Indonesia, the largest economy in Southeast Asia, has seen readjustments in its startup ecosystem amid global macroeconomic uncertainties but is likely to remain the region’s bright spot, according to a new report by AC Ventures and Bain & Company.
“While challenges remain, Indonesia’s resilience shines as investors prioritize startups with solid fundamentals and profitability. With multiple emerging sectors on the rise and a strong commitment to a sustainable future, Indonesia remains a promising hub for global tech investors,” Adrian Li, founder and managing partner of AC Ventures, said in a statement.
According to the Indonesia Venture Capital Report 2023, the past year was filled with apparent shifts in the country’s startup ecosystem.
During the year, investors grew more cautious and applied a more conservative approach to valuing startups. Meanwhile, venture debt became popular to meet the demand for non-dilutive financing among startups and climate funds emerged, marking a shift towards ESG investing.
On the regulatory front, the government applied stringent privacy rules which complicate data collection by fintech and e-commerce players. The authorities also put up efforts to boost IPOs by introducing the Indonesia Carbon Exchange (IDXCarbon), recognising dual-class shares, and creating a new economy board.
“Moving forward, a more resilient ecosystem will likely emerge as stakeholders remain cautiously optimistic,” the report read, pointing out upcoming key trends such as strong early-stage deal flows and startups’ focus on profitability, among others.
The report noted that small deals of less than $10 million saw healthy growth over 2021 and remain the most resilient in 2023 on the back of a surge in seed funding.
The report, which includes data up to August 2023, found that Indonesia maintained its 2022 VC deal value at $3.6 billion despite global declines. During the year, Indonesia recorded a 20% year-on-year increase in deal volumes supported by positive economic indicators.
There were 344 VC deals in Indonesia with an average $16 million deal size last year. That was a mix of an increase in the number of deals—265 deals in 2021—and a drop—the average deal size was $23 million in 2021. Up to August 2023, there were 110 deals with an average deal size of $9 million.
Projections for 2023, however, were less optimistic. The report noted that there is an anticipated 70% to 80% decline in deal value this year compared with 2022 while the funding pace in 2023 remained sluggish through the third quarter.
Indonesia – The region’s bright spot
According to the Indonesia Venture Capital Report 2023, the country continues to show promise on the back of sound economic growth, dividend surplus, and an expanding digital economy.
“In the long run, global investors are expected to maintain a positive outlook on Indonesia, as underlying fundamentals continue to provide new economic opportunities,” the report said.
Last year, the archipelago recorded 4.6% gross domestic growth (GDP), one of the highest in the region. Finance Minister Sri Mulyani expects GDP to expand at 5.04% this year on the back of stronger household consumption.
The country’s digital economy has seen strong expansion due to rapid e-commerce adoption, growing to $77 billion in 2022 from $41 billion in 2019. Indonesia’s digital economy is projected to hit $360 million by 2030.
Going forward, the report suggested that VCs will be busy with early-stage deals in sectors such as electric vehicles and healthcare.
“The current (2023 onwards) trend in investments leans towards ESG and climate tech, particularly electric vehicles and battery technologies. Healthtech remains robust in a conservative deal climate, and there is an upswing in digitally native, direct-to-consumer brands maximizing the influence of e-commerce platforms and social media tools,” the report said.