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A golden opportunity

In May 2021, two of Indonesia’s largest startups, Gojek and Tokopedia, merged through an $18B deal to become GoTo. The newly formed “super startup” claims to represent between 2 and 4% of Indonesia’s GDP (a $1.19 trillion beast as of 2021) and is a testament to the economic opportunity represented by the country, and the region’s, rapidly growing digital economy.

GoTo’s most impressive feat isn’t that it claims to represent roughly 3% of the Indonesian economy. Rather, it is the fact that it is aiming to represent 10% of it, and probably will if everything goes to plan. The digital opportunity in Southeast Asia (SEA), and the speed with which it is growing, are hard to grasp. According to a Google, Temasek, and Bain report, the SEA’s internet economy is projected to be worth $1 trillion in 2030, up from $174B today. This is due to the region's exponential growth in internet adoption and the subsequent growth in digital services usage. The pandemic considerably accelerated both of those trends.

As the region’s economic leader, Indonesia posts some of the most impressive numbers. Technology and startups in particular are radically transforming the lives of Indonesians, providing solutions to the logistical nightmare caused by the country’s geographical layout (17,000 islands).

“The upshot is that Indonesia's e-commerce market is estimated to be worth a formidable $30.3 billion but should top $56 billion in five years. The entire digital economy stands at $44 billion, projected to expand at an astonishing 23% compound annual growth rate to hit $124 billion by 2025. At that point, the market size will be more than twice that of the region's runner-up, Vietnam” - The Generalist

Almost all aspects of the Indonesian economy are being re-invented by digital services. The Gojek and Tokopedia merger aims to create the country and the region’s go-to (pun intended) super-app covering all bases of the digital economy. But before we dive into the merger itself, let’s take a look at both companies’ individual stories.

Tokopedia’s story

Tokopedia, the combination of toko (meaning shop) and encyclopedia is the brainchild of William Tanuwijaya and Leontinus Alpha Edison. The company, launched in 2009, was born out of William’s difficulty to find books in his native region of North Sumatra. The country’s archipelago layout made logistics and fulfillment of goods extremely uneven between the country’s capital, Jakarta, and other Indonesian regions.

As a solution to that problem, the Tokopedia founders envisioned a platform where sellers from around the country could sell their products online, an idea similar to the original Alibaba model in China. Tokopedia’s vision was and still is to democratize commerce through technology, by giving Indonesians access to the same goods and services at the same price regardless of where they live.

Following initial fundraising difficulties due to the founders’ atypical professional backgrounds, the company managed to raise a large round led by SoftBank and Sequoia Capital. This enabled them to rapidly expand while also adding new products to their offering.

“The USD 100 million from SoftBank and Sequoia gave Tokopedia a war chest for its diversification, with fintech at the top of the agenda by 2016. The platform introduced a payment channel for use cases like mobile phone credit and electricity bill credit, followed by train tickets. Eventually, Tokopedia introduced banking services like a credit card application feature developed in conjunction with Standard Chartered, UOB, and Citibank. Users were able to do all of this in one app. Again, it was a new form of convenience.” - KR Asia

A key to Tokopedia’s success has been its hyperlocal approach, proposing special discounts for regional cultural celebrations for example. The company also adapted its offering to suit the sizable Indonesian Muslim population, the largest in the world with 207 million believers, by providing users with a wide variety of halal foods and shariah-compliant payment methods. This adaptability to local elements partly explains why Amazon or other foreign players weren’t able to take over the Indonesian e-commerce market.

Today, Tokopedia serves 99% of Indonesia, reaching more than 12 million merchants and offering 638 million products. 89% of sellers on the platform don’t own a physical store, a potent reminder of the entirely new market Tokopedia brought to life. The parallels to Alibaba are obvious, with Alibaba even leading the company’s $1.1B round in 2019.

“Tokopedia’s trajectory through the years shares some similarities with that of Alibaba, which also started out as an online retail portal that eventually branched out into a basket of business sectors.” - KR Asia

Gojek’s story

In 2010, a recent graduate from Harvard Business School named Nadiem Makari wanted to find a solution to the amount of money lost by idle ojek (Indonesia motorcycle-taxis) drivers. To do so, he created Gojek (do I really need to explain the name?) in an effort to organize the informal ojek economy. The company started as a call center, connecting clients to ojek drivers. The company didn’t build an app for the first four years of its existence.

The Gojek team struggled to raise money initially due to investors’ preference for traditional businesses such as palm oil plantations. This is a common struggle faced by pioneer founders in nascent ecosystems: wealthy local investors exist, but it is hard to convince them to invest in start-ups if the country hasn’t experienced any tangible exits beforehand.

Nevertheless, the founders persisted and Gojek eventually raised, eventually mutating into Indonesia’s spearheading super-app covering more than 20 verticals from food-delivery, to payments, to video streaming. Although relatively absent in the West, super-apps are proving to be a treasure trove in emerging markets.

