Leading the venture capital wave among banking institutions in Indonesia, Mandiri Capital Indonesia (MCI), the VC arm of the country’s largest lender by asset Bank Mandiri, says it is now looking to source startups outside Indonesia, with Singapore the most likely target.
“It would definitely be Southeast Asia. At the moment we haven’t really looked at Malaysia and the others, but Singapore is somewhere we have looked at,” MCI investment head Aldi Adrian Hartanto told DEALSTREETASIA.
While overseas investment is a possibility, Hartanto explained that the focus for MCI will still be at home, where more banks are starting to follow its lead by extending the venture capital business. Competitor BCA has already launched its VC arm and fellow state-own lenders BRI and BRI are set to jump on the bandwagon.
Despite the increased competition, Hartanto said that he was confident MCI, which reportedly invested a total of $25.6 million in seven startups last year, still holds an edge over other VCs given the stature of parent Bank Mandiri and the additional value it is able to offer to startups.
In an exclusive interview with this portal, Hartanto elaborates on Mandiri Capital’s strategy, domestic competition, investments in fintech, and exits.
Is it right to say you are the first CVC by a local bank in Indonesia? What made Bank Mandiri jump into the VC space?
Yes, we are proud that we are the pioneer, the first bank in Indonesia that has set up a VC. We jumped on the wagon primarily because we saw that digitalization is not just a trend, it is happening. Other sectors have been technically fully disrupted like the transportation industry by the likes of Go-Jek and Grab. Also, customers’ behaviour is changing dramatically. For example, in around 2013-2014, the transaction carried out in (Bank Mandiri) branch offices was still around 50 per cent, now it’s actually barely 2 per cent. Most of the transactions are done through mobile banking or other digital channels. So we saw this trend as something exciting and challenging, and we needed to find a way to navigate things. The banking sector is highly regulated, so it’s difficult for banks to cope with the developments of this digitalization era. We saw that we need to have a bridge entity that can be independent to bridge the gap between what banks are actually doing and what the fintech companies are doing.
Are other banks following your lead? How will you handle the competition?
It’s definitely not only us thinking this way. The bank that has officially launched (a CVC arm) is BCA, with its Central Capital Venturra. There are also other banks like BRI, BNI, although it hasn’t been confirmed. Mostly the big banks are also trying to jump on the bandwagon, but I think they are still trying to figure things out, pretty much the same as us when we were starting out in 2015.
The (CVC) industry is still very new and we haven’t been competing for a deal. But we can say that we have an unspoken rule where it will be difficult if we co-invest (with other bank’s VC units), but it would be okay if other banks want to invest in next rounds.
What additional value do you bring over other bank’s VC arms?
Bank Mandiri is not a bank. We are more like a financial service group. Banking is our core business but we have a variety of business units and subsidiaries that offer more than regular bank products. In terms of network, we are one of the largest with thousands of branches, and infrastructure will be key for startups. The last factor is in terms of navigating regulations. For fintech companies, this is something that is very crucial, especially in a market like Indonesia.
As the VC arm of a bank, what are the advantages and disadvantages as compared to traditional VCs?
We position ourselves as a strategic investor. Startups usually realize that they need to partner with the big guys, so we don’t have a problem in sourcing good companies and convincing people to take our money. The challenging part, not only for a bank but also for corporate VCs, is the bureaucracy. Especially in our case, we are pretty new. The banks are still in the middle of shifting their mindset from what they have been doing for the last 100 years to now. So the challenge is to align the mindset and goals. We are gradually trying to influence the bank to realize that this is the future that you need to embrace.
Our position as a strategic investor also means we don’t just see whether or not a company is able to bring good returns, because from our standpoint, returns are not the main objective. The main objective is the potential for innovation and collaboration to strategically support the bank.
Can you tell us about your fund size, average ticket size and funding stages?
We currently manage a $40-million fund. It’s a pure balance sheet fund. So the structure is not an LP structure. The money is purely coming from the bank.
In terms of investment side, we are solely focused on fintech, which we categorize into three subsectors: payment, lending and enterprise solutions. Enterprise solution focuses mainly on either digitizing the bank or digitizing the clients.
