Amid a global slowdown caused by the COVID-19 pandemic, Indonesia’s digital economy has displayed an impressive level of resilience.
Southeast Asia’s largest market owes it largely to its strong fundamentals, including a young, tech-savvy population, as well as local businesses’ pandemic-inspired pivots and growth strategies. And, the country has more to look forward to as the upcoming IPOs of homegrown unicorns, such as the now-wedded Gojek and Tokopedia, provide exits to investors and create a global buzz.
This was the consensus view at a recent DealStreetAsia webinar sponsored by Alpha JWC Ventures, titled ‘Move fast and make things: Big ideas, funds and confidence power Indonesia’s digital economy.’ The webinar featured former Indonesia finance minister and renowned economist Dr Chatib Basri; brokerage platform Ajaib co-founder Anderson Sumarli; B2B tech startup GudangAda CFO JJ Ang; social commerce startup Raena co-founder Sreejita Deb, and Alpha JWC co-founder Jefrey Joe.
Joji Philip (JP): Through 2020, during the pandemic, Raena made a pivot to social commerce. How critical is it for startups to adapt their offering rapidly to meet evolving demands?
Sreejita Deb (SD): It’s the difference between life and death. My first startup was a fashion rental company in India. We had the privilege of a great team and great investors but we realised that while you can have everything going, your existence is very vulnerable without a product-market fit. Or if you have not really cracked the problem that you’re solving.
We launched Raena in 2019 and tried many different ideas. But there were three things that stood out: being able to clearly articulate the problem we were solving, having north star metrics that we tracked and measured our progress against, and finally, being very welcoming to contrarian opinions.
As an entrepreneur, it’s very easy to feel misunderstood. But at Raena, if someone – whether partner, customer or potential investor – is saying something about us, we try to find out why. Can we run an experiment and validate or invalidate it? This has helped us move fast and accelerated the journey of product-market fit.
JP: Anderson, what did Ribbit Capital, which has also invested in Robinhood, see in you, Ajaib and Indonesia?
Anderson Sumarli (AS): Hopefully they believe in the founders and that’s why they made the bet. We really care about building a long-lasting trusted brand and want to be the main relationship holder with customers, when they think about personal finance.
Indonesia is one of the largest capital markets in the world with over half a trillion dollars in market cap. Yet, only 1% of the population is invested in stocks. If we bring the Indonesian investor penetration up to 3% or 5%, how much more massive can our capital markets get?
JP: GudangAda is a B2B marketplace that is looking to end this year with up to a million users. Is the capital raise very critical for firms like yours?
JJ Ang (JA): We are in the midst of securing Series B funding of up to $75 million, and we did about $25 million last year. We will use the capital to extend our business firstly through the B2B marketplace, and then with the layering of ancillary and integrated service offerings such as logistics, merchant solutions and financial services. While expansion capital is a key part of the equation, we already run a very capital-efficient business, even post our fundraise.
Efficient execution is actually what is key to making things happen in this ecosystem. Ultimately this is a very traditional fragmented supply chain that has been operating in a certain manner. Direct capital is not the solution to win [in the] long term. What we want to do is empower key parts of the industry. We are well versed with pain points and positioned to deliver the solutions needed along the supply chain.
JP: There are several other startups in the space, targeting Indonesia’s 6 million warungs which account for up to 70% of the country’s retail. How will this play out over the next 12 to 24 months?
JA: Different solutions providers will approach the issue from a variety of angles. They could come in through order management, bookkeeping, payments, or even financial services. It will be a big boost to the B2B ecosystem.
We are at the forefront of this transformational shift and own the most key ingredient for successful scale-up – the underlying marketplace of e-commerce transactions. Putting my business model hat on, given our penchant for an asset-light model, we expect very attractive partnerships and collaboration opportunities across different areas in the next few years.
JP: There are about 66 VC funds currently in the market to raise over $6 billion just for Southeast Asia opportunities. Alpha JWC Ventures is also raising its next fund. What changes for you with this new vehicle?
