Compared with a decade ago, Indonesia’s venture ecosystem is more mature and the quality of companies has also improved, believes Jakarta-based Intudo Ventures’s founding partner Eddy Chan.
That’s why, despite the upheaval caused by COVID-19, the VC firm continues to fund early-stage companies in their pre-Series A to Series B rounds.
This year alone Intudo invested in eight companies — the data management solutions provider Delman; entertainment company Visinema; Wahyoo, which provides digital solutions for small eateries; micro-insurance platform PasarPolis; cloud kitchen operator Yummy Corp; agritech platform TaniHub, freight logistics marketplace Kargo Technologies; and fintech platform EMQ.
The VC firm still has plenty of dry powder. “We will never invest just to invest. However, we typically run at a cadence of roughly four to six new companies a year,” Chan said, adding: “The pandemic has only strengthened our resolve to investing solely in Indonesia.”
Chan says the company’s underlying investment thesis is “digitisation and transformation of traditional industries” — a process that has only accelerated with the pandemic. “There will be a continuation in the scaling of foundational businesses such as payments, logistics, and enterprise services to support e-commerce and key traditional sectors,” added Chan, who founded Intudo in 2017 along with Patrick Yip.
Intudo, which has 20 companies in its portfolio, had closed a $50-million second fund in February 2019, after its $20 million debut fund in February 2018.
In an exclusive interview with DealStreetAsia, Chan — a former venture investor in successful startups such as PayPal, SpaceX, and Palantir Technologies — said the pandemic has demonstrated the importance of hyperlocalisation in investment operations.
How do you see the VC investment landscape in Indonesia this year and next? Do you expect to see many seed startups raise Series A rounds, or move from Series A to Series B next year?
The Indonesian venture ecosystem is maturing and the quality of companies has improved, compared with a decade ago. We have seen this trend play out first hand over the course of the pandemic with several companies in our portfolio, including Wahyoo (which closed a Series A in Q2), PasarPolis (closed Series B in Q3), and Yummy Corp (closed Series B in Q3). The pandemic has allowed the strongest companies to take advantage of the market uncertainty and adopt more of an offensive approach in line with the adage “the best defense is a good offense.”
The Indonesian venture ecosystem has never experienced a crisis since its inception a decade ago. With such a long bull run, the rising tide raised all boats. The pandemic has demonstrated the importance of hyperlocalization in investment operations, and firms with leadership domiciled outside of Indonesia have found themselves sitting on the sidelines.
Managers in 2020 would have experienced a year defined by firefighting and perseverance, with 2021 transitioning into an uptick of new investments into strong companies that weathered out the storm. As borders gradually open, the availability of capital for earlier stage deals will improve, and we may even witness some larger exits in later-stage companies with the dissipation of market uncertainty.
The ability of companies to raise a subsequent funding round is company-specific, driven by the management, its business model, traction, market-specific dynamics, investor composition, and economic moat. Within our portfolio, we have had several companies secure new financings giving them a runway of over 24 months.
Do VCs face difficulty raising funds and getting liquidity?
For local and regional corporate venture capital (CVC) firms and family offices, many have a moratorium on making investments into new, or even existing, portfolio companies, given the need to focus on their core operating business in the near term. More independent regional firms often have a large volume of existing portfolio companies to manage, making it more challenging to allocate resources to new companies.
As for fundraising for VC firms, we understand that limited partners (LPs) are still adapting to new market dynamics. Public markets have, by-and-large, stabilised, allowing asset managers to assess alternative asset classes, including venture capital. It appears that the bulk of LPs remain more comfortable with managers they have already met in person.
We continue to focus on funding sustainable businesses and investing in roughly four to six new companies each year.
Which sectors are you interested in for next year? What will be the next big thing to see in Indonesia in 2021?
Intudo is not a trend-driven investment firm — we believe companies make trends rather than trends make companies. This is reflected in our backing of many non-traditional or contrarian companies. We will continue to look at the same sectors as we have in previous years — agriculture, consumer, finance/insurance, education, health/wellness, and logistics.
