After pandemic boom, dealmaking in Indonesia slows in 2023

[JAKARTA] After enjoying rapid growth during the pandemic years of 2020 and 2021, Indonesia’s venture capital (VC) sector is heading towards maturity as more investors favour startups with strong unit economics and profitability.

The country maintained its VC deal value at US$3.6 billion in 2022 against global declines and saw a 20 per cent year-on-year (yoy) increase in deal volumes, according to a new joint report by AC Ventures and Bain & Company.

For the whole of 2023, however, it’s projected that Indonesia will see a 70 per cent to 80 per cent yoy decline in deal value. The pace of funding this year stayed sluggish in the third quarter, at around a third of what was raised in Q3 2022.

Deals worth in excess of US$50 million, in particular, saw a drop in volume in the first nine months of 2023, compared to the second half of 2022. Activity involving smaller deals of below US$10 million, which saw healthy growth in 2021, stayed resilient in 2023, indicating steady early-stage momentum.

Consumer tech investments witnessed a sharp dip to US$81 million in the first half of 2023, from around US$580 million in the first half of 2022.

“The VC sector in Indonesia has experienced a significant transformation in recent years,” said AC Ventures and Bain on Wednesday (Nov 15).

“The last 12 months witnessed a market recalibration driven largely by global macroeconomic headwinds. While deal flow picked up quickly in 2021, increasing macroeconomic uncertainty drove caution in investing momentum and the spillover effect from H2 2022 saw a lower number of deals and decline in deal sizes,” they added.

The report noted that investors are concerned about geopolitical tensions, a rise in interest rates, weaker consumer and business sentiment, and the upcoming presidential elections in February 2024.

There is also a shift in investor priorities towards startups that have leaner valuations and clearer paths to profitability, as shown by the declining conversion rates from seed to Series A or Series B funding rounds.

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Series B funding experienced a downturn, shrinking in both the number of deals and average value per deal. Series C and Series D+ deals, though limited in number, have risen in terms of both deal count and average value.

The report also said that investors are leaning towards electric vehicles, energy transition, healthcare and agritech. More investors are riding the energy transition in South-east Asia as they seek opportunities for both early and mature-stage capital to deploy into, it added.

The investment flow to EVs and energy saw a 500 per cent increase from US$3 million in the first half of 2022 to US$18 million in the first six months of this year. This uptick was partially driven by supportive government policies and regulations, as well as subsidies for retail customers.

As far as exits are concerned, the traditional preference for trade sales is gradually giving way to a rising trend in initial public offerings (IPOs).

“However, market pressures and a post-2022 funding environment could potentially dampen spirits around mega-IPOs,” the report said.

While this year has been a difficult for Indonesia’s VC sector, the overall growth outlook is positive given that the VC landscape is entering a more mature state, said Tom Kidd, a partner in Bain’s private equity practice.

He said that with Indonesia’s economy growing 5.31 per cent last year, the country is a resilient and attractive market for VC investments.

“Macro headwinds and a tougher funding environment will help to shape a stronger and more resilient ecosystem. Future growth will be delivered by a clear pipeline of opportunities in emerging sectors coupled with a maturing investor base ready to provide capital to those companies,” he said.

AC Ventures’ founder and managing partner Adrian Li said: “With multiple emerging sectors on the rise and a strong commitment to a sustainable future, Indonesia remains a promising hub for global tech investors.”