Daren Tan, the Managing Partner of Singapore-based Golden Equator Capital, opines that digital marketplaces, Big Data, fintech and analytics will continue to dominate venture capital investments in Indonesia for the foreseeable future.
In an email exchange with this portal following the firm’s investment in Salestock which it co-led with Gobi Partners, Tan said, “Venture firms are also increasingly looking at the digital health and education sectors, which remain untapped opportunities.”
Looking at growth sectors in Indonesia, he explains: “Investors are predominantly looking at B2C plays in Indonesia — founders with localised knowledge and expertise in their space. Larger regional or global players become potential acquirers as they look for opportunities to gain exposure to a highly localised market. We’ve already seen several larger Chinese players investing in Indonesian companies or proceeding with acquisitions, i.e. JD.com (Traveloka), Alibaba (Lazada and Tokopedia) and Tencent (Go-Jek).”
While funds continue to concentrate their capital on consumer internet ventures, Tan notes that the B2B space continues to remain nascent but could offer attractive rewards to investors as interest in the Indonesia market fuels M&A exit opportunities.
However, a factor that has caused analysts and industry observers to look out for shifts in investment behaviour and changes in the VC playbook in Southeast Asia is the rise of Chinese investment in Southeast Asia.
Tan says, “The increasing presence of Chinese investment in the region, such as Alibaba’s backing of Lazada and Tokopedia, and Tencent’s backing of Go-Jek, does not fundamentally change our [Golden Equator Capital] strategy. We see these larger players as potential acquirers, as startups grow and look for exit opportunities.”
Fintech focus, increasing competition
Given the evolving landscape that growth markets like Indonesia represent, other opportunities that Tan predicts VCs will being to target more deeply include the financial technology sector.
He notes: “Fintech continues to present growth opportunities in the region, given the ongoing prevalence of cash and a large unbanked population. In Indonesia, over 70 per cent of the population remains unbanked, while those with a bank account do not own debit or credit cards. When making an online purchase, Indonesians will complete the transaction using an ATM to make a bank transfer.”
“This practice creates many areas of friction, ultimately hindering the growth of the digital economy. There are growth opportunities for fintech companies that enable the unbanked to transact using digital wallets, or allow greater access to financial services such as P2P lending,” he added.
Banks, which are facing increased pressure to cut costs and provide improved services to their customers, may find allies in fintech startups, especially as they ward off competition from tech players and telcos.
Tan explains: “Banks now see the importance and benefits of collaborating with startups to better serve their customers faster, at lower costs. As regulation continues to evolve and banks become more comfortable working with startups, we foresee an increasing demand for technology solutions that can support and facilitate compliance, customer service, mobile banking, KYC and wealth management.”
Already, banks in the region are establishing innovation centres and corporate venture units to identify new methods to adapt as well as collaborate with solution providers to improve their competitiveness.
However, this increased competition will also impact the venture capital ecosystem; the density of venture funds in the region has grown, making fundraising from limited partners (LPs) more competitive.
With the emergence of new venture funds – both homegrown and international – in Southeast Asia, there has also been an increasing number of investors seeking to gain exposure to the region’s technology sector.
Tan believes that this interest is rooted in the “continued growth and dynamism of Southeast Asia’s startup scene over the past five years, the increasing number of exits and large financing rounds, and growing awareness of how technology is playing a key role in shaping emerging economies and new consumer behaviour”.
He predicts that the coming years will see the emergence of more country-specific or sector-specific funds, which will aid them in differentiating from other funds around the region.
The last two years have also seen the emergence of startup stock exchanges in Jakarta and Bangkok, as well as other activity related to facilitating liquidity events in the region for entrepreneurs and investors, whether through buyouts or initial public offerings (IPOs).
Singapore was slated to see the launch of a startup stock exchange in the mid-year, though this has failed to materialise.
Tan observes: “M&As are still the primary mode of exit for startups in the region, as corporates look to gain a foothold into local markets and quickly evolve to offer new services. However, this is starting to change with companies such as Tessa Therapeutics and Sea (Garena) expressing interest in getting listed in the US.”
He adds, “Most investors in Southeast Asia’s retail space still lack the risk appetite and the depth of understanding when it comes to technology investments. Many investors still seek the security of investments into traditional asset classes such as property. Nevertheless, this is changing with the emergence of large tech companies such as Grab and Tokopedia drawing international attention.”
Tan believes that as investor awareness and education grows, eventually, the regional investor base will seek to gain exposure to high-growth and disruptive startups, with the presence of platforms like a startup exchange facilitating an increase in IPOs and other exit events.
What about an early listing on bourses like the Australian Securities Exchange (ASX) or growth boards like the Mothers board of the Tokyo Stock Exchange (TSE) and the Catalist secondary board of the Singapore Exchange (SGX)?
“Pursuing an early listing as opposed to leading a venture round is certainly an option that can bring benefits to startups such as increased access to capital, exposure to retail investors, and building the company’s profile in the market. At the same time, startups will face greater scrutiny, as well as compliance and reporting requirements in order to be accountable to investors,” Tan said.
“There is also a big risk of failed IPOs, given the limited number of players investing in these exchanges and the novelty of technology IPOs. Hopefully, with time and education, these exchanges will build a track record and become attractive avenues for technology startups looking to get listed in this region,” he added.