<img class="alignnone size-full wp-image-1152" alt="Page - Investors - investment environment graphic 3" src="http://redwingconsulting.com/wp-content/uploads/Page-Investors-investment-environment-graphic-3.jpg" width="700" height="270" />
<h4 style="text-align: justify;">Indonesia's tech sector had a frothy 2010 and 2011, but many startups realised in 2012 that trying to monetise eyeballs and clicks is a tough route to profitability. Armed with a new perspective, the sector is now more focused on sustainable business models and delivering breakout value to customers. As the investment environment also matures, multiple opportunities will emerge for investors willing to be flexible in terms of investment structures, and who are prepared to put in business expertise on top of their capital.</h4>
<h5 style="text-align: justify;"><b>The initial hype phase is over…now it’s time to get serious</b></h5>
<p style="text-align: justify;">Like the early days of the Silicon Valley tech boom in the 1990s, the Indonesian tech sector’s first act was characterised by a oversupply of hype and an undersupply of good solid business models. Too many startups placed their faith in being able to monetise a large user base at some unspecified point in the future, and as it became clear during 2011 and 2012 that eyeballs and clicks might not be enough, a Darwinian shakeout took place.</p>
<p style="text-align: justify;">This was a very good thing.</p>
<p style="text-align: justify;">Indonesia now has a much healthier tech sector, led by a number of rapidly-growing online companies who have clearly defined their target segments and who have begun to demonstrate a real ability to make money. Following along behind them is the second generation of Indonesian startups – more focused, more realistic, and far more fixated on delivering services which add real value to the offline and online lives of consumers and businesses.</p>
<p style="text-align: justify;">And as the startups change, so do the investors who fund them. Gone are the days of throwing a hundred thousand dollars at a Groupon clone in the hope that it will pick up enough percentage points of market share to flip to a competitor and exit. In its place is an ecosystem of angel funders, incubators, early-stage funds, mid-stage funds and technology providers who are helping to enhance the technical, marketing and business skills of the tech entrepreneurs so that they can build companies that can thrive and scale.</p>
<p style="text-align: justify;">The next three years will be very exciting times in Indonesia. Customer bases will grow. E-commerce will start to boom. Online payment options will multiply. Unique local online services will emerge. Underpinning all this will be a more methodical approach to managing the startups, driven as much by the discipline of business metrics as by the thrill of new technologies.</p>

<h5 style="text-align: justify;"><b>Indonesian startups are relatively young, and need active investors</b></h5>
<p style="text-align: justify;">The top Indonesian sites today have market values of around US$100 million. While billion-dollar internet companies do not yet exist in Indonesia, more $100m tech companies will emerge over the next three years. These valuations will partly be due to the rising user base (internet users will grow from 55m today to 125m by 2015), partly due to higher levels of online spending by the growing Indonesian middle class, and partly due to improved business focus and discipline.</p>
<p style="text-align: justify;">But the raw fact is that this is an investment market in the relatively early days of its development. Today there are a few hundred Indonesian startups, many of which are still two guys in a garage (or, increasingly often, in a shared incubator office). Apart from a handful of companies which are looking for expansion capital, most startups need mentoring, marketing assistance and help making connections as much as they need investment money: the Indonesian tech sector is still in capacity-building mode.</p>
<p style="text-align: justify;">So investment amounts are lower in Indonesia than in the US: initial investments by the incubators are usually under US$50k, angel and seed rounds tend to be $50k-$250k, and Series A at $200k-$500k and Series B at $500k-$5m.</p>

<h5 style="text-align: justify;"><b>Since startups need more than capital, multiple investment models exist</b></h5>
<p style="text-align: justify;">Beyond straight financial investments, two other investment models have become more common in the last two years: joint venture partnerships and build-from-scratch.</p>
<p style="text-align: justify;">Joint ventures typically consist of a partnerships between a non-Indonesian company with capital and technical expertise and an Indonesian company with local connections, local facilities and market expertise (and which often does not have an existing internet business). The largest example to date is Rakuten’s partnership with Indonesia’s largest media group, Global Mediacom. eBay has also entered Indonesia in partnership with the largest telecoms operator, Telkom, to develop a joint e-commerce offering.</p>
<p style="text-align: justify;">Rocket Internet has been the largest build-from-scratch entrant, having hired hundreds of people to staff its Indonesia operations since launching six online ventures, starting in early 2011. Google has also chosen to hire directly rather than form a JV, in line with its geographic expansion strategy in other markets.</p>
<p style="text-align: justify;">An interesting twist on the two models above is Sumitomo Japan’s partnership with its own in-country subsidiary Sumitomo Indonesia - rather than a genuinely local Indonesian partner - to launch the online grocery Sukamart.</p>
<p style="text-align: justify;">So the internet sector is developing along similar lines to some of Indonesia’s more established industries such as mobile, consumer goods and (many years ago) mining and agriculture. The early years are characterised by a mix of local firms, local-foreign partnerships and foreign-owned subsidiaries, driven by the needs of different investor groups to combine capital, expertise, local market knowledge and risk management.</p>
<p style="text-align: justify;">Over time, as local expertise becomes more widespread, the companies take on an increasingly Indonesian flavour. The Big 3 mobile operators were typical of this – during their build-out phase in the 1990s they employed 50-100 expatriate technical experts each, whereas now the overseas investors typically place only one or two key managers and Board directors within the Indonesian operating company.</p>

<h5 style="text-align: justify;"><b>Exit deals can be done, but transaction details are thin on the ground</b></h5>
<p style="text-align: justify;">As the tech sector matures, investors focused on each investment stage are beginning to emerge. A number of incubators and early-stage Indonesian VCs are actively investing in startups and mentoring them through their early days. A handful of angel groups exist, although their activity is very much below the radar at the moment. The early-stage VCs are very active, and have moved a number of their startups through to later-stage funding rounds, selling on to other funds or strategic investors.</p>
<p style="text-align: justify;">At this point in time founders, seed investors and early-stage funds are exiting through sales to foreign investors (mainly from Japan and Singapore), foreign .coms (such as Groupon and Yahoo) and local corporate players (primarily in the media sector). The Indonesian stock exchange has an emerging IPO market, and although a number of companies from the mobile sector have gone public over the past three years, no pure-play tech sector companies have yet gone to IPO.</p>
<p style="text-align: justify;">From the perspective of deal terms, the Indonesian tech sector is still very much in stealth mode. While investment deals are generally announced when they occur, terms are rarely disclosed, and a standard set of investment metrics is yet to emerge. This obviously leads to challenges in establishing company valuations, which typically tend to be based on market fundamentals and business performance forecasts rather than deal metrics at the present time.</p>
<p style="text-align: justify;">And as the startups and investors develop, we expect to see a Indonesian-flavoured version of the US tech development model emerge: on the one hand, a standard process of startup to incubator to early-stage funding to exit. But on the other hand, a process that will be flavoured with Indonesian <em>sambal</em>, as family-owned enterprises, local conglomerates and networks of local companies put their own unique stamp on the tech growth companies.</p>

<h6 style="text-align: justify;">Sources: Jakarta Globe, Frost &amp; Sullivan, Rakuten Belanja, Tech Crunch, Daily Social</h6>