Despite a degree of cautious optimism, Indonesia’s venture capital deal value is expected to decline 70 percent to 80 percent in 2023, according to a report revealed by Indonesia-based venture capital firm AC Ventures and global consultancy Bain & Company on Wednesday.
According to the ‘Indonesia Venture Capital Report 2023’ report, the Indonesia’s funding pace in 2023 remained sluggish through the third quarter, standing at 0.3 times compared to the third quarter of 2022.
It is noted that the venture capital sector in Indonesia has experienced a significant transformation in recent years.
The last 12 months, however, witnessed a market recalibration driven largely by global macroeconomic headwinds.
While deal flow picked up quickly in 2021, increasing macroeconomic uncertainty drove caution in investing momentum and the spillover effect from the second half 2022 saw a lower number of deals and decline in deal sizes.
While the year has been difficult for the venture capital sector, the report said the overall growth outlook is positive given that the Indonesian venture capital landscape is entering a more mature state overall.
The report also highlighted a significant shift in investor priorities, emphasizing startups that showcase strong unit economics, leaner valuations, and clear paths to profitability.
This is further evidenced by the declining conversion rates from seed to series A/B funding rounds.
According to the report, one of the standout insights from the report is Indonesia’s resilience against global trends.
While the global venture capital deal value faced a decline of 20 percent to 40 percent, it said Indonesia maintained a stable venture capital deal value in 2022 on a year-over-year basis at $3.6 billion.
Further, the archipelago registered a 20 percent year on year increase in deal volumes in the same year.
Attractive macroeconomic fundamentals also suggested that Indonesia remains a bright spot in the region and will provide a favorable climate for startups in the country.
According to the report, with a young and burgeoning middle class, Indonesia’s gross domestic product (GDP) per capita grew by 4.6 percent in 2022.
The digital economy is also on an upward trajectory, reaching a notable $77 billion in 2022.
For Indonesia to stay on its growth trajectory, the report noted that the country needs to navigate macro headwinds such as the ongoing United States-China tensions, the upcoming 2024 elections, increased pressure on major tech players to achieve profitability, and the evolving regulatory landscape.
While platform-based businesses in sectors like e-commerce and mobility dominated pre-2020, the report highlighted there was a discernible shift toward fintech subsectors and new retail models such as direct-to-consumer (D2C) during 2020-2022, mainly driven by the rapid increase in digital adoption during the Covid-19 pandemic.
It said the emerging investment themes for 2023 and beyond point toward an increased focus on environmental, social, and corporate governance (ESG), climate tech, electric vehicles, health tech, and direct to consumer (D2C) brands.
On the exit outlook, it said the traditional preference for trade sales is giving way to a rising trend in initial public offerings (IPOs).
However, it said market pressures and a post-2022 funding environment could potentially dampen spirits around mega-IPOs.
The report also suggested an imminent upswing in Indonesia’s VC industry.
Late-stage startups will likely update their strategies, emphasizing profitability above all else.
With the digital economy projected to touch $360 billion by 2030 and initiatives like the IDXCarbon launch signaling Indonesia’s commitment to a net-zero future, it said global investors have reason to be optimistic about Indonesia.
“Our joint report with Bain & Company captures Indonesia’s venture capital evolution amidst global uncertainties,” AC Ventures Founder and Managing Partner Adrian Li said.
“While challenges remain, Indonesia’s resilience shines as investors prioritize startups with solid fundamentals and profitability,
“With multiple emerging sectors on the rise and a strong commitment to a sustainable future, Indonesia remains a promising hub for global tech investors,” he added.
Tom Kidd, Partner at Bain & Company, added the firm’s research with AC Ventures highlights the shared optimism towards the long-term attractiveness of Indonesia as an investment destination.
“Macro headwinds and a tougher funding environment will help to shape a stronger and more resilient ecosystem and future growth will be delivered by a clear pipeline of opportunities in emerging sectors coupled with a maturing investor base ready to provide capital to those companies,” he said.
AC Ventures is a Southeast Asian venture capital firm that invests in early-stage startups focused on Indonesia and ASEAN, with over $500 million in assets under management.
The firm has invested in over 120 tech companies in the region since 2012.
With a team of more than 35 professionals led by Adrian Li, Michael Soerijadji, Helen Wong, and Pandu Sjahrir, it has offices in Jakarta and Singapore.