The Rise Of Indonesian Angel Investors (Sort Of)
Guest Post - 2 October 2015
If you read the local or Asian tech blogs regularly, you will notice more frequent news about Indonesian startups getting a new round of investment almost on a weekly basis. This is nothing compared to the Indians or the Chinese, but certainly is more vibrant compared to the scene 5 years ago.
The number of VCs looking into deals in Indonesia is definitely increasing. I keep meeting new foreign-based investors who are considering to get into Indonesia as part of their "Asian land grab". Some of them has no clue about the difficulties of operating in Indonesia, but they realize there is huge potential. They might be no different from people who buy the latest overpriced smartphones although their most-used app is this thing called ‘Camera’. But more on that on a separate post. Today I’m more concerned about another (related) issue
As these "new-age, creatures-of-the-future" tech businesses get more publicity and themselves spend huge sums on above-the-line advertising, they become more mainstream. Some players like Go-Jek don’t even have to spend specifically on marketing as their drivers’ jackets and helmets become the most common green item in Jakarta overtaking trees and leaves.
It’s so great to see more and more people use these apps, and they definitely show that some tech startups have the capability to ‘cross the chasm’ into the mainstream. If my mom knows these household names, you can be sure they've gone mainstream. The promise of Indonesia’s huge market of 250 million consumers is slowly coming true, although there are still a lot of work to be done.
Besides the customers, this visibility also triggered huge interest from more potential investors. Yes I mentioned the VCs above. But what’s also interesting is the rising interest from local angel investors. Amazingly, the Indonesian ecosystem has developed this far without having a strong angel investment scene.
If you are a startup just looking to raise IDR 250 million investment round (~US$ 15k) to get started, where do you go? That deal is too small for (most) VCs. Sure there are some hustler founders who are so brilliant at what they do and managed to get connected to networks of their networks and found some angels to invest. But the number of startups who got invested by angels need to be much more than what we see nowadays.
This is the data I got from Angel Labs showing the figures for the US in 2013:
Sure these numbers look staggering compared to Indonesia. But that was not my point. (Oh yes it was amazing for me to find out that in total, angels invest almost the same amount as VCs).
Look at the number of deals and the sheer number of angels actively looking for investments. For every VC deal, there are 18 angel rounds. And for every VC firm, there are 320 angels! If we assume that there is 1 VC deal every week (at least those making the news), there is definitely less than 18 angel deals on a weekly basis in the whole of Indonesia.
If we assume that there are 50 VC firms actively operating in Indonesia, I can say with absolute certainty we don’t have 16,000 angels who are ready to invest in startups. A healthy ecosystem needs investors who are ready to get into different funding rounds. Angels need VCs to do follow-on investments to the startups who grow. VCs need angels to fund those early deals who will in turn feed their investment pipeline
As I mentioned, more and more of the ‘old money’ are curious about angel investing in tech deals. They have made good money through the more ‘traditional’ sectors: mining, plantation, property, media, retail, etc. As the whole economy slows down in 2015 (although according to some people it is a crisis like 1997, they need to get stuffed with my old Macroeconomics 101 textbook), they are holding back from investing in these sectors as they get hit.
Some even admit they are cashing out as much as possible and cutting losses. This in turn create a lot of idle cash and some of them are willing to experiment with a small portion to get into the only sector where investments seem to keep flowing: technology.
I keep hearing this over and over again, “Hey let me know if you have any interesting deals, I wanna start investing in these startups."
I share many people’s believe that technology is an inherent part of any business in future. Although Kinara’s interests are mainly in agriculture, education, healthcare, finance, environment and (some) retail, we are now seeing the majority of our pipeline having some tech component. As some media love to make it sound cooler, the sectors then are called agritech, edutech, healthtech, fintech, cleantech. (As if we haven’t got enough -preneur suffix, d’oh)
Coming back to my point, I think this increased interest is good. If you have a fintech startup, wouldn’t it be great to get a seasoned banker as your angel investor? Just like edutech startups would love to get invested and mentored by someone who has a chain of schools. All this brings sector experience and valuable network to the new business. That is much more valuable than the money they invest
So what’s the worry?
