High growth startups could burn out if there is a lack of investors who can cut US$5-30 million checks
4 billion US dollars. That’s the estimated value of disclosed venture investment into Indonesia’s technology startups in 2017 – much of which is foreign capital. This is a significant number, not because of its nominal which is only a fraction of the United States at US$84 billion the same year, but because it represents a very real prospective investment segment for Indonesia.
At such a nascent age, the Indonesian startup sector is already making up a significant portion of the total foreign direct investment, which totalled approximately US$32 billion last year according to BKPM. Chairman of Indonesia’s Investment Coordination Board (BKPM), Thomas Lembong, claims that if it were not for two sectors: E-commerce / Digital Economy and Smelter, FDI would have surely fallen in 2017.
According to a study commissioned by Google and AT Kearney, approximately 93 per cent of the total Indonesian investment value that year was generated by only three unicorn-level deals. This is an extreme case of very few players generating the vast majority of value, but clearly indicates that the scale of returns only becomes significant when you have startups that are fundraising in their later stages. Alas, this is why we are so enamoured by generating unicorn startups.
Anticipating the funding gap
In the third quarter of 2017, a coordinating body comprised of government officials, venture capital firms and startups jointly identified a critical lack of available capital for mid-stage venture fundraising. This is to be expected as Indonesia’s startup ecosystem is still nascent; this is true particularly with regards to the level of understanding that the global investment community has about the region and the amount of realized capital gains that have come from the market’s early investments.
As a result, much of the venture funds are still focusing on early-stage investments; out of the 70 disclosed Indonesian fundraising deals in 2017, only 4 of them were for Series B. Albeit, as the market matures, more and more players focusing on this stage will enter (i.e. B Capital, EV Growth and potentially Nick Nash’s new fund), there still exists a significant drop-off from Series A – Series B as compared to Seed – Series A or even Series B – Series C.
If this funding gap were to be left unaddressed for Indonesia, it could result in countless highly prospective startups dying simply because they quickly burn through money (as high-growth startups do) without anticipating the complete scarcity in investors that are able to write the US$5-30 million checks they needed. Running out of cash means they would have to lay people off; growth would likely be stunted, ultimately making it more difficult to raise funds. This is a vicious cycle destined to turn the company to zero.
Red carpet access to Indonesia’s most investable startups
Soon thereafter, the same coordinating body launched a government-supported initiative called the NextICorn programme. The vision for the program was to become the bridge that the local startups needed to survive the critical middle funding stage (Series B).
Equipped with a goal that incentivised all of the ecosystem’s stakeholders, the team worked closely with professional service firms (financial and legal) to curate some of Indonesia’s most investable startups. These startups would then become the first batch of Next Indonesian Unicorn prospects to attract investors globally and locally.
The programme developed into a series of on-going opportunities to meet with investors – either through independent events inviting top-tier investors in large groups or partnering with established technology conferences such as AVCJ and Wild Digital. The programme is an ongoing concierge service that supports relations-building between Indonesian startups and the global investment community. The hope is that the information barrier between the two groups will be eventually become negligible and Indonesia will be seen as a key market for all serious investors to consider.
Interestingly enough, if we look at more mature investment markets in the US and China, we can actually start to see more and more companies focus on the middle and late investment stages, leaving a relative funding gap in the early stages. Every phase of development in the investment landscape will present new challenges, but for now, we will address the missing middle.
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