Why Global Investors Can No Longer Ignore Tech in Indonesia
While most people fear the unknown, venture capitalists seek it out and thrive on it. Until recently, Indonesia was something of an enigma for smart global money — undoubtedly a diamond in the rough with lots of potential, but usually a market to size up later on, after all the low hanging fruit in China and India has been picked. This is quickly becoming no longer the case.
Indonesia’s fast-growing economy could potentially become the world’s seventh largest by 2030, surging from 16th today, according to global research giant McKinsey. This would place the emerging market even ahead of developed nations like Germany and the UK. We can already see that one of the most important drivers of this paradigm shift will be the archipelago’s booming digital economy.
Boston Consulting Group predicts Indonesia’s middle and affluent consumer class will double in size by 2020 to roughly 141 million people. Likewise, over the past few years, the country’s GDP has been growing fast, averaging more than 5 percent each year.
People in Indonesia are some the world’s most enthusiastic users of social media, and this is a nation with a growing cornucopia of ecommerce platforms, ride-sharing apps, financial technology, media innovations, and everything else under the sun. As it stands, all of these elements are now coalescing into an explosion of business opportunities for those who are bold enough to come here.
The domino effect
In 2018, Indonesian ecommerce was a US$12.2 billion annual space which bolstered local businesses and individual sellers across the board. In recent years, Indonesia clocked about 30 million online shoppers, or 15 percent of all adults in the country. Data suggests that online sales will grow 800 percent, with formal ecommerce reaching US$40 billion and social commerce (think selling stuff on Instagram) climbing to US$25 billion by 2022.
If our friends at McKinsey are to be trusted, this growth trajectory is bananas. It is the reason why global heavyweights like Google, SoftBank, Alibaba, Sequoia, and Tencent have been pumping money into Indonesia like it’s going out of style. This is because they can clearly see what few others can: a lynch pin.
A blooming ecommerce sector is the key to unlocking everything else. It is the rain drop that breaks the levy for more billion-dollar companies to flood the market via periphery verticals like transport, logistics, fintech, travel, lodging, and more.
If this is your first foray into the tech venture space, in just a couple short years, Indonesia has produced four unicorns, with one of them being an arguable decacorn. ‘Unicorn’ is a term we use to describe a tech startup now valued at US$1 billion or more (thus ‘decacorn’ implies US$10 billion). Tokopedia and Bukalapak are both consumer-to-consumer (C2C) ecommerce startups, while Traveloka is Southeast Asia’s largest online travel agency (OTA) and Go-Jek is the local ride-hailing and on-demand everything app (there, now you’re caught up).
These four companies are causing a domino effect that will without a doubt lead to more digital unicorns. Newcomers would do well to think of payments, logistics, and infrastructure as foundation blocks for developing an investment theory on Indonesia.
Tomorrow is too late
So far, our firm has seen two successful company exits, with a few more in the pipeline for this year. All things considered, we believe that there are some key verticals to zero in on today. New and home-grown tech related to finance, healthcare, insurance, education, artificial intelligence (AI), and media are all of particular interest for us.
We recently invested in Qlue, a startup on a bold mission to build ‘smart cities’ throughout the region, starting with Indonesia’s mega-metropolis of Jakarta. For context, this is a place where more than 10 million people suffer from the world’s most debilitating traffic and basic infrastructure woes.
The product is a crowd-sourcing smartphone app in which users can report various problems such as flooding, crime, fire or waste disposal hazards, and more to local authorities. In turn, city officials are able to respond to this data in an organized way and have a real shot at solving gigantic problems that have plagued the nation’s capital for decades.
The money we put in will be used to help Qlue triple down on its AI and machine learning capabilities. As a partner, we are also providing a strategic foothold for Qlue via Telkom Group’s government and state-owned enterprise network. The sheer implications for this company are colossal, not just in Indonesia, but in emerging markets the world over.
Also on the AI front, we backed a company called Kata.ai, which through its natural language processing tech has been generating millions of dollars in new revenue and revolutionizing the customer service game for some of Indonesia’s largest companies.
Simultaneously, we also believe that the importance of fintech in Indonesia cannot be overstated. We’ve made multiple exciting plays on companies including local online payments startup Kredivo, and Payfazz, a digital platform designed to help Indonesia’s vast unbanked population. Peer-to-peer lending is a big part of the conversation, but that could be an entire blog post to unpack unto itself.
As you may know, fintech can mean many things. For example, remittances (overseas money transfers) to Indonesia averaged a modest US$1.85 billion per quarter between 2005 and 2018. But in the second quarter of 2018, this figure spiked to US$2.8 billion and continues on what is likely a bullish trajectory. Word Bank estimates that Indonesian workers overseas are on track to be sending home more than US$9 billion annually.
If markets like India (which is stuffing in more than a US$80 billion per year in remittances) are any indicator, then this is just the tip of the iceberg for Indonesia’s remittance game.
Because of this and other factors, we recently co-led a US$20 million series C round for a Singapore-based remittance technology startup called InstaReM, which has declared Indonesia as its top priority.
At MDI Ventures, we can see the writing on the wall. Overseas institutional players that get into the country aggressively now will win. Those that don’t will miss out. It’s just that simple.
For this reason, we act as a bridge for global corporates to capitalize on the Indonesian market, but we also act as a liaison to get their capital into other APAC markets. The main thing we try to make global investors understand is that they need to cultivate an in-road today, because tomorrow is too late.
MDI Ventures is a corporate venture capital initiative backed by Telkom Indonesia, with headquarters in Jakarta and operations in Singapore and Silicon Valley. It is an independent entity aiming to bridge the gap between large corporates, smart global investors, and innovative startups in Asia Pacific.
