Indonesia startups starting to feel effects of universal funding slowdown

THE region’s fastest growing startups are starting to feel the ill effects of a universal funding chill, with news of layoffs at Indonesia startups spilling out and deals starting to dry up.

And after the explosive growth of the Indonesian ecosystem in the last decade, startups in South-east Asia’s most populous country may be finding it tough to live up to expectations.

Funding is still happening, mostly at the early stages of seed rounds and Series A. But investors are now cautious and deliberate longer on whether to bring in their money. The due diligence process, according to Emilio Wibisono, co-founder of business-to-business (B2B) marketplace Sinbad, can now take twice as long as it used to.

“In the past, you can get a ‘yes’ after two meetings. Now it is minimum five,” said Wibisono.

With profitability rather than growth now at the top of investors’ minds, growth-stage and later-stage startups are being hit harder as the cash needed to fuel their valuations is slowly drying up. 

Indonesia saw the minting of nine new unicorns during the pandemic, and a whole bunch of soon-to-be unicorns. Startups joining the billion-dollar valuation club in 2021-22 include JD.ID, the Indonesian unit of Chinese e-commerce giant JD.com, fintech Akulaku, last mile player J&T Express, e-commerce company Blibli, payments startup Xendit, investment platform Ajaib and coffee chain Kopi Kenangan.

The country also scored the lion’s share of venture capital (VC) investment ploughed into South-east Asia in 2021, according to Cento Ventures’ South-east Asia Tech Investment report. Indonesia took in about US$6 billion in VC funds, up from US$5.7 billion in 2020 and US$4.5 billion in 2019. This pumped up expectations and hardened sentiment as now-cautious investors decide to scrutinise their investments.

“If anything, it has impacted Indonesia more than other countries in South-east Asia because we see the uptick of unicorns, so there’s a lot of attention here. Also, we’re the most populated country so there’re a lot of expectations of startups here,” said Sinbad’s Wibisono.

The impact is being felt by all startups, regardless of whether they managed to raise money before sentiment turned cool.

Payments unicorn Xendit, which raised a US$300 million Series D round in May, said last week that it laid off 5 per cent of its workforce in Indonesia and the Philippines, citing increasing uncertainty in the current macroeconomic climate. Other Indonesian startups to wield the axe on employees include edtech startup Zenius, e-wallet LinkAja and e-commerce company JD.ID earlier this year.

Sea has also cut its e-commerce arm Shopee’s workforce in Indonesia, with media reports saying up to 3 per cent of Indonesian staff were laid off.

Now expectations are for growing revenues and not gross merchandise values (GMV), and Indonesian startups are not immune from needing to show that they have enough cash runway.

“Indonesian startups had to shut down certain aspects of the business, pay cuts have happened, it’s been a tough time,” said Vidit Agrawal, co-founder of earned wage access platform GajiGesa.

On the investor side, many are taking a wait-and-see approach, according to Jefrey Joe, co-founder and partner at VC firm Alpha JWC Ventures. Vanity metrics like GMV are now being eschewed for greater scrutiny on cost of unit economics, product market fit and path to profitability.

“For many VCs and startups, the focus has also now shifted, from hyper valuation to emphasis on strong execution and fundamentals,” said Joe.

But monetisation isn’t as easy as flipping a switch to make customers pay. After years of promo codes and discounts, user behaviour has altered, and customers have come to expect services to be offered free or at a low price.

Getting the customer base to pay full price or more is something many startups will struggle with.

“Getting a user to pay on a regular basis is a totally different market. Sometimes you are subsidising a solution, but how long can you sustain it? How many of these models are genuinely having an impact on the ground and how many can survive without any subsidies?” said GajiGesa’s Agrawal.

There are some in better positions than others, such as those who managed to raise funding early in 2021. Then there are others that claim to be profitable before a fundraise and are still maintaining positive earnings before interest, taxes, depreciation and amortisation (Ebitda).

“We are profitable when we did the fundraising (in November 2021) and we are still Ebitda-positive. We don’t have an exact runway since we operate on a profit,” said Billy Kurniawan, founder of tech-enabled food-and-beverage startup Jiwa.

Market research platform Populix has been seeing more interest from VC funds in doing due diligence on potential targets. Indonesian startups too are also utilising Populix to get a product market fit faster.

“The climate is cautious, with both VCs and startups being careful in investing and allocating their resources. It’s an opportunity for us to help them to find opportunities,” said Jonathan Benhi, co-founder and chief technology officer of Populix.

This sentiment is echoed by Adrian Li, co-founder and managing partner, AC Ventures, as macroeconomic headwinds have buffeted the global economy into a recessionary climate. Now with a greater emphasis on business fundamentals, investors are waiting to see if companies can and will improve their performance before investing.

“Given the overall slower environment, competition for deal closure is no longer as high as it was in the past, and hence investors also have more time to do their diligence and get to know the founders better before committing to investing,” said Li.

A plus side to this environment is that hiring has become slightly easier, as Indonesia also grapples with a crunch on tech talent. With layoffs, the power dynamic has shifted to the employer.

“We can quickly hire good talent, and we’re happy with them. Salaries have also cooled down, we’re not asking them to take a cut but earlier expectations of 40 to 50 per cent increases have changed to hiring them at 5 per cent higher or last-drawn salary,” said GajiGesa’s Agrawal.

As Indonesia’s startups weather the one-two of macroeconomic headwinds and a funding slowdown, there exist opportunities for those looking to build companies that will make a real impact. Coupled with projections of Indonesia’s potential to be an economic powerhouse – projected to be the fourth-largest globally by 2030 – there is still much opportunity to be tapped with Indonesia’s Internet economy, investors say.

“With weaker demand, less competition and cheaper talent – most of the conditions are ripe for companies with strong fundamentals to be started, and to be well-positioned for the recovery with strong product market fit when the positive cycle returns,” said AC Venture’s Li.

This story is part of a new Business Times (BT) regional series on South-east Asian markets. In the coming months, BT journalists will head to different countries in the region to bring you the latest from the ground.