Wednesday, February 21, 2024

Launch your startup in Indonesia, a quick guide with pros

Indonesia is fast becoming an attractive investment market for entrepreneurs and investors. Vlad Ayukaev, CEO of the Indonesian venture studio Pintar Ventura Group, highlights the importance of understanding the country’s local specifics for those US citizens, looking to launch a startup in Indonesia.

Investing in Indonesia: a promising venture opportunity

Indonesia, with its population of 270 million people, ranks as the fourth-largest country globally. For venture businesses, the market size and potential user base are crucial metrics. Besides the market volume, it is also essential to consider the market’s development stage and emerging niches of goods and services.

By 2030, the number of Indonesian citizens who can afford to increase their consumption is expected to grow from 52 to 118 million people. Despite its lower-middle-income status, Indonesia’s economy has the potential to grow tenfold, making it an attractive investment opportunity. It is particularly appealing to US businesses with experience operating in emerging markets and understanding the associated risks.

In venture business, achieving high multipliers is crucial to invest X and get 10X or even 100X returns in 5-7 years. Such multipliers are challenging to achieve in already highly developed or slowly growing markets. Hence, it is critical to consider the market’s development stage and potential niches of goods and services.

Over the past two decades, Indonesia’s economy has grown at an average annual rate of 5%, and its GDP (in 2017 PPP) relative to the USA has increased from ¼ to ⅘ between 1990 and 2020. The value-added indicators in Indonesia’s manufacturing industry and medium-tech exports have exceeded the USA level since 2019. As a result, investing in Indonesia presents a promising venture opportunity.

How to launch a startup?

When deciding to launch a startup in Indonesia, it is important to understand local laws that regulate the relationship between business, government and employees.

Indonesia has laws and a policy request aimed at protecting the national economy, given its history as a former colony of the Netherlands that did not have its own national capital at the time of independence in 1945. The protectionist approach includes immigration barriers, restrictions on entrepreneurs from abroad to open companies, a ban on land ownership for foreigners, quotas for expatriate workers, taxes on dividends, regulatory barriers to the participation of foreign capital in government-sensitive areas, and high taxes and prohibitive duties on the import into the country of goods that are produced in Indonesia.

Today, these restrictive measures are rudimentary in nature and logic, but they continue to play an important role and influence the speed of globalization of the Indonesian economy, the local high-tech sector, foreign entrepreneurs, investors and the local labor market. In order to work successfully in Indonesia and gain a foothold here, it is necessary to realize and accept these rules of the game.

There is also a common misconception that labor is cheap in an emerging market. In fact, there are too few qualified specialists in Indonesia for this to be true. Yes, you can hire an employee five times cheaper than in Europe, but his efficiency and the time that will have to be spent on an equivalent amount of tasks levels out the difference in the check.

What about labor?

In Indonesia, the laws governing labor relations between an employer and an employee are written in such a way as to protect the latter as much as possible through additional salaries and large compensations for early unilateral termination of an employment contract by a business. There are mandatory thirteenth salaries, called “religious bonuses” for holidays like Ramadan or Christmas, and severance pay, which can be as high as 10-20 salaries.

You need to be very careful when hiring in Indonesia, because it is expensive to fire employees later, and it will be extremely difficult to prove your case in terminating an employment relationship in court. For the Indonesian court, if an employee came to work in the morning, then he fulfilled his job description. And if he didn’t finish something or didn’t cope with the task, then a good boss should first teach him, and then praise him for his efforts.

Another important nuance is that candidates must be carefully screened. Work experience in another company may mean nothing if a person got there by acquaintance, and not due to their competencies. The authenticity of a diploma can often not be confirmed even by the university, since there is no record of graduates. All this raises questions about the credibility of local resumes and requires expensive “manual” checks through special companies.

If you’re determined to launch a startup in Indonesia despite the challenges of labor and laws restrictions, it’s crucial to identify attractive investment niches. Here are some ideas. 

Fintech niche

Indonesia has a national banking system, with such giants as BNI, BRI or BCA and several hundred different financial institutions, however, ⅔ of the population is underbanked, and up to 40% are unbanked. This is due to a weak connection between the territories, making it difficult for people to access banking services, and problems with education, resulting in a lack of trust in banks and minimal financial literacy. As a result, more than 90% of transactions in the country are still carried out using cash.

Indonesia is gradually moving towards electronic means of payment, with 25% to 30% of the population using them regularly. However, technological barriers, such as the lack of NFC-enabled cards, and difficulties in obtaining a license and integrating with local payment gateways and banks, are pushing digital giants such as Google Play and Apple Pay away. Pin codes in the country are also six characters, rather than the usual four digits, to reduce fraud costs.

E-money wallets such as OVO and GoPay have become popular in Indonesia and are more convenient than local online banking. However, they have restrictions on the maximum deposit amount, especially for non-KYC users. Additionally, outside of Java, the number of merchants willing to accept such forms of payment is dropping sharply. Despite this, e-money has long overtaken cards in terms of popularity and transaction volumes, accounting for up to 90% of all non-cash payments.

