And fundamentals of a healthy ecosystem
Contributed by Nikhil Kapur
A few days ago I had an opportunity to speak at IICIES 2017, organised by Institut Teknologi Bandung (ITB), one of Indonesia’s premier tech institute. The school has spawned many founders and startups, and I remember reading that it has the maximum penetration in the founder base of Indonesia. I took this opportunity to spend a bit of time analyzing where Indonesia lacks as a startup ecosystem and what can we do at the grassroots level to improve it.
By any investor’s accounts, the deal quality in Indonesia has not been up to the mark lately. All of us are having difficulty finding enough volume of good quality deal flow, and the few companies that exist get chased by local and international investors incessantly, thus driving up valuations and making the deal less attractive for everyone else on the table.
Don’t get me wrong. There is a lot that is also going on right in Indonesia. The buzz in the startup land is reminiscent of the days of 2014 in India, right when the country hit an inflection point in startup creation and funding. But to be able to sustain this initial momentum we now need to prop up the whole startup base on a strong foundation.
Just like farming has the need for key variables of success, for a startup ecosystem to truly mature, it needs to be built with the following fundamentals.
It all starts with the entrepreneur of course. Without a strong entrepreneurial DNA in the market, you are unlikely to ever find good companies being built. And this hunger exists in the Indonesian people, I have seen it first hand. While the culture might not be as aggressive as that in India or China, the people are ambitious in their dreams and possess the stamina to pursue these dreams. This combination is a must.
Once the entrepreneur has embarked on her idea, the next task is to build a strong support team for execution. And this is where the problems start in developing markets, especially in Indonesia.
Tech talent is a known challenge. According to data from StackOverflow, one of the most-used websites by amateur and professional developers alike, Indonesian developers are one of the lowest contributors amongst big population countries. Even the Philippines ranks higher. As you can see, India is leading the charge amongst developing markets in this sense, and this is one of the biggest reasons for the market exploding in recent years in the country. Business skills are easier to learn as compared to tech skills, you can figure out your way on-the-job if you are smart enough. But if you don’t know how to build a mobile application and can’t afford to hire the right talent to do so, then the barrier to start a business becomes quite high.
It’s no surprise that scaled up companies such as Grab and GoJek are setting up their R&D hubs in India. Indonesia needs to act immediately to plug this talent gap, otherwise, job creation, one of the biggest benefits of creating a startup ecosystem, is going to elude the country.
I have touched on this before in my post here. Contrary to popular opinions, I feel there is an early stage funding crunch in Southeast Asia. While there are enough Seed funds, and maybe enough Series A funds, deploying in the market, there is simply not enough angel activity in the market.
As you can see in the chart above, while the number of VC-backed Seed rounds, when scaled by population, are similar for both India and Indonesia, the angel activity is miles apart. The angel community in Indonesia needs to step up and take the Product Market fit risks that VCs are usually unwilling to take. If left to VCs, likely only business models that make sense will get funded, and this is detrimental to the overall ecosystem. Innovation is brought about by experimenting and solving problems unique to these markets. This business model risk is something not many VCs are unwilling to take but angels can easily take given their diversified portfolio strategy.
Enough VCs have cribbed about this in the past. While the M&A market is starting to pick up in the tech sector (see our exit of Kudo to Grab), traditional corporates are yet to start buying. Further, the public markets in Indonesia are weak.
While difficulty to list in the market is a big factor, improved regulations alone are not going to swing the needle in favor of tech IPOs. The investor base simply doesn’t exist on the Indonesian public market. See the comparison above of daily trading volume of traditional equities in various stock exchanges. Indonesia has a long way to go in this regard and until this volume picks up, no startup and investor will consider IDX as a viable option for exits.
Three Problems. Three Solutions.
How do we fix this, especially from a school’s point of view? There are of course no magic bullets. But there are initiatives that can be started to address these problems, both in the long term and the short term.
While enough entrepreneurial programs are being started, and probably too many incubators and accelerators, I would love to see programs being created to plug the talent gap in the ecosystem. These should be focused on practical skills such as engineering, technology talent, digital marketing, operations. The skills required in the workforce in today’s day and age are very different from those required 10 years ago. The education system needs to evolve to match the needs of the market.
One of the best programs implemented by National University of Singapore is the NUS Overseas College where students get a chance to spend a semester in a growing startup. This way you upskill the students in practical skills that can be used straight out of university. Indonesia has enough scaled up startups in the likes of Bukalapak, GoJek, Grab, Tokopedia, and Traveloka, to be able to impart hundreds of internships to students from top institutes. The schools need to kick off these training partnerships immediately.
Angel activity in Indonesia is bound to increase when the first wave of startups find an exit and their management and employees find liquidity. While most angels come from a traditional business background currently, what we really need are the been-there-done-that founders backing the next generation of founders, and this will eventually happen.
In the meantime, institutes such as ITB can start bringing together their alumni network to bridge this gap. Most of the top schools worldwide have an angel fund that provides risk capital to its students and alumni for experimentation. I personally prefer that this money is invested in entrepreneurs after they graduate, rather than during their studies. This gives them enough capital to survive out of college, while not taking a job they would otherwise take just for the money. It can also be used to fund alumni’s new ventures and should not be restricted to only fresh graduates.
These are just a few ways to give the additional boost that our ecosystem needs right now. There are many more actions that can be taken by all of us to help overcome the challenge we are facing. GREE Ventures is already starting to lay down the groundwork for its own efforts, I implore all of you to play your part in this equation.
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About Nikhil Kapur
Working together with some of the best minds in the tech sector of emerging markets. Love investing in products bringing customer delight. Leading Southeast Asia and India investments for GREE Ventures. Truly believe in the old-school hands-on approach to VC.
Built a profitable tech company in India. Loves dogs and travel. Enjoys the mix of light and dark side in the Startup world.
I write weekly about the Asian startup ecosystem at grayscale.vc.
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