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Indonesia’s Thriving Startup Scene Has Ample Potential For Growth

Indonesia’s startup scene is booming as investors and startup entrepreneurs scramble to capitalize on a potentially lucrative opportunity in the Southeast Asian archipelago’s emerging digital economy which is driven by a growing middle class, a young demographic, rising internet penetration and a supportive regulative environment.While the United States remains the world’s “startup hub” accounting for over 50% of deals and investment value, Singapore is the main startup hub in Southeast Asia. However, other Southeast Asian nations led by Indonesia are fast catching up leading to a flurry of views that Indonesia could emerge as a startup hub in Southeast Asia in its own right.

Two pie charts showing startup investment in Southeast Asia in 2012 and 2016. In 2012, startup investment in Southeast Asia was US$ 0.3 billion, with 83% of that amount invested in Singapore, 14% in Indonesia and 2% in other Southeast Asian countries. In 2012, startup investment in Southeast Asia was US$ 6.8 billion (23 times higher than in 2012) with 41% of that amount invested in Singapore, 19% in Indonesia, and 40% in other Southeast Asian nations.

A report by consulting firm AT Kearney and Google found that startup funding in Indonesia soared 68 times in the last five years reaching US$ 1.4 billion in 2016. The funding momentum accelerated this year with the report stating that in the first eight months of 2017, Indonesian startups collectively raised US$ 3 billion in 53 investment deals.

Bar chart showing startup investment in Indonesia (in US$ billions) in 2012, 2016 and Jan-Aug 2017. Startup investment in Indonesia amounted to US$ 0.44 billion in 2012, US$ 1.4 billion 2016 and US$ 3 billion during the first eight months of 2017.

Most startup investments in Indonesia are still in the seed or early stages by volume, but by value, late stage investments account for the lion’s share.

Pie charts showing venture capital investment in Indonesia by stage during the January - August period of 2017. Indonesia saw a total of 53 deals during the period, of which 43% were seed stage, 30% were Series A, 8% were Series B, 15% were Series C or later and 4% were debt/PE. By deal value, total venture capital investment in Indonesia during the period amounted to US$ 3 billion, of which 0% were seed stage investments, 15% were Series A, 1% was Series B, 43% were Series C or later, and 40% were debt/PE.

Indonesia’s e-commerce and transport sectors have taken the lion’s share of startup funding over the past few years.

Pie chart showing startup investment in Indonesia by sector (% of total investment value during 2012 - Aug 2017). 58% of startup investments during the period were taken up by the e-commerce sector, 38% in the transport sector, 1% in the finance sector, 1% in the classified/directory sector, 1% in the payment sector and 2% in other sectors.

 

Tremendous Potential

Still, Indonesia offers vast untapped potential. With a population of over 250 million, Indonesia is the fourth most populous nation in the world. Over 60% of Indonesians are aged between 20 to 65 i.e., their principal working years, and 27% of Indonesians are less than 15 years of age. Thus, Indonesia has a young demographic, a low dependence ratio and a sizeable domestic market (over 50% of Indonesia’s GDP is derived from domestic demand).

Consequently, the country has the ingredients for strong economic growth which in turn is contributing to an expanding middle class; according to the International Monetary Fund’s “World Economic Outlook” report published this month, Indonesia is among the top five ASEAN countries to surpass 5% GDP growth rate this year. Already Southeast Asia’s largest economy, the Indonesian government aims to be a top ten economy by 2030 and Pricewaterhouse Coopers projects Indonesia to be the world’s fourth largest economy (in terms of GDP at PPIs) by 2050, up from 8th place in 2016.

In 2016 Indonesia had the world’s fourth largest middle class with 19.6 million households according to Euromonitor International and this is set to increase to 23.9 million by 2030, making this group a significant consumption driver in the country.

Indonesia’s growing young consumer base is also increasingly getting connected; the country has over 100 million internet users (the majority use their smartphones for the purpose) and with just 53% of Indonesia’s population having internet access, there is tremendous potential for the country’s internet population to expand. Indonesia is poised to be the world’s fourth largest internet market by 2020 according to a joint report by Google and Temasek.

With Indonesia’s growing population of young consumers increasingly turning to the internet for a multitude of reasons, be it to look for online shopping deals or watch online videos the country is seeing a growing digital population which in turn is giving rise to a growing digital economy with tremendous opportunities.

 

Thriving Startup Ecosystem

Unsurprisingly, Indonesia is becoming a hotspot of startup and investor activity. A number of homegrown startups have mushroomed and foreign players have jumped in as well. Notable homegrown success stories include Go-Jek, Taveloka, and Tokopedia, and there are numerous others aiming to strike gold. Kredivo (an online credit provider), Investree (a P2P lending marketplace), CekAja (a financial product comparison service), Bukalapak (an e-commerce platform), DokterSehat (an online health portal), Mivo (a life streaming service) and Socialla (an e-commerce platform focused on cosmetics) are just a few examples in Indonesia’s long list of startups.

