On August 17, 2017, Tokopedia.com, the largest eCommerce marketplace in Indonesia, announced its latest round of investment of USD 1.1 billion from Alibaba Group. month before that, Traveloka, another unicorn and top online travel booking startup, received a USD 350 million investment from Expedia. The list goes on with other startups like Go-Jek and Tiket.com, both of which secured deals with local and regional/global investment firms.
Indonesia has definitely become one of the magnets for key investments by major venture and private equity funds in quest of another country with potential growth after China and India. Indonesia, with a population of 260 million, is the largest among neighboring ASEAN countries. But with more than 16,000 islands, the world’s largest archipelago faces a more challenging logistical coverage in handling its abundant natural resources and a production age group that comprises 60% of the population.
But chances are scant for Indonesian startups to undergo a public offering once they dominate certain sectors and popular business models already favored by regional/global strategic investors. Those strategic investors are likely to have major stakes already in pre-established companies, making it difficult for Indonesian institutional and retail investors to participate.
As of now, no tech startup company is listed in the Indonesian Stock Exchange. Is this an indication of scant interest from local investors to invest in technology companies?
I would say definitely the answer is not like what we have perceived. In fact, most of Ideosource’s limited partners (investors) are from Indonesia. Our LPs are sophisticated investors, but it does not mean that retail investors are not interested. It is just not possible for them to participate due to a minimum check size of investment, length of fund period that usually spans from five to ten years before getting any return, and other aspects involving limited exposure to startup investment.
Even some of my close friends have asked me whether they are able to participate in the Ideosource fund at a smaller amount. Success stories among tech startups are ubiquitous — traditional companies and local conglomerates have set up their own initiatives and funds to dabble into tech startup investments. However, most individual retail investors have no access to participate in any of those great startup successes. They can only hear about them, wondering in awe.
How about the risks?
Nevertheless, those successful startup companies are only a handful among hundreds or even thousands of startups that have existed in Indonesia — failed companies are ubiquitous too. It is not for the fainted hearts to see some of their investments go down the drain, so it is definitely a reason to call them sophisticated investors. Traditional security and asset management companies would not dare to deal with failed companies in numbers that most VCs see as normal; moreover, most of those so-called successful startup companies are not in blue or bleeding to the bone with their marketing spending to boost revenues and user base.
There is no precedence in Indonesia to a public company like Amazon, which had been in the red for 20 years until mid-2016. Amazon investors understood Amazon would need to invest big and re-invest all of its retained earnings to reach a certain stage where they dominate the market putting a (very) high barrier of entry in the sector. As a result:
“Had the average Joe decided to save $5,000 and spend it on Amazon’s stock when it first hit the public markets 20 years ago, they be worth at least $2.4 million today.”
Ideosource is no different during our early years of fund setup. We had failed startups in our list too, and most of those startups failed after not finding the follow-on investors — the ecosystem was not there. So since then, we decided to ensure our startups are cockroaches (resilient creatures) able to stay alive for longer time despite slower follow-on investment process.
It may not be justifiable from the winner-takes-all-type investment thesis, which values only one winner through buying traffic, transaction, and customers. Instead, we look into companies with passionate founders who do not believe in the “blitzkrieg” type of model, most of them believe in winning the space by being a resilient creature, because they are happy doing what they have been doing building the companies from the ground up, creating a strong team, strong culture internally and able to win the customers in the long-term by being trusted and all out to serve.
As a consequence, we have been more selective in our startup investments, but fortunately any investment we made during and after 2015 have flourished and are in a very good stage, primed for next stage exponential growth. We also learned to provide investment with enough runway for them to reach certain numbers attractive for follow-on investors to come in.
Can the risks be mitigated?
The nature of startup investment locally in Indonesia has improved a lot, Ideosource case above is just an example from our internal experience, and other venture capitals even angel investors have matured and have been exposed quite long also having met hundreds of startups and often mingle during startup events giving a much sharper decision on who are investable. Same thing with startups quality now have improved year on year getting into a stage whereby choices are wider and we know the risk to invest on the best among those pool is actually quite save, at least from the eye of an experience and exposed investors. Probably similar to Amazon investors in the early IPO days able to understand and realize Jeff Bezos’ long term goal and they stick to support its vision.
VC investment model can work well in the hand of an experience investment committee and it has to be in quantities to compensate for failed startups, many people have heard the one success or jack-pot investment will provide return and profit for the rest of nine investments or even the whole fund. As in Ideosource Fund I, one financial technology (fintech) startup provided 80x return, normalized to around 8x return as a fund. Although not as a spray and pray model and more of a specific investment thesis, the statistic proved to be true.
So is investing in Indonesian tech startups attractive?
And, does it mean that public and individual retail investors can participate freely investing on their own? The answer is better to be “no”, simply due to several factors discussed before:
- Liquidity and Investment Size: a five to ten years investment period is common with a minimum check size of $50k to $250k. It may work for angels but probably not for retail and public investors.
- Handling the Risks: even sophisticated investors rely on venture capital firms to manage their investment simply to manage the risks. They know that those venture capitals via its investment management team will take care of portfolio screening and due diligence, diversification, and mentoring.
- Mentoring: this is one of the most sought after value most startups look for from their institutional and angel investors. They want to speed up the process without:
- too much trial and error getting advise from veterans, and
- to be introduced to the right channel and network
- to get shared resources for back-office administration, accounting, taxation, legal, working space and many others.
How about liquidity issue?
Underwriters, brokers, clearing house, custodian, appraisers, legal firms, trustees and administrators are all part of the ecosystem surrounding the stock exchange to ensure offering and transaction are smooth without glitch and legitimate. However, we certainly know that to list a company publicly assisted by those parties in the ecosystem and to maintain it in the stock exchange are relatively expensive, moreover for smaller cap companies.
The crowdfunding site Kickstarter has radically changed the way creative ventures can raise money in the Internet age. In 2014, 3.3 million people around the world contributed more than $500 million — roughly $1,000 a minute — to finance more than 22,000 projects.
Other equity based crowdfunding startups have also emerged with attractive offering combining researched data and seasoned investor communities such as funnel.com, funderbeam.com, crowdfunder.com and many others.
Can crowdfunding sites be as popular to retail and public investors as the stock-exchange? probably yes if liquidity is there.
We see extreme cases now happening in cryptocurrency trend of raising money via Initial Coin Offering (ICO). The crypto-coin provides instant liquidity, easily tradable via blockchain platform. It is an extreme approach due to many ICOs are not based on real tangible assets, but at the end only a few will sustain its value due to many of them not supported by the right business model suitable for token trading.
A few smart crowdfunding sites now offer extended liquidity via ICO or token creation for easy secondary trading of those crowdfunded assets they have funded, and it is almost like a small private ICO with real assets being appraised and appreciated or depreciated according to the performance of the company. And the ownership of assets that have been tokenized can be traded easily by selling the token/coin to other traders, and this can happen without disturbing the underlying contract of the asset itself.
I truly believe that tech startup investment can be offered to Indonesian retail and public investors as in the case of traditional stock exchanges, perhaps via secondary board implementing a combination of positive factors offered by traditional stock exchanges but agile and efficient as in the new era of cryptocurrency. The key is an ecosystem inviting relevant parties and regulators to contribute according to their roles and responsibilities to ensure checks, re-checks and balances are happening during the process with reasonable costs and ease of participating.
This guest post is written by Edward Ismawan Chamdani, Ideosource Venture Capital’s Co-Founder and Managing Partner.
It’s initially published at Medium and has been republished with permission.