JJ: We have been around for about 7 or 8 years and believe this is actually a good time for us to raise money and deploy capital. Because of travel restrictions and COVID, fundraising will get quicker – whether it is a ‘yes’ or a ‘no’. The best thing that I can do when I talk to founders is to stop wasting their time and deliver quick feedback.
Investors are looking at Southeast Asia more positively. There is also greater diversity and more importantly, higher quality among investors. These are people who did not consider the region pre-COVID maybe because it was too early for them. They will most likely invest in a one-or-two-year horizon. If I can highlight the three things that really contributed: the first company that went public and put us on the map is the Sea Group. But we also look at Grab’s SPAC, the Gojek-Tokopedia (GoTo) merger, and Traveloka as well as Kredivo that you reported in DealStreetAsia.
This movement will create liquidity and attract more investors into the region, if we consider how quickly companies are growing, especially during this pandemic, because of accelerated digitalisation. For some sectors benefiting from COVID, not only will they have faster growth but a quicker path to profitability. Investors are attracted to growth, but they also want profitability and sustainability.
JP: Compared to your earlier funds, when it comes to large institutional investors — like pension funds in the US and Europe — how has investor interest changed?
JJ: The most important thing is liquidity and exits. Sea Group being the second-best performing stock last year in NASDAQ tells them that they can make money investing in Southeast Asia.
For us at Alpha JWC Ventures, we have had a couple of exits both through secondaries, and via M&A. If there are not enough exits, we can tell investors: ‘We do not have exits yet, but you need to believe that we have massive potential.’ Some key data points to support that view are the fundamentals of the business: revenue, unit economics and profitability.
If you look at our portfolio, many of our investee firms are actually profitable. It makes a lot of these investors take a big step to start investing.
JP: Dr Chatib, where do you see Indonesia overall? Are more unicorns likely to emerge?
Dr Chatib Basri (CB): A couple of years from now, Asia will play a major role as a powerhouse. There will be three central poles of growth – South Asia, East Asia and Southeast Asia.
When you are talking about Southeast Asia, 50% of the total population is basically Indonesia, as is about 50% of the ASEAN GDP. I would say ASEAN is, in fact, Greater Indonesia. The market opportunities exist: we are talking about an unbanked population of 170 million to 180 million. The average working age is about 26 years old.
The only problems are related to infrastructure and tech penetration. Since the ecosystem is not entirely there, its absence gives a lot of opportunities to start businesses here in Asia. I think it’s the best time to invest in Indonesia, especially because of the pandemic.
JP: Speaking specifically about banking, where does this leave legacy banks?
CB: The banking sector is heavily regulated. If we try to get into ultra-micro credit, the transaction cost will be very high because you will need to establish branches in rural areas. To be honest – I’m a chairman of one of the largest banks in Indonesia – banks don’t have the DNA for this. But with fintech, do you regulate them as finance or tech companies?
With peer to peer lending or fintech, you can cut transaction costs. Tech companies are very agile and the banking sector should collaborate with them. I don’t view this as a threat to conventional banking.
JP: Indonesia’s internet penetration hit about 74% in 2020, adding 25 million new users, last year. Have we entered an era where consumers are tracking ahead of firms in digital adoption?
SD: The pandemic showed people how vulnerable jobs are in the wider ecosystem. There was more of a necessity to take your destiny into your own hands and find entrepreneurial ways to make money. A seller in Raena’s context is probably very familiar with social media. The easiest transition is to start creating and then monetising content.
All of the trends that have been mentioned – higher digital adoption, greater consumption of digital media and willingness to pay online – have contributed to our growth.
With beauty as a category, people used to assume that they needed to touch and feel products before buying. But when offline stores shut down, that is where the millennial workforce came into play. They are shooting really creative videos which help explain why a product is special. Tik Tok and Instagram have become virtual malls. It is supplemented by a transaction loop enabled by Shopee, Tokopedia, etc. Raena is the supply chain ecosystem powering the content plus commerce wave.
