Indonesia: Investing local vs global

Excerpts from our discussion during TechInAsia Jakarta

I wanted to post this almost a month ago but only now have I found time to clean up my notes. I participated in a very interest panel in TechInAsia Jakarta in November 2017 and thought its best to share the discussion here for the benefit of those who could not attend.

The theme of the panel was Local vs Global: Where should you build your Investment Strategy? In summary, all the panelists agreed that the opportunity lies locally, in this case in Indonesia, but its best to keep an eye on what’s going on globally to understand how to build companies at scale with business models that work.

Here are the views of each investor present on the panel.

B Capital represented by Pauline Andriejanssen

Local presence and Global vantage point

B Capital invests in B2B/B2B2C Healthtech, Fintech, Consumer enablement (payments, financing, logistics, AR/VR) with $5-$20M cheque size. B Capital has been an active Series B fund in the region with investments such as NinjaVan and CXA in Singapore and like to invest in consumer enablement in Southeast Asia.

As per Pauline, the fund believes in growth potential of the SEA markets and hence wanted to be locally present in these relevant markets. Being a global investor, they want to operate as a global team with global IC and do late night conference calls across their US and SEA office. This helps them identify the right opportunities at a macro level and not be disassociated from other parts of the world.

The fund is closely looking at adjacent sectors to consumer technology such as logistics and distribution, what I would call e-commerce enablers. Given the fund’s relationships with the consulting firm BCG, they have close ties with corporates in different markets and hence would prefer working on B2B/B2B2C companies. For direct B2C companies in Indonesia, according to Pauline, the biggest challenge is the cash burn needed to reach critical mass and to carve out a sustainable pathway, that is typically painful and the companies as well as the investors will have to be in it for the long haul. And that’s why approaches which are more B2B2C will be required.

IFC represented by Pravan Malhotra

Invest locally with a Global outlook

IFC is a fund-of-fund, backed by the World Bank, and occassionally invests directly in B2B, Healthtech, Fintech, and Edutech startups with $3M to $20M cheque size. It has invested directly in companies such as RedDoorz and Oway in Southeast Asia.

The fund, according to Pravan, is naturally global in its outlook and looks at investment opportunities globally, with the IC sitting in Washington DC.

B2B companies, with either marketplace or SaaS driven business models, is what the fund likes a lot. Healthcare is another primary focus, and have invested a lot in India in that space, but haven’t seen much in SEA. Regardless, they are working closely with World Bank for enabling digital health in these emerging markets. They also looked at consumer tech companies but have not yet been comfortable with the underlying economics there. However, vertical e-commerce such as online groceries and online menswear, especially in India are still part of the consideration.

According to Pravan, the advantage of investing globally is the ability to quickly able to compare models and metrics across different companies globally when companies pitch to them. He also feels that Chinese capital coming into Indonesia is interesting, but models in Indonesia will need to be frugal, and are likely to be attuned to Indian business models due to the state of demographics and infrastructure as Indian models are a bit more frugal.

Another interesting fact is that India had companies such as Flipkart, who built the required infrastructure for themselves, but in Indonesia, due to lack of capital availability, the bigger companies such as Go-Jek are the ones who have access to capital and are trying to grow horizontally. It might be that investors might think of these competitors as too large to put capital against when trying to invest in consumer enablers.

Nikhil Kapur representing GREE Ventures

Domestic focus with Asian comparables

GREE Ventures is a pan-Asia early stage fund that is investing in Consumer Healthtech, Fintech, and more recently Agritech with $0.5M to $2M cheque size

Coming to our fund now, our focus is on pan-Asia opportunities because we truly believe that the next decade of economic growth is going to come from this region rather than the West. For us, markets like Indonesia and India are unique and we cannot just copy models from US and paste it here. Many have tried doing that and have burnt their fingers if not hands. As a result we compare models that work within Asia and look for cross-border synergies and compare.

As for comparables to China, we feel that it’s absurd to be doing so because the disposable income that a large set of Chinese population has is way higer than that found in countries such as India and Indonesia. As a result, we need to rethink business models and problem-solution-fit in these markets, even while we can leverage cross-border collaboration and comparables between India and Indonesia.

One might ask, does it make sense for Indonesian startups to go outside Indonesia or should they focus on the huge long tail? We saw this happen in India as well, where the first wave of tech companies went after the top 1% of the market. But the second wave went after the middle/bottom of the pyramid. The economics of this population look very different from that of the tier-1 city population and hence these businesses need to be very well localized. For us, the bigger value lies in this second wave of cohorts, because the defensibility against potential competition from American and Chinese companies in the long term will be high.

It’s time that founders in Indonesia also start focusing on this long tail and solve problems unique to their people. And the way to do it, in my opinion, is to go and spend time outside Jakarta and solve problems that local people are facing every day. That said, the entrepreneurs should still look at other markets such as India to see how entrepreneurs their solved similar problems.

This topic has been top of mind for quite some time, especially when making B2B investments. Even in large enterprise markets like India, investors these days are shy of putting dollars to work in a domestic-focused B2B company and would rather see a significant chunk of revenues coming from outside India. The reason for this is the longer sales cycles and smaller deal sizes in these emerging markets. I agree with the philosophy and also feel that some Southeast Asian B2B companies are likely to have an upper hand over those in India; given the small local enterprise market, they have to be global from day one.

However, for B2C investments, investors want companies to focus on the domestic market, as every market is uniquely nuanced and requires strong distribution channels. B2C models also look more viable at scale, so shareholders would prefer to go deeper in a market than scratch the surface. I disagree with most investors who think B2C models are always financially unviable. I love to invest in B2C companies with smart distribution channels and a strong focus on their bottom line as they solve real-world problems for the middle and bottom of the pyramid.

I hope this article was helpful for those who couldn’t attend the panel (yes, ours was probably the least glamorous one, so I forgive you). In case you want to see the full panel, I’ve attached the video below.

A big shout out to Daren Tan from Golden Equator Capital who not only did justice to the panel but brought out really interesting points such as the top 5 cities in Indonesia only making up 60M of the 260M population, and there being so much untapped potential in the market.