“In mature markets "unbundling" — or the specialization of apps by specific verticals - has been the norm in the last decade or more. But not so in emerging markets. Once you have almost millions of users on your platform, the marginal cost of cross-selling related vertical services is zero. It's no wonder that in Indonesia, the main source of inspiration for startups like Gojek is not Silicon Valley, but China.” - Source

Gojek eventually became a so-called “decacorn”, valued at more than $10B. Similar to Tokopedia, Gojek’s main strength relies on its hyper-localism and true understanding of local customer needs, which enables them to beat foreign players. Gojek is a true engine for Indonesia’s SMEs and ojek drivers, with 96% of its 450,000 merchants being SMEs and 8 in 10 GoFood transactions coming from mom-and-pop stores. Gojek also has an influential branding strategy, positioning itself in an “Indonesian tech excellence” narrative.

“Go-Jek uses its mobile platform to create options for non-cash payments – something not offered by conventional ojek or taxi services. In addition, Go-Jek positions itself as a national brand – the new and cool Indonesian start-up – to create an emotional attachment with the Indonesian customer. By wearing green jackets with the Indonesian flag embroidered on the front, along with green helmets, Go-Jek drivers stand out in public. Go-Jek brands itself as a national champion that Indonesians can feel proud of. This was a smart move that was hard for international competitors to mimic.” - Source

The merger

While undoubtedly successful, Gojek and Tokopedia faced intense competition from players such as Grab and Shoppee respectively. It is also important to add that all of these players aren’t necessarily vying for dominance of the food-delivery or e-commerce vertical. The true fight is over financial services, and who can serve the most amount of people with the most amount of services. In a way, other verticals act as a lead magnet to subsequently offer those users various financial services such as payments, BNPL, and credit.

“While ridesharing alone may not be profitable, fleets of vehicles on the streets pay off in several ways. Ridesharing becomes a loss leader to grow the user base. Food delivery generates profits and builds networks of merchants who accept the company’s payment app. Together, these activities create real-world brand awareness, as people literally see the company in action.” - Source

While Gojek was rumored to merge with Grab, which operates in almost the same verticals and would’ve been subject to intense monopolistic scrutiny, the Indonesian decacorn finally merged with Tokopedia in 2021, in a deal estimated at $18B. The newly formed entity, GoTo, was listed on the Indonesian stock market in 2022, achieving a market capitalization of $32B on listing day. Following the merger, the newly formed entity boasted 14 million merchants, 2.5 million drivers, and a combined number of active users (Gojek and Tokopedia) of 100 million. According to estimates, this newly-formed company represents between 2-4% of Indonesia’s GDP.

The reasons for the merger are obviously to heed competition, but also to combine what makes both companies great in order to create a true powerhouse. An explanation of the merger can be found in a precursory article by Kr Asia written just before the merger was announced:

“If Tokopedia wants to get the most out of its hold over an enormous sector, it must offer even more to all users and merchants. A union with ride-hailing company Gojek could strengthen Tokopedia’s logistics capabilities, while Tokopedia’s offerings in the fresh food segment fit Gojek’s grocery service GoMart and meal delivery service GoFood. Gojek’s B2B ecosystem—which spans point-of-sale (POS) terminals, e-wallet GoPay, ad service GoScreen, and merchant networks—could appeal to merchants that use Tokopedia to sell their goods.” - Source

The merger enables both companies to continue operating independently, while work is done behind the scenes to optimize operations by leaning on each others’ strengths. A third entity, GoTo Financials, was created to consolidate and engulf the strategy, products, and execution of the newborn behemoth’s fintech plays.

GoTo today

GoTo is still far from profitable posting a $954 million net loss for the first half of 2022. The stock isn’t performing exceptionally either, enduring a sharp drop in 2022 since this summer. Competition is still harsh, but GoTo is still trailing ahead of its competitor Grab, at least in Indonesia.

Notably, GoTo has started to see the fruits of its grandiose fintech plan, its main strategy for growth and profitability. In an illustrative example of the merger’s potential, the integration of Gojek’s GoPay into Tokopedia’s checkout flow has led to 93% of transactions on Tokopedia now being handled by a GoTo product.

For a deeper look into GoTo’s financial health and plans for the future, take a look at their Q2 22’ results.

Conclusion

What is truly interesting about the GoTo story is that their journey is still embryonic. The company has almost achieved phase 1 of its grand plan, which is to bring all Indonesians into the digital services realm, before offering them the plethora of financial services made available through technology. The potential for growth is still gigantic, especially throughout the region.

More importantly, I believe that similar stories to GoTo will start popping up in other densely populated markets where socio-economic development might be a step under that of Southeast Asia. I wouldn’t be surprised to see a Nigerian or an Egypt version of a massive GoTo-style merger in the next decade.

The Realistic Optimist provides weekly, in-depth analyses of some of the hottest stories in our now globalized startup world. Subscribe below to receive it directly to your inbox and don’t hesitate to share it with people with similar interests :)