JP: The total amount raised by startups in Southeast Asia, last year was about $8.6 billion – just a small 2% dip, compared to 2019. Do you think that it’s time for investors to double down on sectors such as fintech, vertical e-commerce, etc.?
JJ: If we dig deeper, there’s actually a bigger dip at the early stage, followed by an even bigger increase at later stages. When companies did raise funds, the rounds tend to be bigger and more oversubscribed, compared to the pre-COVID level. In the COVID era, there are fewer earlier stage founders, but we see an increase in the quality – only founders who are daring enough start a company in difficult times.
Even companies that are not doing too well are getting funding if the narrative is about how they are holding on and managed the crisis. The revenue may be down, but it’s not a bad place to invest. If there is a comeback, they will be better, stronger and have less competition.
JP: In terms of sustaining the momentum, will logistics become an essential part of the local supply chain that GudangAda offers?
JA: We started our pilot logistics programme last year. It was an effort to inject increased stickiness into the ecosystem to support marketplace transactions. It will continue to evolve into being a standard option for users on the platform. Just like with our marketplace, we are asset-light. We pursue a partnership model, rather than building and owning.
We are in the early stages of our logistics strategy and there have been promising operational milestones. In less than a year, we have actually successfully generated an average of approximately 55% increase in deliveries month to month since the launch in 2020.
More importantly, our scalable distribution and marketplace model is why we now have a presence across 500 cities in Indonesia. We are hence able to continuously expand our coverage area to weave in logistics services. It creates an ecosystem that drives stickiness, as well as improving monetization down the road for GudangAda.
JP: What will Raena do to sustain growth? Will you expand to other segments or just focus on skincare? Have you reached a stage where skincare has become more important than makeup?
SD: Makeup was a way to feel better about ourselves back when we constantly went out. And now, when we are home, we want a more long-term investment in ourselves. That’s why we are seeing an increase in sales of skincare, wellness and self-care. At Raena, 80% of our sales is skincare; 15% is mother and baby, and only 5% is makeup.
Our decision to enter other categories depends entirely on our assessment of the fundamental problem we are solving. Is it a category that millennial/independent sellers want to get involved in? Can they make money? From the brand perspective, is there a fragmented supply chain, a long tail of brands or suppliers that we could essentially aggregate? If we can do these two things, we enter new categories.
White labels for us are a great way to tap into niche customer demand. One of the things we realised last year from constant customer feedback and polling of our seller base was that people wanted a sunscreen that was easy to apply and left no white cast. They were looking for options that basically could withstand blue light. It was a niche that none of our brand partners was addressing.
We worked with manufacturers in Korea and launched our own sunscreen. That one SKU is now 5% of our total monthly volume. Our private label strategy is never to cannibalise sales of our brand partners. It’s always exploring niches with the potential to yield power SKUs. In terms of the next steps, the strategy is to double down on beauty and other categories with similar characteristics: small niches where we can really add value to the end-customers we are serving, and then use our supply chain relationships to ship great products.
JP: During the pandemic, one of the sectors that have done well in Indonesia is P2P lending. But with the pandemic, a lot of borrowers have been unable to pay back their debt. How do you see the future for these platforms in Indonesia?
CB: What happened to P2P lending is not unique. It has happened to banking and all businesses. Many of them have closed since they cannot sustain operations. Like it or not, this will play out like natural selection. It is important for fintech and P2P lending businesses to see opportunities. What are the competitive advantages? One area where even the banking sector cannot compete at the top level will be the credit score or analytics. Maybe it is because of my background as an economist, but I’m orthodox. I’m not a big fan of the so-called GMV [gross merchandise value, a metric favoured by many privately-held companies, including the region’s unicorns]. Profit matters and we cannot continue to just burn money.
Also, one of the businesses during the pandemic is the government since other businesses cannot move. Fintech can play a role there. They do have the data on the small/medium enterprise, social protection and credit score. These will help the government disperse money. You have to be very innovative in such a situation.