For Indonesia, the underlying dynamic is digitisation and transformation of traditional industries — a process that has only accelerated with the pandemic. Whereas technology enablement was historically a “nice-to-have” for companies of all sizes; post-pandemic, it has become a “must-have”. There will be a continuation in the scaling of foundational businesses such as payments, logistics, and enterprise services to support e-commerce and key traditional sectors.
For our Series A and Series B deals, we have an ardent conviction about the management team, business model, traction, market-specific dynamics, investor composition, and economic moat. For Pre-A deals, we may dip into more experimental non-consensus investments that may be riskier but have more upside as they scale.
Do you have any plans for exits this year or next?
Indonesia, and Southeast Asia as a whole, has often been criticised for its dearth of exits. Still, we believe that change is on the horizon, and appetite for the ecosystem will grow.
Over the last few months, we have witnessed the formation of Southeast Asia-focused special-purpose acquisition companies, such as Bridgetown Holdings and Malacca Straits, which we anticipate will create viable exits in the near-term and build up further public market exposure and attention to Southeast Asia.
Also, secondary exits continue to be a viable exit route for investors, allowing money to be pulled off the table as the company reaches maturity. On a smaller scale, we have found that as company valuations start to creep above the $50 million mark, secondary sales become quite commonplace as many global investors need to achieve certain ownership targets and can only do so via purchases of secondaries. That said, we note such partial exits may not generate a full exit that one typically thinks of in venture capital. Still, they provide meaningful liquidity early on.
Has COVID impacted your investment thesis?
The pandemic further illustrates that the economy and society are balanced between online and offline spheres. There will be some behavioral changes among consumers and businesses, some of them will be permanent, but many may just be more temporary trends. The one thing that remains the same is digitisation. In Indonesia digitisation is an inexorable tide. The pandemic has only strengthened our resolve and commitment to investing solely in Indonesia. We are not making any significant changes to our mandate.
Are you still planning to add more startups to your portfolio this year?
We have plenty of dry powder to spare, including capital for potential new deals and adequate reserves to back up the truck with super pro-rata investments into existing companies that are demonstrating breakout growth. We will never invest just to invest. However, we typically run at a cadence of roughly four to six new companies a year, which has continued to be the case for 2020.
How is the fintech sector faring so far?
As we have built out our fintech portfolio [Xendit, PasarPolis, Oriente, ErudiFi, EMQ], we have tended to look into vertically-focused marketplaces that generate substantial customer and transaction data that, in turn, allows the company to embed fintech. Tech-enabled general sector money lending businesses are more vulnerable to undercutting interest rates from competitors.
Vertical-focused marketplaces are able to accumulate market and customer data to develop targeted lending solutions that are adapted and introduced over time. They can leverage unique transaction data and meet customer needs in ways that traditional or more general sector lenders may not be able to.
Why do you invest in fintech that focuses on education rather than in edtech itself?
We have backed student loans focused P2P platform ErudiFi. Unlike other models where a company disburses money directly to students, with ErudiFi, funds are instead disbursed directly to the educational institution to pay for tuition and guaranteed by parent or co-borrowers. This model offers underlying security with more reliable guarantees and safety as the money is being used for its intended purposes. It circles back to our belief in vertical-focused fintech plays, rather than unfettered lending.
Are you looking to invest in edtech since students can’t go to school amid the pandemic?
The pandemic has highlighted the importance of remote learning opportunities. It has, in turn, made this somewhat of a crowded space, which often makes us nervous, since valuations are rich and almost every venture capital firm wants to bet on it.
Given that the most significant barriers to success in this industry is the availability of the internet at the provincial level, leading edtech in many areas only can grow as fast as infrastructure is built. Should the market present itself with an opportunity to invest in a company in this space that we truly believe in, we would be certain to evaluate. We look at deals on a case-by-case basis and avoid strict sector plays.
What made you invest in the cloud kitchen Yummy Corp?
What makes Yummy Corp interesting is how they work with existing restaurants and foodservice players to digitise operations and set up cloud kitchens — looping back to our firm belief in the digitisation of existing and traditional businesses.
Other models may set up new brands or food courts that prepare a number of different operations under one centralised kitchen. Yummy Corp has made significant strides during the crisis, working with third-party restaurants to help them acclimate to diverging consumer habits, and most recently announced a US$12 million Series B financing to supercharge the company’s growth.