Originally published in Venture Beat
By Adrian Li
Most investors would jump at the chance to go back in time and invest in a sure thing. Imagine having the opportunity to time travel to China in 2007 or 2008 to make an early-stage stake investment in a startup like Alibaba, now a publicly-traded online giant valued at more than $250 billion.
For venture capitalists seeking a similar opportunity, Indonesia could be the answer. That’s why I moved to Jakarta in 2014, after years working as a tech entrepreneur in China, to set up a VC firm. I believe this could be the next digital frontier, a place that could enjoy the sort of explosive growth China had.
In 2008, VCs invested $4.2 billion in China, up from $2.8 billion in 2007, according to Dow Jones VentureSource. China has since exploded as a center for venture capital. By 2015, VCs invested a record $37 billion in startups, more than double 2014 levels, according to Preqin Ltd.
With a population of more than 250 million, Indonesia is the world’s fourth most populous nation and the largest economy is Southeast Asia. However, three metrics in particular reveal that Indonesia is a lot like the China of 2007 or 2008 — e-commerce as a percentage of retail sales (1.4 percent in 2015), Internet penetration (28 percent in 2015) and GDP per capita ($3,834 in 2015.) The economy grows about five percent annually, e-commerce is expanding rapidly (by $10 billion a year and forecast to hit $130 billion by 2020), and smartphone use is forecast to swell to 100 million by 2020. Indonesia is also a leading mobile-first nation, with more than 70 percent of its Internet traffic on mobile devices. All that, coupled with weak infrastructure and poor logistics systems, makes it an especially big opportunity for e-commerce growth.
It’s a set of circumstances that has helped Indonesia to develop three unicorns (private companies worth more than $1 billion). The companies, sustained by local demand, highlight the nature of the opportunity. Tokopedia is an online marketplace, founded in 2009 and now reportedly worth about $1 billion, that allows people to open their own online store to sell everything from shoes to screwdrivers. Think of it like an online night market. Online travel reservation firm Traveloka, founded in 2012 and also acknowledged to be valued at more than $1 billion, is Indonesia’s No. 1 online travel agent, aggregating the archipalago’s multitude of travel operators. Ride-sharing company Go-Jek, valued at $1.3 billion, has 200,000 motorcycle drivers — called “ojeks”— who get people, parcels, and deliveries where they need to be. Think of it as Uber on two wheels.
These three companies together demonstrate that Indonesia is a market where venture capitalists can back entrepreneurs that are building businesses based on proven models. That’s possible because consumers have essentially the same needs all over the world. With small tweaks, these ideas can become near-sure solutions for their local market.
However, the three companies also underscore a lesson learned from China: You cannot just drop a Western company into a unique Asian culture and expect it to thrive without alteration. Take, for example, the case of Uber, which had big ambitions for China but in the end sold its unprofitable Uber China business to Didi Chuxing after failing to dominate a crowded market where it made some cultural missteps.
Likewise, in Indonesia cultural differences favor innovative local firms. Local advertising and e-commerce companies, for example, can use their data about online behaviors to create services for nascent local financial services technology firms that lack the consumer credit data available in developed nations. Global leaders such as Google and Facebook may struggle to match such local insight.
Like China, many local Indonesian startups are service companies that require intense local activity and execution, giving an opportunity for them to build market leadership that could eventually lead to a local stock market listing.
For example, Go-Jek began in 2010 by founder and CEO Nadiem Makarim to connect motorcycle taxis with riders. It stayed small until mid-2014, when VCs were seeking out ridesharing startup opportunities. Go-Jek was a uniquely Indonesian twist on ride-sharing, and in Makarim it boasted a local leader with a pedigree including time at Harvard Business School and McKinsey & Co. Now it completes more than 22 million transactions a month, attracting big-name investors such as Sequoia Capital.
As China’s technology market matures, domestic Chinese VCs are increasingly looking abroad for the next big thing. In June last year, seven members of the so-called China Angels, a small group of influential entrepreneurs and investors, including Xu Xiao Ping, founder of the Zhen Fund, China’s largest seed-stage investor, and Kai Fu Li, founder of the Sinovation Fund, a $1.3 billion venture fund, came to Indonesia. The group met with the founders of Go-Jek and Tokopedia at their offices and with more than a dozen early-stage ventures.
After the trip, China Angels Chairman Xu Xiao Ping said, “There are similarities in what we experienced in China five to seven years ago, and this represents a great opportunity to invest both in terms of timing and proven models to invest into.”
The great news for adventurous investors is that Indonesia has not yet been flooded by capital. In the 18 months from the start of 2015 to the end of June 2016, $3 billion of venture capital was invested in startups in all of Southeast Asia, up from less than $200 million in 2011. That $3 billion is slightly more than the $2.8 billion invested in China in 2007.
So, whether you’re looking to take a stake in the next hit online dating platform or mobile payment processing company, Indonesia could be a great place to look.
Adrian Li is a Managing Partner of Indonesia-based Convergence Ventures and a Kauffman Fellow.