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Business Insight

Indonesia is in danger of running out of 'unicorns'

Action is needed to foster more early-stage startups

Gojek and a handful of other leading tech companies have ridden away with a disproportionate share of venture capital investments in Indonesia. (Photo by Akira Kodaka)

Indonesian startups have been at the center of attention in Southeast Asia for the last few years. But as a growing number of them have graduated to unicorn status, investors have steered away from early-stage deals in favor of technology companies with some track record of success.

More than $4.07 billion was invested into local startups in 2018, up 36% from 2017. While that sounds impressive, the funding imbalance toward more established companies threatens to dry up Indonesia's pipeline of startup champions.

A few years ago, investors were concerned about a different financing crunch in Southeast Asia as investments were flowing into seed-stage companies -- brand-new startups with little to no business record -- while very little was earmarked for when these small businesses graduated to the next stage of fundraising, the "series A" round. Entire panel discussions at tech conferences were dedicated to discussing how to head off the expected funding crunch.

These days, it is a different story entirely. The same investors who once championed six-figure seed rounds are now focusing most of their attention on later-stage deals. Average deal sizes have grown to several million dollars.

The majority of venture capital is getting sucked up by a few unicorns, the handful of companies that have reached valuations of $1 billion or more. For example, Tokopedia's $1.1 billion fundraising last December accounted for more than a quarter of all venture capital committed in Indonesia last year.

The number of seed-stage deals meanwhile has been fairly flat for the past four years as investors have turned more conservative, fluctuating between 40 and 60 a year, according to CB Insights data, after climbing rapidly between 2013 and 2015.

Paradoxically, the newfound desire to mitigate risk has come as a result of successful risk-taking. In the past, venture capital funds had to have a high tolerance for risk in Indonesia. Because the funds were relatively small, the best way they could reduce risk was by maximizing the number of bets they made through making many small investments.

Fast forward just a few years and the investors who made good bets have been able to leverage their track records to raise much larger war chests.

East Ventures is one of the only players that has consistently focused on seed-stage deals over the past decade. But its early-stage funds have been getting bigger, with the latest clocking in at $75 million. This means it is under pressure to write bigger checks which in turn means its investees are liable to become overvalued early on.

SoftBank's misjudgment over coworking space operator WeWork has also sent investors running for cover. Until a few months ago, many venture capital funds made early-stage decisions based on whether or not they believed SoftBank would participate in later rounds. Now after SoftBank has spent up to $8 billion to bail out WeWork, many local investors are asking their portfolio companies to either close their funding rounds quickly or prioritize profitability for survival.

Against this backdrop, founders have to take more responsibility for their own businesses and find ways to finance growth -- and turn a sustainable profit --- themselves.

If they are unable to raise seed funding for their startup, they should take it as a sign that they may not have enough traction in the market and need to reconsider their business model. If more Indonesian companies can demonstrate business momentum before attempting to raise venture capital, more investors will have the confidence to go in on early fundraising rounds.

In the medium term, the angel investor community should be encouraged to help fill the seed-stage gap. This is what has happened in the U.S. and Europe. Indonesia does have some wealthy individuals who back tech startups and a new group, the Angel Investment Network of Indonesia, is starting to come into its own. But such investors are still too few in number.

In the long term, the government should step in to stimulate the ecosystem with early-stage grants in the way Malaysia and Singapore have. Their Startup SG and Cradle funds, respectively, exist to help spur seed funding and give startups an opportunity to build traction which can give confidence to institutional venture capital funds for subsequent rounds.

A focus on later-stage investments is by no means a bad thing. In fact, it is mission critical for all stakeholders in the game. But the only way the tech ecosystem can stay balanced in countries like Indonesia is if enough seed money and opportunities remain to rear the next generation of unicorns.

Aldi Adrian Hartanto is principal and general manager of investments at MDI Ventures, a venture capital fund based in Jakarta and backed by Indonesia's Telkom Group.

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