As an ex-banker and now an investor, I am trained to spot the possible risks in anything. Call it negativity, but thanks to Inside Out I can now explain it. Fear and Disgust protects Riley from accidents and embarrassing moments in life! As much as I believe we need a lot more angels investing in startups, there are a few things these angels need to fully understand before committing themselves.
1. Let founders keep majority shares
For traditional investors, this may sound counter-intuitive. Although new startups have no asset and the founders don’t have any money to invest, it’s better that the angels only take a minority stake. "What?? I put in all the money and they get to keep majority of the company??”. There’s a reason why you should do a proper due diligence and get to know the founders REALLY WELL before investing in them. It may sound like a dumb cliché, but when you invest in startups, you invest in the people.
Trust me, I was dumb enough to know this but didn’t put it in practice. We fell in love with a great idea and later realised the founder didn’t have the capability to execute. Lost all our money and left with a beautiful presentation deck. (Now that I think about it, we should frame it as a reminder to all our team). Now isn’t that the more reason for the angels to get majority? Well, it didn’t matter that we were left with minority or majority of zero. It’s still zero.
The only reason to let founders keep majority is because we trust them 100% with the business and we have full faith that the business cannot run without them. If you can’t trust them that much yet, don’t invest at all. The worst situation is if the founders lose motivation and leaves the company. Can you keep it running and growing? Or will you own a majority of zero?
(Yes this has been done before, an investor took over a failing business he invested and grew it to be a giant. But that guy was Tony Hsieh and the startup was Zappos. Read all about it in his book Delivering Happiness. If you think you can be as good as Tony, then go ahead)
“Ideas are just a multiplier of execution” ~Derek Sivers
2. Be ready to get your hands dirty
Most angels in the US are ex-entrepreneurs themselves, making their money from exiting (read: selling) a company they built from scratch. And they got addicted to that process of building something. When they invest, they love to spend time with the entrepreneurs and help them solve problems. They are ready to open up their network to help the investees. They sometimes sit on the board (in Indonesian term: become "Komisaris") but don’t act like board of large corporates who just receive monthly reports and then have monthly meeting/chit-chat. In short, be ready to get involved.
There is a danger of over-involvement, plenty of jokes out there about investors meddling too much (an extreme is Russ Hanneman & Erlich Bachman characters in the TV series Silicon Valley). But my personal experience with Indonesian startups is that they need (and ask) for investor support in a lot of things. Be ready to jump into action when asked, then sit back and let them run the show. And don’t forget to let them know you’re available if they need a sounding board.
Some ‘angels’ I met here are professionals who still work full time. Realistically they are extremely busy. They might spend 1-2 hours to ‘mentor’ the entrepreneurs each month, but that is not enough. I admit I myself am still struggling with balancing the activities of searching for new investments and spending time with current investees. And I am already doing this full time!
3. Don't just do it because it's cool
Yes tech startup is the [prom queen/basketball team captain] of the business world nowadays. Everybody wants to be seen with them. Geek is the new cool. But guess what, being a geek requires a real interest and commitment. It’s about immersing yourself in the culture. Not just by reading about them in the (mainstream) news. Experience using the apps themselves to understand what they are all about. Get ready to install and delete so many apps on a daily basis. Open and close a lot of browser windows on your laptop. Take a deep dive and experience yourself the scary, yet beautiful ocean. Geek out and embrace it.
You’re not geeky enough if you only get your knowledge of tech startups from mainstream media. If you think all Uber drivers are afraid of getting caught by police because you keep reading articles about how Ahok wants to regulate them, you’re not geeky enough. I know a lot of people who still take Uber in Jakarta everyday and keep hearing from the drivers about the realities. If you think WhatsApp is the hottest chat app, ask some teenagers about Snapchat. (I don’t get Snapchat but keep hearing how cool it is from my students and my daughter).
