- 03/05/2018
- Category: Commentaries
The technological development provides new opportunities for Indonesia’s digital economy practitioners. Many startups grow and offer a large variety of solutions related to the mobility of goods, services, and people. Based on the ranking made by Startup Ranking, Indonesia is ranked 4th in the world with the number of startups as much as 1.754.[i] Four startups from Indonesia, namely: Tokopedia, Gojek, Traveloka, and Bukalapak, have a valuation of more than US $ 1 billion.[ii] The emergence of startups is determined by the availability of capital funding. Funding is an essential part to ensure the sustainable existence of startups. Venture capital is a form of private equity which is designed to support the growth of small business, such as startups.
The capital placement by Venture Capital Enterprises (VCEs) brings positive and negative values. Indonesia’s Financial Services Authority (OJK) has registered 67 VCEs in Indonesia having a total amount of asset IDR11,000 bn.[iii] A startup which has received the investment from VCEs, is called an investee company.[iv] The contribution of VCEs in developing startups is not limited to financial supports in the form of stocks, but also in the managerial assistances. VCEs demand a strong commitment from their investee company. This strong commitment is required since VCEs only put their money to startups with a high prospected business valuation in the future. This article would like to introduce venture capital business and its contribution to the emergence of startups, as well as the development of Indonesia’s digital economy environment by answering these questions.
Q1. What makes venture capital differs from other funding options?
The VCE is a business entity engaged in financing/equity investments into an investee company that receives capital funding for a specified period and is exercised in the form of quasiequational financing, a convertible bond, and/or financing based on the distribution of results of operations.[v] The capital funding by VCEs has a temporary period of assistance and may not exceed 10 years. This limitation becomes the main difference of VCEs’ capital funding from bank loans. A bank can offer the extension of loan based on debtor’s profile. The limitation of capital funding assistance from VCEs to startups is regulated through Presidential Decree no. 61 of 1988 on Financing Institutions and the Decree of the Minister of Finance No. 1251/KMK.013/1988 on December 20, 1988 concerning Provisions and Procedures for the Implementation of Financing Institutions, article 4, paragraph 2.[vi]
Capital funding by VCEs are classified as high-risk investments. VCEs participate actively throughout the ups and downs of a startup. There is no any demand of guarantees from the investee company by VCEs, also VCEs do not have any legal instrument to minimize the risk of failure on their capital investment. To ensure its operational sustainability, VCEs should have five major elements, i.e. a solid funding portfolio, a competent management, reliable regulatory agencies, asset liquidity, and business opportunities.[vii]
The real VCEs grow together with their startups to ensure that the business runs consistently and the business valuation accelerates progressively. If a startup develops rapidly and excels, then the VCEs can divest through a “go public” mechanism in the capital market to gain profit from the rising startup stock valuation values. The full involvement of the VCEs has a less favorable impact to the decision-making process of startup management, in which the management decision is potentially influenced by the investors. These things further emphasize the main difference of VCEs compared to banks. In bank loans, the company has the discretion to control its business management. Bank only acts as a money lender without any involvement in the corporate management structure.
Q2. Why are venture capital funds attractive to startups?
Startups usually offer a novel and unique business solution. Startup’s breakthroughs contain both potentials and risks to its founders and future investors. With a high rate of failure or a high risk of failure, startup’s founders face a real difficulty in finding investors to finance their business. A total VCEs in assuring the business sustainability has been a lure attraction for startups at the early stage with limited resources (human, capital, knowledge, etc.). In addition, VCEs offer flexibility of equity as well as consultation and market access assistance, so that startup can grow quickly and stably.[viii]
The capital supports offered by the VCEs can be adjusted to the real stage of startups, that is classified into the following levels:[ix]
- Early stage à seed financing, startup, first stage
- Expansion stage à second stage, third stage, fourth stage
- Exit stage à acquisition financing, management buyout
For each stage of capital supports, there are other financing alternatives tailored to the company’s growth phases.
Q3. Is the Indonesian market attractive for Venture Capital Enterprises?
Based on a research published by Google and AT Kearney in September 2017, the total investment of VCEs in Indonesia reached US $ 3bn or doubled from the previous year, with average investment in the early stages, especially the phase of seed financing and early stage.[x] Venture capital business is projected to continue increasing along with the growth of Indonesia’s national economy, the percentage of the middle class, and the young population of technology users in the upcoming three years.[xi] Nevertheless, Indonesia has not become the most attractive for foreign VCEs. In Southeast Asia, Singapore and Malaysia are still ranked above Indonesia in terms of investment participation through VCEs.[xii]
Q4. How does the Indonesia’s Financial Services Authority regulate Venture Capital Enterprises?