In terms of the stage, we usually invest in post-seed companies. We don’t invest in ideas, in companies that have only been around for one or two months, so we prefer companies that already have a solid performance in the past 6-12 months, usually at pre-Series A to Series A. Sometimes opportunistically we also look at Series B companies, but it’s very rare. Our ticket size or sweet spot is usually around $500,000 to $2 million, but could also be less or more depending on (the startup) needs.
Will there be cases in which you will invest in startups whose business may be unrelated to the bank?
The central bank regulations clearly state that the subsidiary of a bank cannot invest in companies not related to financial services. So, we currently focus on fintech companies that will be able to support or align with the bank.
Having said that, along the way, we will definitely look at companies beyond fintech such as the so-called fintech enablers. These are companies that technically do not offer financial services, but we could empower them to offer such products. For example, e-commerce companies need a variety of financial service products to allow them to better serve their customers.
This is something we’re looking at but not focusing on currently. Along the way, once we know how to better navigate the regulations, we might want to jump on the bandwagon in that space.
You made your first investment only last year. Do you feel you are still trying to get a feel for this business, or do you feel you have already gotten a good grasp of it?
Yes and no. It’s a continuing process especially since Mandiri itself is such a large group. We think that we haven’t really optimized the value creation that Mandiri is able to provide. But we already have better ground rules in terms of doing things. In the first three months after I joined, for example, we didn’t have a proper investment guideline or thesis. We didn’t know whether to invest at the seed stage, later stage or early stage, how to navigate around startups and the bank, what the process is to accelerate engagement and so on. Now we’ve already learned the ups and downs. So, the foundation is already there. We just want to optimize everything we already started to develop. Last year was our fund beta phase, now we are able to standardize and optimize our funding.
We are also starting to look beyond Indonesia. We looked at that initially but after the first couple of months, I realized it would be difficult if we keep asking the guys from Singapore or other countries to come to Indonesia for a discussion. But we realize that there are certain things that we cannot get in Indonesia and so we should start to look to other countries.
It would definitely be Southeast Asia. At the moment, we haven’t really looked at Malaysia and the others, but Singapore is somewhere we have looked at. Given the nature of the ecosystem, we saw a lot of founders with a focus on building deep tech companies. We believe they have more room to navigate and to explore in their home countries. However, the main question remains – do they have the ability to expand to more challenging markets like Indonesia given its complexity and the disparity? Our main thesis is a strong Indonesia focus in order to maximize the value that we could bring to the table.
Can we expect this investment in an overseas startup sometime this year?
We really hope so. We are not really in a rush, because we are not financial-focused investors. We have a so-called evergreen fund. We don’t have the requirement to pay back to our investors, so we are able to take our time to really focus. We definitely hope we could do it but we want to make sure that everything is right.
The fintech sector is disrupting the banking industry. How do you view the opportunities in this space?
Disruption is definitely happening; it’s just a matter of how banks cope with it. We believe the future of banking is fully digital. So, we thought, instead of being against these (fintech) companies, why don’t we align with them?
There are definitely certain areas that we might not look at such as e-wallet companies like Go-Jek (with Go-Pay). We focus on companies that instead of totally changing banking, evolutionise the process.
Do you have an exit timeline? Can you tell us more about your exit strategy?
It’s definitely something that we still look at. We look at both the strategic and financial side. We have several companies which we believe in future will be able to solve the challenges Bank Mandiri is facing and will be very impactful for us. So our strategy is to keep increasing the stakes in these companies, so in the future, once they are ready, the bank might want to buy them. Although we haven’t really talked about it yet, it is something we envision.
There are some companies, meanwhile, which we see might be good for the bank but may not fully be a strategic fit, meaning they don’t really evolutionise what banks do, but are complementary. We will keep investing in them, but we are also okay if other companies want to buy them. There are also certain companies which are more of an experiment. So at this moment, it may not be a strategic fit, but in the future, it might be. So we are just investing in them to keep an eye on them.
What is MCI’s plan for this year?
We are looking at three to four companies this year. But it could be more, depending on the market and the opportunities. We are looking more at pre-Series A and Series A companies. At the moment, we are still focusing on Indonesia, but opportunistically, are open to other countries as well as long as they have an Indonesia angle. For example, if they already have a presence in Indonesia although they are based in Singapore or other countries. That’s something that we would look at as well.