Ecosystem Deep Dives #4: Indonesia - Asia's powderkeg
Why Indonesia's start-up ecosystem is poised for economic and impact growth.
Ecosystem Deep Dives is a weekly series in which I analyze start-up ecosystems from around the globe. If you like this series, please feel free to subscribe and share (it’s free!)
An entrepreneur's paradise, a politician's nightmare.
Made up of over 17,000 islands inhabited by around 270 million people, Indonesia is one of South East Asia's demographic giants. Its economy is growing fast. According to a joint study by the World Bank and the IMF, Indonesia will be the world's 5th biggest economy by 2024. Internet penetration has tripled in 10 years, and the country's growing middle class, who bring with them augmented buying power, is proving to be a golden opportunity for the country's entrepreneurs.
And Indonesian entrepreneurs have definitely not missed that opportunity. The capital city, Jakarta, placed second on Start-Up Genome's 2020 "emerging market ecosystem" ranking. This put Jakarta's start-up ecosystem ahead of renown cities such as Barcelona and Dubai. With a total value of $26.3B, Indonesia as a country boasts the most valuable start-up ecosystem amongst all other emerging markets. Indonesia is also parts of the CIVETS group (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), a group of countries deemed by investors to have explosive growth potential in the next decade.
The Indonesian ecosystem is interesting to compare with one of its neighbours, Singapoure, which is often referred to as the "Silicon Valley of South East Asia". While Singapoure, due to its small size and wealth, specializes in IP heavy, deep-tech start-ups, a lot of Indonesian start-ups succeed by bridging small, yet essential gaps in the lives of many Indonesians. A good example of this is Warung Pintar, a successful Indonesian start-up which digitizes and streamlines the operations of the many small, cornershops (called "warungs") that are a omnipresent in the lives of almost all Indonesians. However, some Indonesian start-ups are also active in advanced tech, with organization such as the Indonesian Blockchain Association leading the charge.
The demographic goldmine
As we talked about in the DRC episode, the many systemic and structural issues plaguing Indonesia all present opportunities as well as challenges for Indonesian entrepreneurs. More often than not, Indonesian start-ups have made it big by disrupting outdated and inefficient sectors such banking, transporation and logistics. As an example, Gojek, which can be considered the most successful Indonesian start-up to date, has built their success by offering services such as ride-hailing, food delivery, and digital payments. Another example would be TaniGroup, a company that "helps farmers earn more for their crops by streamlining distribution channels", who have just closed a $65.5M Series B round. These examples go to show that even by solving what certain investors might consider "mundane/unprofitable" problems, Indonesian start-ups are able to win the numbers game by catering their solution to benefit the largest number of people possible.
What's exciting is that the space and the need for innovation is in no way saturated. With 47 million of unbanked adults, Indonesia is still extremely ripe for disruption in the fintech space. That's probably one of the reasons why fintech is one of the country's largest sectors, with 332 fintech companies and counting. With 50% of the population being under 27 year old, new entrepreneurs will find it easier to propose their digital solutions to new, more tech-savvy customers who are also, on average, richer than their parents. The need and desire for digitalization pushed on by the pandemic is also a factor in the ever-growing Indonesian start-up potential. This need for digitalization extends to remote areas, which still represent a largely untapped market. The potential for start-ups operating in so-called "Tier 2-3 cities" is so lucrative that Arrive, a VC fund linked to American rapper Jay-Z, has recently invested in Evermos, a halal-focused, social e-commerce platform.
The other huge advantage Indonesian start-ups enjoy is the potential for scalability. First, the domestic Indonesian market is big enough for a start-ups to test and get to profitability even before thinking of expanding to new countries. On top of that, the fact that many of the structural/systemic issues faced in Indonesia are also largely present throughout the region (Philippines, Vietnam to name a few) enables Indonesian start-ups to scale abroad if they need/want to. Increasing internet and smartphone penetration makes the already massive Indonesian e-commerce market not even close to its peak.
Another interesting paradigm shift in the Indonesian start-up world would be a bigger focus on “bottom-up” initiatives, tapping into Indonesia’s natural and human resources instead of continuing to create in the “traditional” B2C, downstream segment of the value chain. For Edward Chamdani, co-founder of the Ideosource incubator, the next wave of opportunity will come from bottom-up initiatives leveraging Indonesia’s still largely untapped natural and human resources.
"By 2025, Indonesia is anticipated to have an ecosystem that comprises more than 50 percent of all e-commerce markets in Southeast Asia with an estimated value of US$46 billion – thanks to the unique advancing mobile-first market." (Cekindo)
Land of giants
The Indonesian ecosystem is probably the most "mature" one we've covered so far. One of the reasons for this is the extraordinary success of the 6 unicorns the country boasts. These include:
Bukalapak: The first Indonesian e-commerce platform that allows its users to buy consumer goods from thousands of sellers.
Gojek: A fast-growing app that provides integrated services from quick payments to food delivery and transportation, and much more.
J&T Express: An e-commerce freight forwarding and expedited service provider of international shipping services for businesses and individuals.
JD.ID: A gateway to connect users to high-quality products in various categories at competitive prices.
OVO: A service simplifying the online and mobile payments for customers.
Traveloka: An online travel agency that uses artificial intelligence to recommend the right holiday for customers.
