Indonesia VC: Lucrative clicks

Indonesia's - already one of Asia's most populous nations - is said to be on the cusp of a baby boom. According to the National Population and Family Planning Agency, the population will increase by 1.49% next year, a jump of 4-5 million people.

This fact alone makes Bilna.com a potentially lucrative play for its investors. In January, the online babycare retailer closed a Series A round led by Singapore-based Golden Gate Ventures alongside strategic player TMS studios - a Japanese animation studio - and existing investors Cyber Agent Ventures and East Ventures.

Indonesia's sheer size and youthful demographics have made it a compelling destination for start-ups and their investors. There is also the rapid economic growth, urbanization and emergence of a nascent middle class with the means to engage in discretionary consumption. Above and beyond these metrics are specific factors that are making e-commerce players excited.

"It is not just an increase in GDP and an increase in disposable income," explains Paul Srivorakul of Ardent Capital which backs a number of e-commerce business across the region, including Indonesia. "It is also more specific things like smart phone penetration and access mobile broadband, combined with social media, which is driving a lot of infrastructure we need to do commerce online and internet-based business."

According to New York-based research firm e-Marketer, internet use in Indonesia grew 22.1% last year with 72.8 million people - or 29% of the population - online. By the end of this year that number is expected to have grown to 83.7 million and by 2017 it is anticipated that 112.6 million people - or 43.2% of the population - will be online.

Issues of scale

The challenge for venture capital is turning these numbers into returns in a segment that is not only quickly becoming crowded but also presents significant hurdles for companies looking to scale up.

AVCJ Research shows e-commerce has so far dominated early-stage investments Indonesia. Of the 14 early-stage stage deals completed last year - all of which were in the internet segment - seven were transactions involving e-commerce companies. The remainder was divided between online services (two deals) and content providers (five deals).

At the same time the broader e-commerce market has grown. With a compound annual growth rate of 31.8%, Indonesia is the second-fastest growing business-to-consumer market in Asia, surpassed only by China on 39.2%. By the end of this year, the market is expected to be worth $1.79 billion while by the end of 2017 it is anticipated to swell to $5.48 billion.

Typically, the segment has been targeted by a number tech-focused venture capital investors based both in the US and Asia. Yet some argue that to view e-commerce as a simply as a tech play is to misunderstand the challenges associated with industry.

"E-commerce is not a tech investment in the traditional sense," says Kahilee Ng, a venture partner with 500 Startups in Southeast Asia. "In fact the technology element is a small part. A lot of it is about things such as logistics and warehousing. If anything it is more like traditional retail."

For business-to-consumer (B2C) e-commerce in particular, infrastructure requires considerable investment. Ng explains that in many cases a start-up will launch and only realize several months down the line that the amount of capital need to expand the business is much more than anticipated.

As such, venture capital investment has been essential to companies looking build their own logistics network from storage to payment solutions - a necessity in an emerging economy.

Money recently raised by Bilna, for example, was used enlarge and modernize its warehouse and add cash-on-delivery capabilities. Berrybenka - another B2Cplay in the fashion segment - used the $5 million in Series B funding it raised last November to invest in logistics capabilities, including cash-on-delivery and one-day delivery options, in addition is looking to launching a mobile app.

"Indonesia has some unique challenges, says Vinnie Lauria, general partner with Golden Gate Ventures in Singapore. "Logistically scaling up and building warehouses can be more difficult in Jakarta and then you run into issues with reliability, such as third-party drivers and manpower. These scaling issues hit you hard when you are small and are trying to grow fast."

This is exacerbated by the fact that Indonesia is a country spread over an archipelago of around 17,000 islands, often with less than adequate transport links. As a result, many businesses see their activity limited to few major cities.

Bespoke solutions

The fact that the likes of Berrybenka and Bilna have scaled up and attracted funding makes them the exception to the rule in the country's e-commerce landscape. Ardent's Srivorakul underscores the enormity of the challenge facing start-ups, explaining that when his firm looked for potential targets among a number of small e-commerce players, they often found that companies would expand to 18 employees and then plateau out, unable to grow.

"They have no scale or efficiency and can't get funding, and we don't want to fund them because they can't scale. It's a vicious circle," he says.

This as the genesis of a-Commerce, which Ardent helped establish to address the scaling problem by providing end-to-end solutions for e-commerce business in Indonesia and Thailand. It raised $3.1 million in bridge financing last December in a round led by NTT Docomo Ventures with CyberAgent Ventures and is now looking to expand cross the region.

"Based on our experiences, we thought that if we could take some of that pain away we would not only help small businesses but we would also get all the big brands coming in, all the retailers going online," adds Srivorakul.