Kredivo, an Indonesia-based online credit provider successfully completed its Series A round, co-led by Jungle Ventures and Singapore-based NSI Ventures earlier this year. The amount raised was undisclosed.

This January it was reported that Socialla raised an undisclosed amount in its Series B round from Japanese fashion platform Istyle (TYO:3660) and East Ventures.

Foreign startups are also circling the Indonesian opportunity. For instance, Singapore-based ride hailing app Grab is acquiring Indonesia-based O2O payments startup Kudo in a deal that could be worth over US$ 100 million. Grab also launched a ‘Grab 4 Indonesia’ 2020 master plan aimed at supporting Indonesia’s goal of emerging as Southeast Asia’s largest digital economy by 2020. Under the plan, Grab will invest US$ 700 million in Indonesia over the next four years which includes opening an R&D centre in Jakarta and US$ 100 million to be invested in Indonesian startups in the mobile and financial services space.

On the investor side, funding is pouring in from local and foreign players and the investor enthusiasm appears robust; AT Kearney and Google in their “Indonesia Venture Capital Outlook 2017” report found that 57% of Indonesian investors and 80% of foreign investors plan to increase their investments in the country.

Notable venture capital firms from America’s Sequoia Capital, Singapore’s Monk’s Hill Ventures, Japan’s Rakuten Ventures (the investment arm of Japanese internet company Rakuten) (TYO:4755), and tech companies such as Alibaba (NYSE:BABA) and Expedia (NASDAQ:EXPE), have pumped billions into Indonesian startups.

Chinese tech giants, perhaps in their quest for global dominance have been the most aggressive investors lately; a report by consulting firm AT Kearney and Google states that in the first eight months of 2017, Chinese firms accounted for a staggering 94% of total startup funding by value in Indonesia, a massive leap from the previous year when Chinese firms accounted for about 2% of Indonesian startup funding by value.

Notable Chinese investments include Alibaba’s investment in online marketplace Tokopedia, Tencent’s  (HKG:0700) (OTCMKTS:TCEHY) (OTCMKTS:TCTZF) and JD.com’s (NASDAQ:JD) US$ 1.2 billion investment in motorbike-on-demand platform Go-Jek.

Singapore-based East Ventures known for backing notable Indonesian startup success stories such as Tokopedia and Traveloka has raised a sixth fund focused on Indonesia.

American VC firm Wavemaker Partners is closing a US$ 50 million Southeast Asia-focused fund, with Indonesia placed as a key market.

Local investors are also hungry for a share of the opportunity on home soil. Bank Mandiri (IDX:BMRI), one of Indonesia’s largest banks, launched its VC unit Mandiri Capital Indonesia (MCI) with 500 billion Indonesian rupiah of initial capital to invest in startups.

State-controlled Telekomunikasi Indonesia’s (IDX:TLKM) (NYSE:TLK) Metra Digital Innovation Ventures (MDI Ventures) led a pre-series A round SaaS firm Kofera in June this year, and led a B series funding round for Wavecell the same month. Last year, MDI Ventures announced its plans to invest US$ 100 million into global and domestic startups.

This year, Indonesia’s largest private bank Bank Central Asia (IDX:BBCA) (OTCMKTS:PBCRY) launched a VC unit called Central Capital Ventura to invest 200 billion Indonesian rupiah in fintech startups, joining the race to use fintech to reach Indonesia’s unbanked population.

In March this year, Bank Rakyat Indonesia (IDX:BBRI) hired an executive from state-owned Telekomunikasi Indonesia (also known as Telkom) Indonesia’s largest telco, Indra Nutoyo to help bolster the bank’s fintech plans and in July it was reported that the bank was in the process of acquiring a venture capital firm, the process of which will be concluded by the end of the year. Indra Nutoyo is likely to head the new VC unit.

In another sign of investor confidence, early this month, Indonesian e-commerce startup PT Kioson Komersial Indonesia Tbk (IDX:KIOS) raised 45 billion rupiah by selling 150 million shares, or 23.1% of the company’s total share base, at 300 rupiah each, in what was Indonesia’s first e-commerce IPO. Riding on a thriving startup landscape and voracious investor appetite, the offering was oversubscribed 10 times and could pave the way for more startups to take the IPO route as Kioson had done.

With Kioson’s stock price closing at 2,120 rupiah yesterday (October 16), Kioson investors have been handsomely rewarded with a massive 600% capital gain since the shares began trading less than two weeks ago on October 5th.