Can any of these platforms stay relevant with a huge digital banking revolution playing out in Indonesia?
CB: There are not too many real digital banks. They are still in the old conservative banking sector but using digital. The fintech business model is real digital banking and has a competitive advantage due to data. But in the future, all three sectors should collaborate analytics from fintech, payment systems from banking, and data from the telco.
JP: In the Alpha JWC Ventures report on unlocking the next wave of digital growth beyond metros, you said that Indonesia will produce at least three more unicorns in e-commerce, lending and SME. There are 15 sectors in India that have a unicorn. Can there be unicorns across 15 sectors in Indonesia too?
JJ: We definitely care about helping founders create unicorns, but we equally care about the end result. Some startups in India, for example, become unicorns but when investors exit and they don’t have an up-round, what is the end of that valuation? This goes back to the momentum coming from second-tier cities. Indonesia has a lot of potential but it can remain ‘potential’ forever. The catalyst that will actually make a difference is digitisation, not only in the metros but also in rural cities.
If you ask me, based on our knowledge, the difference between the playbook in Indonesia or Southeast Asia versus other markets, our unit economics and fundamentals are actually stronger. We’ve seen that in multiple industries and verticals. For example, in GudangAda’s case, once they start monetising, we expect to see strong revenue, and we have already started to see signs of that coming. The second and third-tier cities will be a game changer.
JP: Sea Group is the benchmark that everybody in the region has been looking up to – both its listing as well as stock performance. Could you speak about its impact in setting the narrative for startups as well as existing and potential investors?
JJ: When we talk to investors — in companies or into funds — it’s really helpful to have one key benchmark like the Sea Group, which is listed on the NYSE, to educate the global market.
Apart from the Sea Group, the big news about unicorns or decacorns going in for SPACs or mergers for IPOs is definitely changing the game. We are Indonesia-focused and country-specific funds are usually among the last categories for global investors. That’s because they want to start investing in the region first and only then narrow the focus. But thanks to all these companies, they understand that while we are a country-specific fund, Indonesia is the largest market in the region.
JP: Dr Chatib, what sort of an impact will these upcoming IPOs have on the region’s tech battleground?
CB: This will shift the battleground of the tech companies in the region. It will create a path for exits. If you are investing in tech, the issue is the valuation can be realised with a recent liquidity event. GoTo and Grab will inspire many companies
JP: Do you think local companies should also list on the Indonesian exchange?
AS: I am a huge proponent of this. The reason why 70% of all the new retail investors are millennials is not because of age, but earnings potential. As wealth increases, they think about investing and making their money work.
For the majority of the unicorns, this is also the customer segment. In the US, the reason Apple, Tesla and Google are some of the most popular stocks is that the shareholders are people who actually use the products and have a strong brand affiliation and loyalty.
From the social responsibility angle, if you are a unicorn and benefited from the population, you’ve got to allow retail investors to participate in your success.
JP: What’s the role of the Indonesian government to ensure that the IDX remains competitive? What changes are required so it becomes attractive to list in Jakarta in case of a dual listing?
CB: I was a regulator before. I have to admit that there is no way that regulators can catch up with innovation. The regulations that we issue could be obsolete six months later.
The ideal solution is for a regulator to be agile. But an agile bureaucracy is an oxymoron. And so, the interaction between market players and regulators is very important. This is something new and there is a learning curve when it comes to SPACs or an IPO for a tech company. I expect players in the market can collaborate with regulators and try to find a way. The best solution: maybe regulators should change their mindset from ‘agree on rules’ to ‘agree on principle.’
JP: At what point do you see factors like ease of doing business, IP protection, or governance come into consideration? Where do you see the country on these parameters?
CB: The government has already passed the so-called omnibus law with a view to streamlining regulations. This is very important to attract investors. At the same time, bureaucratic hurdles are an opportunity for tech companies. The solution for this will be online systems that support government programmes.