The market for credit cards, wallets, or POS products in Indonesia has explosive potential. With only 16 million credit cards in the country, there is significant room for investment in this industry, considering the population is almost 300 million. Indonesian banks have even fewer payroll clients, further highlighting the potential for growth in the fintech niche.

Overall, the fintech niche in Indonesia faces challenges such as technological barriers, a lack of trust in banking institutions, and limited access to banking services in remote areas. However, the potential for growth and development is enormous, with e-money wallets already overtaking cards in popularity and transaction volumes, and significant room for investment in credit cards, wallets, and POS products.

The education system

Education system in Indonesia is hybrid – there are, among other things, private kindergartens, schools and universities that are guided by world standards. The cost of education in such institutions is commensurate with Western ones, and most Indonesian citizens cannot afford it. However, there are strong local universities in Indonesia, such as: the Bandung University of Technology, the University of Indonesia and, and Universitas Gadjah Mada.

In fact, Indonesians are creative, interesting and smart people. But the lack of systematic education at all levels leaves an imprint on local personnel: from our experience, many candidates have problems with formal logic, difficulties with setting hypotheses and preparing reasoned conclusions. Despite not being able to get a good quality education, most Indonesian citizens do not have a foreign passport and cannot afford to travel to other countries, so borrowing from other cultures is also very slow.

At the same time, Indonesians are curious and willing to learn. There are a huge number of students and schoolchildren here, so the market for tutors and private teachers is very developed in the country. Indonesia is one of the most attractive markets for educational services, with a formalized supply and demand, to enter which a startup needs only to produce high-quality content and work on marketing. 

Logistics and infrastructure

With almost three hundred million inhabitants, there is always a demand for clothes, food, cars, real estate, and so on — classic markets associated with the population. However, the provision of these markets with goods in Indonesia is hampered by logistics, which “sags” at all levels. Indonesia is an archipelago of 18,000 islands. The centers of attraction in Indonesia are the island of Java, home to over half of the country’s population and home to the capital, Jakarta, and Bali, an international tourist destination. Basic infrastructure has already been built on these islands – roads, airports, hospitals and universities. All major companies and startups operate here. 

For any country, transport infrastructure is the main unifying factor. For Indonesia, which is located on thousands of separate islands, this is also a fundamental problem. Niches for investment are obvious here — these are ports, airports, highways. There are problems with food logistics — difficulties with containers, frozen storage. There are still free niches in the field of marketplaces, dark stores, distribution centers.

Indonesia Venture Ecosystem

Apart from finding your niche, you need to be able to find the right connections in the country. That is why attracting funding is one of the most important components of the success of any startup. It is important to understand the local specifics, which parts of the VC ecosystem are represented in the country, and how effective they are and will be in the future.

Therefore it is essential to find out more about the Indonesian venture ecosystem, if you are looking for the right startup in this country and fully understand the specifics.

Funds

The Indonesian startup community is concentrated in Jakarta. There are large local and Singaporean funds here, such as AC Ventures, Alpha JWC and MDI Ventures. Many banking structures, such as Mandiri or BRI, also have their own venture divisions. A feature of Indonesian VCs, like other Asian ones, is the lack of industry specialization and a wide range of checks from 200 thousand to 20 million dollars. Local funds are ready to participate at different stages and grow their check if they like the project and the founders.

Local money is not in a hurry

In the US or Europe, a VC fund can provide funding 15 minutes after a pitch, and an entire industry is built around this. It is impossible to imagine that the Indonesian fund is ready to make a decision at the table. Most likely, it will take at least a few weeks, but rather months from your acquaintance until the moment you start discussing numbers or money. Local VCs like to look at companies, founders they definitely meet several times, before that they call. A typical flow is similar to a European or American one (cold letter — personal call — pitch — data room — meetings — due diligence — deal document), but much more time can pass between stages.

Why is it important to “be yourself”

If you come from the USA with the desire to open your startup, you will have to look for investors through LinkedIn or go to Jakarta’s CBD (Central Business District) business district to meet them personally. However, you should not count on the fact that you will quickly be able to become part of the local venture community.

Hard skills in Indonesia do not play a decisive role. The main thing is what kind of people you have in your notebook. Indonesians themselves often say: “It’s not what you know, it’s who you know in Indonesia”. However, it can take months or years to build a trusting relationship here.

The good news is that Indonesians are curious about foreigners, especially entrepreneurs who are willing to bring new knowledge and technology. Indonesians are friendly people, and they are very happy when representatives of Western civilization openly show that they respect them.

Therefore…

In summary, Indonesia is an attractive investment market for entrepreneurs and investors. Understanding the local specifics, including the stage that the government is committed to developing, is important. In addition, Indonesia has a large and growing middle class that is increasingly interested in healthy and sustainable living, which presents opportunities in areas such as organic food, eco-tourism, and renewable energy. Overall, Indonesia offers a wealth of opportunities for startups and investors, but it is important to be aware of the local specifics and navigate the regulatory environment carefully in order to succeed.