Traditional venture capital funds are slowing in Indonesia's technology sector, despite a digital boom. A new form of investment is developing as major companies begin to dig into emerging technology, creating a wave of so-called corporate venture capital funds. But these funds will need patience and a change of strategic direction if they are to outperform the independents.
The new wave includes some very big players. In the latest development, Bank Rakyat Indonesia, the country's largest lender, acquired Bahana Artha Ventura in November as a vehicle for corporate VC purposes. Bank Central Asia, another large Indonesian lender, launched a corporate VC initiative called Central Capital Ventura with $15 million in January 2017.
But Indonesia's first corporate venture capital fund appeared in May 2014 in the form of the $50 million SoftBank Indosat fund, jointly owned by Japan's SoftBank and Indosat, a large telecommunications company. In 2015, Telkom Indonesia, another telecoms giant, launched MDI Ventures (currently the largest corporate venture capital fund, with $100 million to invest). Bank Mandiri, Indonesia's largest bank by assets, followed in 2016 with Mandiri Capital Indonesia, launched with $36.9 million.
Several corporate VC funds have also been established by large family-controlled Indonesian companies, including GDP Ventures, an offshoot of Djarum Group, a property-to-banking conglomerate that is the largest shareholder in Bank Central Asia. Venturra Capital is associated with Lippo Group, another large diversified conglomerate, and SMDV with Sinar Mas, a large paper and palm oil producer. In March, SMDV announced a partnership with Yahoo Japan and Singapore-based East Ventures to form EV Growth, a corporate VC firm that will seek to raise $150 million to invest in early-stage Southeast Asian tech companies.
The main motivation behind all these funds is the realization that investing in early-stage tech startups can have significant knock-on benefits for corporate investors, in addition to returns from the growth of the startups -- a lesson learnt from overseas institutions such as Vertex Ventures, an initiative of Singapore's state-owned Temasek Holdings, which began investing in technology in the early 2000s, Singapore Telecommunications' Singtel Innov8 fund, launched in 2010, and Australia's Telstra, a leading telecoms provider, which set up a corporate fund in 2011.
The perception that corporate parents can reap transformative benefits through collaboration and investment in high-tech startups, in addition to any returns that flow from the startups themselves, accounts for the most notable difference between corporate and independent funds: The strategies of corporate funds tend to be aligned with those of their parent companies, rather than independent of them. Typically, startups are fed capital derived from the balance sheets of the funds' parent companies. Corporate funds usually avoid seed funding -- investing in very young startups -- while independent funds often make ambitious early stage investments in hopes that some will pay off with spectacular "moonshot" returns.
The surge of interest in corporate funds comes as independent VC funds face growing problems in two key areas. It has become harder to find technology deals that can generate high returns on a par with those they expect from investments in natural resources, property and infrastructure projects, in part because of competition from big-spending foreign investors. And identifying exit strategies that allow them to cash-in investments and move on to the next deal has become more difficult, in part because of the Indonesian Stock Exchange's refusal to accept listings from companies that are unprofitable or lack hard assets, as technology startups often do.
The number of VC exits in Indonesia will probably grow over the next year, thanks to buying sprees by successful and mature startups such as Go-Jek, a ride-hailing app, and Tokopedia, an e-commerce company. But these will be small deals, far from the "grand slam" exits of which independent VC funds dream. East Ventures is the only independent VC fund operating locally that has so far been able to nail decent exits of this kind, with two unicorns (startups that come to be worth $1 billion or more) to its credit -- Tokopedia and Traveloka, an online travel booking platform.
Taken together, these problems are having a serious impact on the funding available for startups. Venture capital is pouring into Indonesia, but more than 60% is flowing into the mature stages of startups, making it hard for early-stage startups to attract investments. A potential tax break on returns from VC investments in startups is being considered by President Joko Widodo's government, and could make a difference. But the rise of corporate VC funds can also help, if corporate funds can find the right investment model.
That is easier said than done. Large corporations funneling money into VC funds need to understand that technology investing requires a great deal of patience: The right startups must be identified and given time to grow and become profitable, and a successful exit must be engineered. The SoftBank Indosat fund clearly found the first stage difficult, admitting in 2015 that it had not been able to find many local companies worth backing. At the time, reports indicated that only $50,000 had been deployed. By last September, the fund claimed it had deployed most of its capital, but was unsure if it would raise further funds.
When this happens, parent companies often shutter their corporate VC funds and divert the remaining capital into a different investment arm, or even an external VC fund. This perpetuates the financing problems facing startups. Indeed, most startups meet their demise in the early funding stages due to a lack of support. To mitigate the "startup mortality rate" in Indonesia, corporate VC funds need to offer developmental frameworks in the form of incubation and acceleration programs, followed by support structures for entrepreneurs who need to make it through to their first fundraising round and beyond.
These lessons are being learnt. For example, Bank Mandiri's MCI fund moved in its first year of operations to register Mandiri Digital Incubator, a program intended to help financial technology entrepreneurs to validate product concepts and test business models. GDP Ventures, Venturra Capital and SMDV all behaved initially like independent funds, seeking to spray capital into the market and see which plants grew best. However, they have begun combining this traditional VC approach with in-house venture-building over the past two years as the growth rate of Indonesia's digital economy has risen.
All three conglomerates are now going into deals as controlling shareholders, with the strategic aim of consolidating their digital assets. GDP Ventures recently acquired Tiket.com, an online travel agent, to expand Djarum's Blibli.com e-commerce offering. Lippo is looking to marry its investment in Grab, a Singapore-based Asian ride-hailing app, with Ovo, its electronic payments app. MDI Ventures aims to invest in tech companies that offer synergies and collaboration with Telkom Indonesia's infrastructure, customer base and data resources, investing only in companies with proven business models and healthy unit economics -- traits that significantly de-risk potential investments.
Four years into the era of corporate VC funds in Indonesia it has become clear that while traditional VC firms opened the door for corporates to deploy capital into emerging technology, many of these arrangements will soon dissolve and be reborn as corporate venture capital funds. The struggles of independent VC firms show that the glory days of simply spreading capital into Indonesia's nascent technology market are coming quickly to an end.
To succeed, however, corporate funds need to fulfil a number of conditions. They must provide patient capital to give startups time to mature, and provide "safe houses" where startups can benefit from corporate synergies and collaboration, either through direct investment or acceleration programs that drive further partnerships. Most of all, though, corporate funds need to think carefully about how their technology investments fit together as elements of their own corporate structures, and how startups can be folded into their core businesses.
Nicko Widjaja is CEO of MDI Ventures, a corporate venture capital initiative launched by Telkom Indonesia. He has spent more than a decade in corporate transformation and VC, along with founding and funding technology companies in Indonesia.