In Indonesia, venture capital is specifically regulated through Presidential Regulation No. 9 of 2009 on Financing Institutions and Regulation of the Minister of Finance No. 18/PMK.010/2012 on Venture Capital Enterprise.[xiii] In addition, “OJK” has authorized four additional regulations related to venture capital investment in the form of “OJK” Rules (POJK), including: POJK No. 34/POJK.05/2015 related to Business Licensing and Institutional Venture Capital Company, POJK No. 35/POJK.05/2015 concerning Venture Capital Company Operations, POJK No. 36/POJK.05/2015 on Good Corporate Governance for Venture Capital Companies, and POJK No. 37/POJK.05/2015 regarding Direct Venture Capital Company Examination.[xiv]
The rapid growth of Indonesia’s digital economy is a potential attraction to invite foreign VCEs and to encourage local VCEs in investing their money which can lead to stimulate the startup’s growth. The Indonesian government needs to work hard, smart and agile in creating a conducive business environment to accelerate the growth of VCEs and startups in Indonesia, including with the human resource development, fiscal incentives, seed financing/acquisition options, and other facilitations.
Editors: Atin Prabandari MA(IR) & Nabeel Khawarizmy Muna, S.IP Picture: Unsplash
[i] Startup Ranking. Accessed: https://www.startupranking.com/countries [16 April 2018]
[ii] Davies, Ed, Cindy Silviana. “Indonesia expects to have more than 5 unicorns by 2019: minister.” Accessed: https://www.reuters.com/article/us-indonesia-startups/indonesia-expects-to-have-more-than-5-unicorns-by-2019-minister-idUSKCN1G310J [16 April 2018]
[iii] Otoritas Jasa Keuangan. “Statistik Lembaga Pembiayaan Periode Februari 2018.” Accessed: https://www.ojk.go.id/id/kanal/iknb/data-dan-statistik/lembaga-pembiayaan/Pages/Statistik-Lembaga-Pembiayaan-Periode-Februari-2018.aspx [16 April 2018]
[iv] Keputusan Presiden No. 61 Tahun 1988 tentang Lembaga Pembiayaan pasal 1 angka (11)
[v] Situs resmi Otoritas Jasa Keuangan (OJK)
[vi] Soemitra, Andri. “Bank dan Lembaga Keuangan Syariah”, p. 309
[vii] Sihabudin. “Reevaluasi Pembiayaan Perusahaan melalui Modal Ventura di Indonesia”, p. 292
[viii] Sinamo, Albiker. “Menantikan Bangkitnya Modal Ventura Indonesia.” Accessed: https://indonesiana.tempo.co/read/118295/2017/10/24/parongiljehe/menantikan-bangkitnya-modal-ventura-indonesia [3 April 2018]
[ix] Ibid, p. 293
[x] Haliding, Safri. “Outlook Modal Ventura dan Startup 2018.” Accessed: http://id.beritasatu.com/opini/outlook-modal-ventura-dan-startup-2018/170420 [16 April 2018]
[xi] Indonesia Venture Capital Outlook. Accessed: http://www.southeast-asia.atkearney.com/paper/-/asset_publisher/dVxv4Hz2h8bS/content/indonesia-venture-capital-outlook-2017 [10 April 2018]
[xii] Aprilyani, Jane. “Menurut Riset Ini, Indonesia Negara Peringkat 9 Paling Menyenangkan Bagi Pebisnis Startup.” Accessed: http://m.tribunnews.com/techno/2018/03/20/menurut-riset-ini-indonesia-negara-peringkat-9-negara-paling-menyenangkan-buat-pebisnis-startup?page=all [ 10 April 2018]
[xiii] Fitriadi, Mireza, Sinung Driyo Subanar. “Kedudukan Otoritas Jasa Keuangan terhadap Perusahaan Modal Ventura Asing Dalam Melakukan Pembiayaan Secara Langsung di Indonesia”, p. 78
[xiv] Yoga, Paulus. “OJK Keluarkan Empat Aturan Modal Ventura.” Accessed: http://infobanknews.com/ojk-keluarkan-empat-aturan-modal-ventura/ [ 10 April 2018]