Ardent is not the only company preoccupied by scale. Rocket Internet - an e-commerce-focused incubator and early stage investor headquartered in Germany - is tacking the issue with its six portfolio companies that have operations in Indonesia.

While Ardent is looking to help local teams scale up, Rocket has adopted a regional strategy. It has adapted models and solutions used elsewhere and applied them to several geographies to create industry leaders. Initiatives include a centralized IT system that is used for every start-up platform across several countries.

"Logistics and payments are such important piece of the infrastructure and they need to be developed," says Stefan Jung, co-founder and managing director with Rocket Internet in Jakarta. "In case of Indonesia we needed to make significant investment ourselves in the infrastructure. For example, the country has a 4% credit card penetration so we brought in tools and systems for cash-on-delivery as it is a significant proportion of our orders. These tools had already worked well in India."

He adds that if the right infrastructure is in place, it is easier to take advantage of the opportunities presented by Indonesia's sprawling geography. While most e-commerce start-ups focus on Jakarta and the major cities, Jung says greater demand potentially comes from the more remote areas of the country where people -who have not had access to big name brands - are now able to shop via their mobile phones. This sentiment is echoed by Ardent's Srivorakul.

"As soon as you get to scale you start to find 60% of your purchases are outside the capital city," he says. "It's counter intuitive, but if you are outside the big cities and you don't have the mega malls to go to, you will shop online and you tend to buy more not just shopping to get what you need."

Foreign influence

Foreign strategic investors are also looking to bring their established platforms and processes into the Indonesian market, often through partnerships with local players. Japanese e-commerce giant Rakuten entered the country though a joint venture local media conglomerate MNC, while Singapore telecom giant SingTel teamed up with Shopify in June with Indonesia at the heart of a broader Southeast Asia strategy.

While the space has become more crowded as a result, numerous industry participants observe that demand for services is still expanding faster than supply. And, if anything, the foreign influence has been positive.

Overseas strategic investors - keen to gain a local foothold - have taken part in a number of fundraising rounds for Indonesian start-ups. For example, Japanese price comparison site Aucfan.com and digital marketing firm IREP participated alongside 500 Startups and Gree Ventures to invest in e-commerce marketplace Bukalapak. Berrybenka's latest round was led by TranscomoscInc, another Japanese digital marketing firm.

Their capital is welcomed by Indonesia's e-commerce entrepreneurs. They have historically been starved of investment due to the small size of the still nascent venture capital community and the local family conglomerates' unwillingness to pay high valuations. Moreover, those that do manage raise capital from these conglomerates usually leverage personal connections and come to the table with track records. Few young entrepreneurs can offer this.

The recent rounds raised by two Rocket portfolio companies illustrate the value strategic players put on exposure to Indonesia's e-commerce sector. Fashion retailer Zalora Group, which operates in Southeast Asia and Australia, received $112 million from a group of investors including US-based diversified conglomerate Access Industries. Meanwhile, Lazada, an Amazon-like retail platform focusing on Southeast Asia, raised a $250 million round, which featured UK-based retailer Tesco.

"Exit valuations are lowest if you sell locally and highest if you sell overseas," says Ardent's Srivorakul. "The local guys often think they can do what you are doing better, faster and cheaper so they don't respect the value. International guys, on the other hand, see the value in acquiring businesses rather than trying to replicate models themselves."

Rocket's Internet's Jung adds that the increasingly competitive market means it is much easier for promising start-ups to get Series A rounds, with quality entrepreneurs now routinely receiving 3-5 term sheets. This was not the case as recently as three years ago. "There is still lack of Series B and Series C as the ecosystem must develop further," he says.

What is good for entrepreneurs is not necessarily good for the local VC firms that fear being outmuscled by overseas investors offering valuations they are unable to match. Of particular concern is the tendency for these start-ups to relocate their operations and headquarters to Singapore once the foreign money has come in, effectively dismantling the ecosystem the local venture capitalists are trying to build.

Ardent's Srivorakul would welcome more support, but he remains bullish on the sector. It is a sentiment echoed by Golden Gate's Lauria who posits that the high valuations generated in a handful of headline deals do not necessarily give a full picture of the opportunity set in the country.

"There are so many opportunities that were just not there before," says Rocket Internet's Jung. "When you look at all the steps that have taken over the last three years it is like a sleeping giant waking up."

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Venture
• Technology
• Consumer
• Southeast Asia
• Early-stage
• Venture
• Consumer
• TMT
• Southeast Asia
• Indonesia
• Rocket Internet
• Golden Gate Ventures
• 500 Startups