Are venture capitalists sowing the seeds of Indonesia’s future?

Indonesia is a middle-income country blessed with an abundance of natural resources. Its evolution from a mainly agrarian society to middle-income country status has largely depended on commodity exports, financed by foreign portfolio investments – typically, investments in Indonesian resources companies.

However, in recent years, Indonesia has emerged as a hotspot for innovation and entrepreneurship. As Southeast Asia’s largest economy and a nation teeming with young, tech-savvy entrepreneurs, Indonesia is now a compelling market for a new form of investment – venture capital.

Venture capital is a form of venture finance tailored to the needs of startup companies with high growth potential. Securing venture capital is often critical for the survival and growth of startups, which are considered too risky to attract alternative sources of funding, like debt, in their early stages.

But it’s not just the venture capital that startups covet – it’s also the venture capitalists themselves. They bring important knowledge and expertise, often serving as mentors and board members for the startups they invest in. For this reason, venture capital is sometimes called ‘smart capital’ and it is an important ingredient for developing the capacity of any startup.

 

Opportunities abound

An expanding middle class, rising smartphone adoption, and a growing demand for digital services are just a few of the factors driving the rapid evolution of Indonesia’s startup ecosystem. Homegrown success stories such as Gojek, Tokopedia, and Traveloka have not only established themselves as regional giants – they have also fundamentally reshaped the consumer behaviour of Indonesians and paved the way for a new wave of startups and entrepreneurs.

The Indonesian economy was hard hit by Covid-19 but it didn’t diminish Indonesia’s technology sector. That is because the pandemic helped accelerate the adoption of many digital services. HealthTech startups offering telemedicine, online pharmacy services, and health monitoring solutions have all seen increased demand. The resulting shift in consumer behaviour has created a significant window for healthtech innovations to flourish.

Perhaps the biggest success story was the telehealth app Halodoc – which recently secured a further US $100 million in funding from investment partners in Singapore, Denmark and Hong Kong.

But rapid technology adoption post-pandemic will also unlock demand in other sectors. One of the most promising prospects is fintech. With a sizable portion of the Indonesian population still lacking access to traditional banking services, fintech startups have the potential to revolutionise the financial landscape. Mobile payment platforms, peer-to-peer lending, and digital wallets have gained traction, creating financial inclusion opportunities for millions.

These opportunities and success stories highlight Indonesia’s potential and encourage more investors to take part in the nation’s growth story.

In 2022, there were roughly 200 seed stage investments, worth US $762 million, and 62 growth stage investments, worth US $3.5 billion, in Indonesian startups. Much of this venture capital comes from overseas – especially the US, which is by far the world’s largest venture capital market. Y-Combinator – which established the world’s first startup accelerator to mentor to technology companies – is very active in Indonesia and many of Indonesia’s local venture capital funds also have deep links into Silicon Valley.

 

Challenges and obstacles remain

Despite Indonesia’s quick rise to startup stardom, a number of obstacles prevent Indonesian startups from reaching their full potential. Infrastructure bottlenecks, including limited access to reliable logistics and internet connectivity in certain regions, impede their capacity to grow.

Additionally, while Indonesia boasts a young digital native population, a considerable portion of the community remains underserved by technology because of digital illiteracy and economic disparities. This presents both a challenge and an opportunity for startups to find solutions that bridge this gap.

The Indonesian government is trying to overcome these human constraints. It appointed GoJek co-founder Nadiem Makarim as the minister for education, culture, research and technology, and has approved the entry of foreign university campuses into Indonesia.

Regulatory hurdles, despite improvements, still pose obstacles for investors and startups. Navigating a complex regulatory environment requires time, effort, and legal expertise, which can sometimes deter potential investors. For instance, the Indonesian Financial Services Authority (OJK) insists on minimum capital requirements for foreign venture capital companies.

Similarly, the lack of standardised investment structures and exit options (the sale of investments) further complicates matters, often leading to longer investment horizons and potentially lower returns.

Much needs to be done here, although a new ‘golden visa’ policy may help lure foreign investors and technical experts to Indonesia. The government is already using it to encourage investment from high profile tech leaders like Sam Altman, CEO of Chat GPT and the former president of Y-Combinator.

 

Indonesia’s digital economy is at a crossroads

Portfolio investments in natural resources still dwarf investments in Indonesia’s technology sector.  But venture capital investments have an outsized influence on the lives of everyday Indonesians, helping spread health services to remote communities and banking services to those who are financially excluded.

The Indonesian venture capital market is at a crossroads, bursting with opportunity but still contending with its fair share of difficulties. The achievements of early-stage firms have sparked international attention and investment, laying the groundwork for continued expansion.

But to realise Indonesia’s full potential and advance its venture capital industry into a new era of innovation and prosperity, it will be essential to address legislative, infrastructure and societal impediments.

By reducing friction in the investment process, Indonesia can attract more international capital. But failing to do so will divert venture capital – and its promise of technological development – towards other emerging technology centres, like India and Vietnam.