<article>Companies with a sharp focus on fundamentals, cost reduction, and innovation are expected to ride out inflationary pressures, sluggish global growth, and the so-called funding winter, according to investors and entrepreneurs at the Indonesia PE-VC Summit 2023. </article>

Companies with a sharp focus on fundamentals, cost reduction, and innovation are expected to ride out inflationary pressures, sluggish global growth, and the so-called funding winter, according to investors and entrepreneurs at the Indonesia PE-VC Summit 2023. 
From a growth-at-all-costs strategy earlier, 2023 spells a change in priorities for the tech universe as sustainable profitability and new approaches to funding take centrestage. 
What is emerging is that despite the collapse in valuations, growth continues to hold up and the scarcity of capital is actually breeding a new discipline in terms of business performance. 
“Valuations of high-growth companies have crashed in the past three years, but business performance is expected to become better,” says Northstar Group managing partner Patrick Walujo in a fireside chat. 
The listed tech universe, which has been hit hard, will see companies with a strong business model, leadership and working with disciplined KPIs thrive in this market, according to panelists.
The summit featured 45 speakers including three policy-makers, 20+ top investors, and 15 leading founders and attracted participation from nearly 600 delegates from the investment ecosystem.
Here are some top takeaways from the summit:-
<h3>Of valuations, runway &amp; new funding approaches</h3>
Early-stage companies will need to demonstrate that their runways are long enough before they need to seek new funding, with investors suggesting that these players should seek slightly more funds than they require near term. 
“A startup&#8217;s chance of raising funds depends on its stage. For early-stage companies with limited runway it may be hard to get funding even from VCs,” says Vertex Ventures’s Joshua Agusta.
And, later-stage companies should be able to demonstrate value through their growth prospects rather than looking for high multiples, investors point out. 
&#8220;Late-stage tech offers the most interesting opportunities as valuations have adjusted and the business case is proven,&#8221; Walujo noted.
Fresh funding rounds may not have to be down-rounds with flat rounds potentially being the next up-rounds. Despite the significant amount of dry powder or unallocated capital, there will need to be an adjustment of expectations from founders, according to panelists.
Companies may seek out alternative funding such as venture debt but this is still quite marginal.  
Fundraising may include different structures such as warrants, convertibles, and options to offset smaller sizes as founders may be reluctant to take down rounds. But, in the end, it will depend on whether they can provide some guarantee of growth.
An increased focus on debt structures is expected as they work well for both sides but there is also a question of the availability of debt plus the currency involved will also become more important although USD will still tend to dominate. 
Access to cheap cash should be seen as a burden, given that there are increasingly high expectations of the return on that capital.
The key will be to keep financial products simple with a real focus on business growth, with smaller cheque sizes and convergence between the founder and investor.
“Deals will be sealed, but there will be more moderation to make sure startups can generate revenue and profits,” Jessica Huang Pouleur of Openspace Ventures observed.
Profitability can in itself be seen as a source of funding and a tool to extend the runway. 
&#8220;Founders will make much more capital-efficient choices as the era of easy money is out of the door,&#8221; said Rohit Agarwal, principal at Sequoia Capital.
The move toward positive EBITDA will mean that companies will at some point find it easy to raise new capital, as long as they can sensibly manage to control costs. A premium on profitability is expected to continue into 2023.
<h3>Consumer story going strong</h3>
Consumer-facing tech companies will have an advantage as they can demonstrate a faster path to profitability. Companies with better prospects will also be able to achieve exits in the current environment, with Cimory cited as an example. Indonesian dairy major Cimory announced a $130 million strategic secondary investment from General Atlantic days back.
As consumers switch back to more offline activity, the omnichannel approach gains more significance. Companies such as coffee operator Kopi Kenagan have reported a pronounced improvement in footfall, which means the balance has switched back to more offline sales, which is positive for profitability, given far lower third-party sales. 
“Despite the obvious headwinds, we’re becoming more profitable. There’s a shift in consumer behaviour and we are getting more traffic from our app and walk-in stores,” said Edward Tirtanata, CEO, Kopi Kenangan.
Other players such as DTC eyewear brand Saturdays have also benefited from more offline activity, given an omnichannel approach, with the company increasing the number of offline outlets. Brand aggregator Hypefast, which initially relied 80%-90% on selling online, will see the benefit of extending its sales to offline channels. 
Offline, quality local brands could see higher demand amid economic headwinds, according to Hypefast CEO Achmad Alkatiri. The Hypefast platform is already profitable but the new environment allows the platform to improve profitability. 
Indonesia continues to see the emergence and growth of local brands suited to local tastes. For example, eyewear startup Saturdays has focused on designing frames for Asian faces, taking an omnichannel approach. 
<h3>ESG is not a silo function</h3>
ESG adoption should not be taken in isolation but as part of a broader process and a general mindset covering good governance and contributing to overall profitability, rather than a means in itself or to attract investors, according to panelists.
“ESG is not a silo function. Our approach is to be more cost-effective, and efficient through ESG and this is allowing us to be more inclusive. Everything we have done for ESG has reduced our organisational expenses,” says Tanah Sullivan of GoTo. 
Sustainability does not need to be a cost centre. In fact, embedding ESG into existing structures can reduce operational expenses, improve returns and help to generate additional revenues.
In order to understand the potential benefits, there needs to be an in-depth understanding of the underlying businesses and where the benefits may be rather than an arbitrary implementation of any ESG policies.
“The ways that a startup can help people, the community and the environment is the positive impact it can have. Just integrating ESG is not enough to attract investors, the fundamentals are important,” says East Ventures partner Avina Sugiarto.
<h3>Fintech goes beyond payments </h3>
Indonesia’s fintech sector is at a turning point. A quiet consolidation among digital banks might be underway as the market is increasingly turning highly specialised.
Fintech companies are beginning to see entrepreneurs going direct rather than turning to banks and companies involved in providing payment gateway businesses. For example, Xendit is moving into the lending business with its existing clients. Xendit will not stay exclusively in the payments business but will look to move into other value-added businesses from fraud prevention, back office, and sub-ledger services but also lending, even though there is still room for expansion in digital payment services.
&#8220;Payments can be monetised. We are confident of providing services that merchants are willing to pay for,&#8221; said Xendit COO Tessa Wijaya.
Angus Mackintosh, a consulting editor with DealStreetAsia, is responsible for the publication’s Southeast Asia digital economy weekly newsletter and its monthly research reports. Angus is also the founder of CrossASEAN Research and publishes on Smartkarma.

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