JAKARTA (TheInsiderStories) – Venture capital (VC) increasingly show an important role in the development of startup companies in Indonesia, amid prospects of growth in the digital economy in the country.
Still at its young age, investment in the digital industry is soaring to reaching nearly US$3 billion in 2017, double than the previous year according to Google and A.T. Kearney’s report.
Most of the investments are still in the seed or early stages, but late-stage investments are generating most of the value.
In Indonesia, VC largely fall into two broad categories, local investors and foreign investors, which typically originating from more developed startup markets (Japan, U.S.). These investors bring global expertise and networks.
Meanwhile, local VC mostly invest in companies that are already operating and generate cash flow or profit and invest more with profit-sharing models or even financing models like bank and finance companies.
The Financial Service Agency (FSA) recorded, in 2017 local VCs have invested around Rp6.8 trillion ($488 million) in local startups, rise only 8 per cent from previous year.
However, if we take a look into today’s state, Indonesia’s startups funding landscape has been dominated by foreign VCs, where the largest funding rounds are led by e-commerce and related transport companies.
E-commerce and transport categories dominate deals and investment values, and the largest funding rounds have been led by companies such as Go-Jek, Traveloka, and Tokopedia.
In 2017, Chinese investors became heavily involved in Indonesia’s startup environment, accounting for 95 per cent of its investment value.
Despite the aggressive of foreign VCs, local VCs are still facing the problematic issues where constrained by capital or source funding.
It is still difficult to expect local VCs to invest in startup, perhaps their concern due to high Non Performing Finance in financing industry which reach 7.08 per cent in 2017.
Therefore, it is required to have a strong capital structure in order to maximize investment by equity participation scheme which is the strength or value proposition from venture capital not owned by other financial institution.
The reformation in local VCs mindset is needed, otherwise the potential of startup and digital companies will be taken up by foreign VCs, and the local players will only be spectators.
However, rapid growth of financial technology also implies that there exists a big need for talented engineers. Without such talent startups will not be able to meet demand and survive.
VC players stated that there are four key focus areas that need to be the center of attention to speed up growth of the startup ecosystem in Indonesia, which are talent development, fiscal incentives, funding option, and startup facilitation to capital market.
Despite the circumstances, both local and foreign VCs are optimistic about the Indonesian market. The positive outlook is driven by the fact that Indonesia is still under-tracking regional peers on investment value versus GDP and Internet users, which indicates high room for growth. VCs are also confident in the strong macroeconomic fundamentals and favorable demographics in Indonesia.
Most VCs are looking to diversify from e-commerce because of potential market consolidation, major new entrants, high investments, and the long lead time for profitability.