someday remunerate their entire fund.
But there has to be more to building a thriving startup-investor ecosystem in Indonesia than merely spraying capital and praying for explosive growth from newbie founders.
Whether Indonesia’s early-stage venture investors like to admit it or not, most of their new investments are ill-fated from the start. In reality, it’s simple math. CB Insights says 70% of tech startups fail within 20 months of their first funding round.
Based on my own observations, the sad truth is that in Indonesia, first-time founders are not prepared for the reality that they will need more money to actually reach the growth targets demanded by investors.
I think it’s important for local founders to know the difference between chasing explosive growth in the form of what I call “venture scale” and pursuing steady growth as a small or midsized enterprise (SME).
My theory is that Indonesia currently has too many digital startups that have opted to chase venture scale fuelled by venture capital, without having adequate assistance from their investors that would help get them to the break-even point and beyond. Consider the two growth models below.
The area which I like to call Indonesia’s “Valley of Death” has tech venture fund managers throwing unwitting founders into its abyss by the truckload. With this risk in mind, for many, the SME model would have been the safer route from the start.
Indonesia. It’s Harder Than it Looks
To make matters worse, one of our earliest findings at MDI Ventures was that – in the Indonesian market – scaling up a technology company is considerably more challenging than it is in developed and homogenous markets like the U.S. and China. Indonesia simply does not enjoy the United States’ high credit card penetration or China’s widespread digital wallets.
Digital payments in the world’s largest archipelago are mostly done by bank transfer. This inevitably means high friction from a customer experience standpoint. Moreover, the percentage of the country’s unbanked population still sits high. As Indonesia’s population now exceeds 260 million people, the World Bank’s Financial Inclusion Index for 2014 (the most recent data set for this in the country) shows that only 36% of adults in Indonesia have bank accounts.
Monetizing digital products in Indonesia has proven to be an extremely tough nut to crack. In the pre-internet era, local consumers (and even businesses) were accustomed to using pirated software, resulting in a widespread under-appreciation of digital products. According to Business Software Alliance, as recently as 2015, Indonesia’s rate of unlicensed software use clocked in at 84%, costing companies approximately $1.1 billion in missed revenue.
To cope with these inconvenient dynamics, we co-manage two of Indonesia’s large digital incubators: Telkom Indonesia’s Indigo Creative Nation and Bank Mandiri’s Mandiri Digital Incubator. The idea with both of these startup labs is that we wanted to help startups that have raised their first round of capital make it through the Valley of Death. In order for these two programs to be successful, they need to help the startup cohorts secure future funding rounds from new investors and help them keep pace with their growth targets.
So far, the startups that have participated in these incubators include names like Payfazz, a mobile banking and payments solution; PrivyID, a universal identity enabler and digital signature provider; Kofera, a performance-based marketing platform; and Sonar, a social and digital media monitoring and analytics firm.
After two years and two cohorts, more than 70% of startups that have passed through our incubation programs have received subsequent rounds of funding. Ninety percent of them remain operational and active after graduation.
I believe the not-so-secret formula is: collaboration. Program managers should stop treating incubators as their own personal campaign platforms (utilizing them to service their own agendas). Instead, they should focus on the work itself: initiating partnerships with new startup investors and facilitating relationships between startups and corporate managers.
Incubator and accelerator heads need to educate these players -- not hustle them. This means trying to have fewer vanity lunches in downtown Jakarta, and instead try to start more meaningful dialogues; not as snake oil salesmen, but as actual partners who can bring value to the table.
Creating a healthy startup ecosystem in Indonesia also means preventing the industry from an overvaluation bubble brought on by hype and politics. We need to send the right message to the global investment community that Indonesia’s tech startups are here to stay. The nation has enough new tech companies popping up each day, but what the ecosystem really needs is for early-stage investors to guide these startups through the Valley of Death.
Nicko Widjaja is the CEO of MDI Ventures, a corporate venture initiative by Telkom Indonesia which is based in Jakarta with operations in Singapore and Silicon Valley. Widjaja has spent more than ten years in corporate transformation, venture capital, founding and funding tech companies in Indonesia.