Like other tech sectors around the world, Indonesia has already been through a number of phases of hype, boom and realism. At the moment it’s in a realism phase, with a number of larger investors entering the market to build companies which can take advantage of long-term growth trends. In parallel with this, the Indonesian tech ecosystem continues to mature, with incubators, startup communities, tech news sites and regular business plan competitions all serving to raise the level of capability among the tech entrepreneurs.
A rapidly-maturing sector that supports three distinct types of startups
The tech sector in Indonesia began a sustained growth drive in 2010, signalled by the formation of the first Indonesia-focused VCs and a significant rise in the volume of investment deals. With the formation of a number of startup incubators in 2011, plus greater sector awareness through online news sites such as Daily Social, TechInAsia and e27, a healthy ecosystem has been firmly established.
Startups in Indonesia come into being through four distinct routes:
- Independent incubation: independent incubators such as Ideosource, Batavia and InvestIdea provide a mix of funding, mentoring and facilities to help entrepreneurs turn their ideas into potential businesses.
- Corporate incubation: incubators tied to larger companies or funds (examples are Grupara/Medco, MerahPutih/GDP Ventures and Mega Media/Indosat) all provide startups with similar services to the independent incubators, but with a potential route into a larger funding entity within the same group.
- Bootstrapping: self-sufficient founders can pull together the right mix of skills and initial funding themselves. Typically the founders will be:
- Entrepreneurs on their second or third Indonesian startup (increasingly common these days)
- Indonesians returning home after studying and working abroad
- Local graduates who want to try something outside the corporate life
- Foreigners who come to Indonesia and discover a tech opportunity
- Foreigners with an overseas website who find that many of their early users are from Indonesia
- Well-funded startups: these take a variety of forms, from startups begun by investment funds (eg Blibli/GDP Ventures), startups begun as an Indonesian/foreign JV (eg Rakuten Belanja), startups begun by Indonesian corporates launching digital businesses (eg Gramediana/Kompas), or startups funded by foreign investors (eg Lazada).
A common view among investors is that one of the most difficult challenges in tech investing in Indonesia is finding the right skills and experience in both the technical and commercial managers of the business. This perceived shortage of skilled resources has directly led to the formation of the numerous incubators in Indonesia, and has also motivated local corporates to form joint ventures with foreign internet companies rather than trying to build their own technology platforms.
A shift in focus from building user bases to defining sustainable business models
The focus of many startups around 2010 was on rapidly building a large base of users. With 220 million mobile phone subscribers in Indonesia at the time and widespread prediction of a mobile advertising explosion, it looked like significant revenues could be generated from eyeballs and clicks.
However, apart from a brief boom in premium sms services which ended abruptly during the infamous Black October (when the regulators called an immediate halt to premium sms billing practices), most of these startups went under as the mobile advertising revenues remained a distant promise, in Indonesia and in other mobile markets.
Out of their wreckage emerged a cohort of online businesses which had pursued a more diverse (or more realistic) range of revenue sources from the start, together with a realisation within the tech sector that there were larger rewards to be gained from building sustainable long-term business models than from targeting hit-and-run opportunities.
The current focus of the Indonesian startups is therefore to define and implement business models which have clear routes to profitability and which target clearly-defined needs among Indonesian (and sometimes overseas) customers. A list of the types of ventures being pursued can be found here.
The broader startup environment in Indonesia
Tech startups are given little support by the Indonesian government, and the administrative procedures to set up a new company are famously inefficient (it typically takes 2-3 rather painful months of work to register a corporation in Indonesia versus a few days via an online procedure in Singapore).
In addition, local startups are given no protection from foreign players, with the tech market being completely open from a regulatory perspective.
However, foreign investors quickly find that there are other challenges, ranging from understanding the Indonesian user through to navigating through the Indonesian administrative procedures, so an open regulatory market by no means implies that Indonesian companies are powerless against foreign competition.
Finally, although Indonesia is at heart a very entrepreneurial country, with small and medium businesses representing 99% of all companies, it has not yet got to the point where startups are broadly seen as being cool places to work. Many graduates leave university with the goal of finding a secure job in a large corporation, and startups are often perceived as risky rather than exciting.
Of course, this will all change in a heartbeat when Indonesia’s equivalents of Marc Andreesen, Jeff Bezos and Steve Jobs make their first millions, and the architects of Indonesia’s tech boom come in to the public eye.