Private equity investor Northstar Group is betting on the consumer opportunity at the bottom of the pyramid in Indonesia, Southeast’s largest economy that is home to 271 million people, the investment firm’s co-founder and managing partner Patrick Walujo said.
“When you look at the need of our brothers and sisters in that segment, it is really basic services and products. We also take a view… if we deliver good quality, affordable products to them, this not only benefits us as investors, but also benefits the society and the country,” he said at the Indonesia PE-VC Summit 2020 organised by DealStreetAsia in Jakarta on Wednesday.
The fund manager also sees opportunities in sectors such as education and microfinance. According to Walujo, the need for education is tremendous in the country plagued by a scarcity of industry players. As for microfinance, he hopes that the firm can provide capital to startups as Indonesian banks alone are not equipped to fully service companies operating in this segment.
When you look at a successful young company, what has been the most competitive advantage? What is the key factor in differentiating a successful startup from those who may fail?
The two most important elements are the business model and the quality of the founder(s). Capital helps to some extent, but too much capital can be unproductive. The essential for a founder is to build a company and make sure its balance sheet is strong enough to find the right investor.
From your point of view, do Indonesian entrepreneurs choose their investors wisely? What should be the most important factor for young entrepreneurs in choosing whose capital to take?
I see three types of situation in funding. One is when the company has a lot of choice, the second is a balanced situation in which the entrepreneur can raise the money but has little choice. The third is when the entrepreneur has to work hard to find funding. The most successful company I would say is the entrepreneur who has a realistic target.
How easy are exits? You have sold down some of your stake in Gojek (Indonesian ride hailing firm). Are exits generally challenging?
If you have a good investment, it is very easy to exit. If you have a bad investment, it is very difficult to exit. The return is driven by the performance of the company. We have to find a balance between maximizing our return and managing our risk. In fact, we only sold down a portion of our Gojek stake to recover the principal that we put in the company. We still have exposure to the firm. We have the duty to ensure our investors’ capital is managed properly.
Regulation plays a huge role both in creating and limiting opportunities for startups. From your point of view, how would you assess the government’s role? Is that supportive enough?
We are lucky that our current government is very supportive of innovations and these startups. But it doesn’t change the fact that we need to build relationships with regulators and inform them of what we are doing. For instance, on financial services, the authorities are open-minded when it comes to peer-to-peer lending innovation. It is important to learn from the Chinese experience – the government regulates the sector without choking innovation.
How protectionist should regulation be? Do you favour regulation that supports local companies against foreign players with deeper pockets?
I favour fair market practice in the sense that nobody should be able to dominate a country, simply because of money, regardless of quality of products and innovation. That’s why there is an anti-monopoly commission. But it doesn’t mean that the government should protect the market and prevent foreign players from coming in. As long as they are operating in a level-playing field, we welcome competition.
Given its potential and the young demographics, the Indonesian economy should be growing at over 5 per cent rate. To what extent can young companies make a difference to Indonesia in generating income and job growth?
I think it is immense. Technology and digitalization have opened up all kinds of opportunities for people to access additional income and information. This has eliminated middleman in the system and got rid of inefficiency.