To top it all off, the country recently witnessed a behemoth merger between two of its top start-ups, Gojek and Tokepedia, who combined to become the GoTo Group. Formed in May 2021, the new company formed as a result represents almost 2% of Indonesia's national GDP. While this is undoubtely good for the economy and the creation of new jobs, this begs the question as to how dependent national economies want to be on a couple tech companies. As we've seen with the GAFAM legal saga in both the EU and the US, tech companies that achieve a quasi-monopolies end up having a huge impact on the lives of their users, good or bad. But contrary to governments (at least in democracies), citizens cannot vote tech CEO's out of office.
Another trend to notice is that the still rare but rapidly growing unicorns in emerging markets are built on the backs of gig economy workers. Many of these unicorns replicate and adapt Uber/Doordash models to their local economies, hitting the jackpot if executed right. However, one must dive deeper than the shiny unicorn announcements and massive M&A's to discover the working conditions of who truly contribute to the success of these apps: gig workers. Gojek, similar to Uber, Rappi and Deliveroo, has been accused of failing to guarantee decent pay/working conditions for their workers. For example, more than 1,000 Gojek drivers went on strike following the Gojek merger and subsequent bonus cuts.
It's hard for me to have a definite opinion on this issue, because both sides have valid arguments and the solution to this problem needs to incorporate the interests of both sides. On one hand, Gojek and Rappi provide easy, flexible work opportunities for people struggling to find jobs in the "mainstream economy" either due to a lack of education or other factors. For example, Rappi has provided a lifeline for tens of thousands of refugees from Venezuela who arrive in the country with little more than a high-school diploma. On the other hand, companies might take advantage of the fact that their drivers have little leverage to cut costs, bonuses, and work benefits.
I believe the solution to this dilemma is two-sided. On one side, governments should incorporate regulations around the employment status of drivers, forcing companies to guarantee minimum wages and work benefits. The second change has to come from the VC/investor world. The switch from "shareholder" to "stakeholder" management provided a first evolution from the neo-liberal idea that "the only purpose of a company is to provide value to its shareholders". The investment process should also go through an evolution, incorporating both monetary returns and social/environmental benefits bought on by the company's growth. In other words, the principles of "impact investing" should become the norm.
Back to Indonesia: What's left to do
The Indonesian government has been supportive of the national start-up ecosystem, with President Joko Widodo launching the "Making Indonesia 4.0" initiative (similar to the "Digital Tunisia” initiative). In the fintech sector in particular, the government has started regulating activies such as P2P (peer-to-peer) lending and digital payments, allowing for start-ups to not longer operate in legal greyzones.
The Indonesian business landscape has also long been criticized as hard to navigate, with an especially cumbersome company registration process. According to the 2019 World Bank "Ease of doing business" ranking, Indonesia was a mediocre 73rd. With new services such as Stripe Atlas, which enables foreign founders to incorporate a US-based company without ever setting foot in the US, local governments are scrambling to facilitate and adapt their corporate laws to start-ups in order to keep them at home. This poses another ethical question about whether services such as Stripe Atlas are doing a service or a disservice to nascent start-up ecosystems. On one hand, they enable founders to accelerate their ventures, but they can also deprive local ecosystems of precious tax money.
Another big problem faced by Indonesian start-ups is the scarcity of local, high-quality technical talent. This is a widespread problem amongst almost all emerging market ecosystems, from Palestine to Colombia. An article by Harvard Business Review states that 75% of survey fast-growing start-ups from emerging markets cite lack of talent as their number one barrier to growth. In Indonesia's case, as with many others, this lack of talent isn't necessarily due to the state of the education system but rather what the education system trains students to be. Countries around the world have always boasted state of the art engineering schools, but where are the elite DeFi schools? Where are the Web 3.0 world-class universities? Where are the "blockchain and cryptocurrencies" majors? The " outdatedness" of elite universities is leading students to be excellent in skills needed for the past decade instead of skills needed for the next one.
This gap is being filled by private actors such as Platzi and other online schools offering curriculums relevant to the 21st century, but they are not free. The beauty of elite, public institutions relies on offering students from all backgrounds, regardless of their ability to pay, the opportunity to acquire the skills needed to be successful in life. These institutions need to get up to date or risk losing the very purpose of why they exist.
The Indonesian start-up ecosystem has already proved, and continues to prove, its huge potential for economic growth and social impact. The country's infrastructural problems are proving to be golden tickets for entrepreneurs who use the country's large population to keep their business profitable even while serving poorer clients such as farmers and "warung" owners. The ecosystem has already produced giants, which had the double effect of unlocking the "start-up flywheel" while also making the country question itself on the ethical considerations related to "hyper-growth" businesses.
With adequate government support as well as educational modernization, the country is unquestionably poised to become a regional and global economic powerhouse. The buzzing Indonesian start-up ecosystem is also attracting diasporas, referred to as "sea turtles", to come back home and launch businesses of their own. Contrary to what Fidel Castro thought, diasporas are not "coakroaches" but rather the secret sauce to kickstarting start-up ecosystems in emerging markets (although I doubt Castro was a strong proponent of start-ups anyways).
It's for that reason that I founded GrowHome, a platform enabling diasporas to mentor, collaborate and fund start-ups back home. GrowHome is active in Tunisia, and is currently raising a pre-seed round. Reach out to me if you're interested :)
See you next week, for an episode about Estonia's start-up ecosystem! Feel free to share and subscribe if you enjoy my work :)