If you still think Twitter is taking over the ‘king of social media’ title from Facebook and didn’t know about Twitter’s business problems, you’re so not geeky. (FYI, Twitter stock price is down 50% since end of Sep14 and Facebook is up 17% for the same time period). If you haven’t heard what the nasty naysayers are saying about Evernote being the first fallen unicorn (or even worse ask, what is Evernote?), then sorry to say, you are far from being geeky.
Sadly I have to say, the majority of Indonesian media still doesn’t get the startup game. A well-respected business magazine (foreign brand) wrote about the rise of Indonesian startups and they get confused about the startups’ income and the investors’ gain. Equity investment is an alien concept for most Indonesians. Most media write about the upside and the success stories. To know about the 8 out of 10 startups who fail, you have to dig deep. Nobody likes to talk about failures yet they are a normal thing in startups.
Recently I met an old friend who starts to get interested to be an angel investor. He kept talking about how cool the startup scene is, how e-commerce is ‘booming’, his admiration about some of them and so on. What shocked me was, he didn’t realize how most of the startups he talked about are still making a loss. He didn’t understand how those massive valuations don’t correlate to profits. He didn’t know that despite the huge valuation, Uber is burning a lot of cash in China and most markets. I kept my laptop open and googled some articles for him to read. He seemed shocked. I felt bad being the party pooper and burst his bubbles. I just don’t want him to gullibly put his money to some ‘exciting’ startups and then get devastated if they failed.
Just to repeat, if you want to enjoy the ocean, get ready to dive deep. And if you’re afraid of water, don’t just follow the trend because you see your cool friends diving.
4. Have a long term view and be ready to face failures
Equity investing is a long term game. To add the long term, it is extremely difficult to make money. A study by Kauffman Foundation on angel investment shows that more than half lose money. Yes the rest do make returns, and some (~10%) even make more than 5x the original investment.
“… on average, exits generated 2.5 times the invested capital in 4 years from investment to exit.”
Now do remember that this was a US & UK study, arguably the 2 most ‘mature’ ecosystems. The realities in Indonesia is very different. Exits are still very rare. We can count with 1 hand the number of startup exits in 2015. We don’t have a secondary market for private shares yet. Selling your shares to other (later-stage) investors is not straightforward.
This is not a liquid investment. You cannot just cash out anytime you need the money back. This is money you have to absolutely be ready to lose. This is not your children’s college funds. Your life must go on even if these investments fail. This portion of your investments should only be ~10% of your total net worth.
"You make it sound really scary…!"
I said it before, I think our ecosystem needs much more angel investments done. We cannot sustain these many VCs operating in the country without angel-invested companies feeding their pipeline. Just like a farm cannot sustain themselves without other farms/companies producing seedlings. Angels turn these seeds into sprout/seedlings.
I think we need to encourage angel investments to be more widespread. But as always, do that realistically. Personally I would love to see:
- more sharing of actual experiences from more seasoned angels (and no, I am not experienced enough, just a loud-mouthed newbie)
- more discussions and stories about the pitfalls. Talk about the losses and the realities. Talk about how hard it is. But yes, of course we can still brag about our wins, too
- more syndication led by the experienced angels. This will enable the newbies to learn from the seniors. However we gotta make sure they also get involved. Accept no freeloaders. It’s a pay-it-forward culture
Ride the wave!
As the (old, 90s) surfers say, “hang loose!”. The wave is coming, ride it! Early 2010s was a hype of startups where a lot of entrepreneurs follow the trend of founding tech startups. As expected, most failed. Only the best survive now, and those who start nowadays are more prepared. Could this be the year where some angel investors start investing and get burned a few years later? As long as they are all ready for small injuries and don’t burn to death, it will only be good for Indonesian startup ecosystem.
And of course, let's make sure they are not angels of death for the startups, too.
- The article is initially published at Dondi Hananto's personal blog and being republished with permission.
Dondi Hananto is Founder at Kinara Indonesia, a local venture capital. He can be contacted on Twitter @dondihananto.