Amid funding crunch, smaller Indonesia startups face hard decision to sell or shut down

[JAKARTA] Faced with a funding crunch, smaller Indonesian startups are starting to reconsider their options, including selling their businesses to larger and more established tech companies – or in the worst case, the grim prospect of closing down entirely.

An increasing number of startups that have secured seed funding, but have run out of cash, are selling their entire businesses to larger tech players, said industry insiders. These startup founders would rather sell at much lower valuations than shut down their companies, they said.

Larger players such as Bukalapak and GoTo, which recently listed on the Indonesian Stock Exchange, have surplus cash and thus the financial firepower to acquire smaller startups that they can incorporate into their ecosystems.

“There is some consolidation happening within the startup world in Indonesia,” said Hafiz Kasman, co-founder of Kinobi, a Singapore-based education technology startup.

“Many of the smaller and newer startups are facing a cash crunch. Rather than shutting down, they prefer to sell even if they do not receive cash.”

Last month, Zenius, one of Indonesia’s most prominent edutech companies, announced a temporary shutdown due to “operational challenges”. The news came amid speculation in the industry that the startup was in some financial difficulty.

Available capital

While many startups are struggling, analysts said it does not mean that there is a shortage of available capital in the market.

Joel Shen, head of technology and venture capital (VC) in Asia at Withersworldwide, said VC firms are sitting on an “unprecedented amount” of capital, but are finding it difficult to deploy these funds due mainly to a change of focus.

“Even though VCs are sitting on a record amount of dry powder (the amount of capital that has been committed minus the amount that has been invested), their risk appetite has changed completely,” he told The Business Times.

“Businesses that hope to raise money from VCs have to demonstrate monetisation models, visible exit pathways, realistic entry valuations, and a clear path to profitability.”

He added that the amount of capital committed minus the amount deployed rose to a six-year high of US$15.7 billion at the end of 2022, from US$12.4 billion the year before.

That has created an impasse, as VCs will need to start deploying the capital this year or face the possibility of returning the money to investors.

“VCs will have to start to deploy the money soon. I’m beginning to see some VCs sign cheques to companies they would have never considered in the past, such as F&B outlets and health and beauty firms,” Shen said, noting that there are signs that the funding winter may be starting to thaw.

In a recent report, the Asian Development Bank noted that while Indonesia has produced some unicorns and even a decacorn, the ecosystem has its share of weaknesses. Apart from funding, especially in the early stages, there remains a lack of real-world business advice for startups, the report read.

Farhan Firdaus, a partner at Meet Ventures, an early-stage VC firm, said he is still excited about the Indonesia market, but he now focuses on the core strengths of the market he is investing in.

One startup he is looking at is Loka Suka, an e-commerce platform that works closely with the country’s cottage industry.

He added that sectors such as agritech, aquaculture and farming will appeal to VCs as the landscape shifts from e-commerce and ride-hailing platforms. “We are focusing on B2B startups as the price point is lower and there is the element of both the tech and social impact,” he said.

Firdaus said that he is industry-agnostic, and focuses on the South-east Asia, India, South Korea and Japan markets as this allows him to cast a wider net.

“Funds that are too focused on specific markets or sectors will find it difficult to disburse funds,” he said.