JP: How do you look at issues like inflation and currency fluctuation going forward?
CB: I don’t know if this was fortunate or unfortunate, but I had to deal with the ‘taper tantrum’ in 2013 when the US ended its quantitative easing.
A similar event will repeat again, probably by 2023. Once the US normalises and has completed its vaccine rollout, it will normalise monetary policy. A couple of years from now, the Fed will need to raise the interest rate. We can see this indication from the increase of the treasury yields in the last couple of months.
If this happens, then you can expect a capital outflow from emerging markets, including Indonesia, India, South Africa, Brazil, etc. and a depreciation of their currencies. And so, before the police come, let’s have a party. Inflation will remain low because of the weak demand due to the pandemic. But once the economy and mobility are back to normal, we need to anticipate a rise in inflation.
JP: What is your view on the next generation of leaders and founders in Southeast Asia, especially Indonesia? Given that there are more second or third-time founders, serial entrepreneurs and even executives from unicorns, how will their presence affect investor interest?
AS: There’s no better time to be a founder or to join an early-stage tech company. The reason a new startup exists is because of a whitespace opportunity created by shifts in trends or consumer behaviour.
I see so many opportunities that if I could clone myself, I’d be doing two startups all at once! Because of all these IPOs, there is a mass exodus of tech and engineering talent coming out of unicorns. They want the thrill of building a company really quickly. This combination of good talent and really good ideas and opportunities creates a very interesting next generation of companies.
JP: A related trend is a lot of foreign talent coming to Southeast Asia, especially Indonesia. There are founders who got an exit in India looking to build in Indonesia. How can entrepreneurs create teams with a unique blend of local and foreign talent?
SD: A bunch of us were part of a once-in-a-lifetime shift to e-commerce. When I was looking to start up after my last company, I looked at India and Indonesia. A lot of the trends that we had seen playing out in India were now in Indonesia. It was really an opportunity to be part of a big once-in-a-lifetime change in the ecosystem.
When it comes to multi-cultural teams, there are two aspects. Your board will have a very strong influence on your decisions and strategy. At Raena, we have been privileged to have a great mix of Indonesian as well as foreign investors. We are able to get unique local insights that as a foreigner, I could not have got.
The second thing that’s very important is access to talent and networks that having a local partner opens up. We work very closely with Alpha JWC Ventures in terms of building our team and thinking about culture. My message to foreign entrepreneurs looking to tap into Southeast Asia would be to be very cognizant of who you’re bringing to the table and to ensure you have diverse voices and opinions.
JP: Many ex-founders are turning into investors. Do ex-founders bring a greater value add to their portfolio?
JA: The short answer is yes, absolutely. It’s the same reason why we’ve seen financial investors and PE-VC funds increasingly adding operating partners to further deepen the bench, especially in Southeast Asia, which comprises different countries and markets.
Internationally renowned funds continue to play a key role beyond operating activities by adding information and network bridges that link Southeast Asia based startups to global business models. In a nutshell, gone are the days where value add was just capital and opening doors for networking. While still important, they are now the prerequisites.
Companies and founders today are turning their attention towards investors who really understand the issue that they face, who can work with them and stick through the good and bad times. Investors with operational expertise and financial acumen remain the most highly sought after.
JP: When we are talking about exits, how important is capital recycling? With a lot of global companies looking at the region, do you think in terms of exits, apart from a few mega IPOs, it will otherwise largely be driven by trade sales and M&A?
JJ: Capital recycling is extremely important because we need liquidity. We recently made an exit announcement on one of our investments in Vietnam via M&A. That is actually a pretty good exit for us.
Smaller exits are at least as impactful as mega exits. They happen not only through M&A but liquidity events involving employees in unicorns or later-stage companies. I want to highlight that because that does not make news but it adds to the confidence of everyone in the ecosystem. Once early employees, investors and founders get that money, they put it back in the ecosystem.
This article is originally published in DealStreetAsia. Read the original article here.
