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or the last several months, Communications and Information Minister Rudiantara has claimed that Indonesia will see the emergence of two e-commerce companies valued at more than US$1 billion by the end of this year, which will put them in the realm of '€œdigital unicorns'€.

Is this plausible? The short answer is '€œyes'€ and we will probably exceed this expectation.

In 2016, the total e-commerce market in Indonesia in terms of gross merchandise value is estimated to reach close to $6 billion. Roughly 60 percent of this value is generated by travel related services, for example online airplane tickets and hotel reservations, and the remaining $2.4 billion is made up of actual e-commerce retail sales.

How much will the companies that serve this market be valued at? Well, the e-commerce industry currently values companies as a multiple to their sales and the most recent valuations, for example in India, indicate a benchmark multiple of two to three times total sales. Thus, this would imply that by the end of 2016, we should have a potential value for Indonesian e-commerce companies anywhere between $5 to 6 billion, perhaps even more given that they are mostly very early-stage companies and so could fetch higher multiples. Unfortunately, potential company value is not equally distributed across all the players. But more about that later.

Nevertheless, we are quite certain that by the end of the year at least two, if not three, companies will reach a valuation of $1 billion or greater. This would qualify them as members of the digital unicorn club.

While this scenario is plausible and highly probable, several structural barriers still remain for the Indonesian e-commerce market to truly blossom.

The first is related to payments. We will need a more pervasive and customer friendly payment platform. Currently, the vast majority of e-commerce payments (around 70 percent) are completed with bank transfers and another 15 percent with credit cards.

This poses considerable limitations for mass-market e-commerce adoption given the high unbanked population (more than 65 percent) and very low credit card penetration in Indonesia. In addition, bank transfers via ATMs pose significant customer hassles and cause order cancellation rates to remain high at greater than 10 percent.

Cash-on-delivery is growing but still constitutes a relatively small portion at around 15 percent of total payments. Over the next few years we will need a much higher share of cash-on-delivery, well above 50
percent. Note that 50 percent of Indonesians say they are willing to shop online if they can pay on delivery.

The second barrier is logistics infrastructure. Poor infrastructure, archipelagic geography and a extremely fragmented and relatively low-tech logistics industry presents massive challenges in terms of speedy and cost-effective deliveries. Guaranteed delivery times are on average four to seven days in urban cities and seven to 14 days in other outer regions. Way too slow.

Logistics expenses are extremely high, even greater than the margins e-commerce companies are extracting per order. A 3 percent margin on a $30 purchase results in just under $1 of revenue while the estimated average logistics cost per order is greater than $2 to 3. So as most of these deliveries are subsidized by e-commerce companies to stimulate penetration for every order, they are losing money. It starts to look financially very ugly unless of course you are the logistics company.

Finally, we will need greater simplification of the required operating licenses and '€œopenness'€ in our regulatory framework, particularly toward foreign investors, as will be in need of a lot of capital to finance the e-commerce boom.
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We will need a more pervasive and customer friendly payment platform.

Based on international benchmarks, to fund the expected growth over the next three to five years, we will probably need close to $3 billion of fresh start-up risk capital. In India, only the leading e-commerce companies Flipkart and Snapdeal have raised over $5 billion in the last four years '€” over $2 billion per year in the last two years. As the break-even point for e-commerce is far away, access to funding capability is a critical success factor.

Given that traditional funding channels like banks do not fund high risk e-commerce start-ups, it is difficult to imagine that this size of risk funding will be provided exclusively by domestic investors. While international investors will not be shy to '€œtake a plunge'€, they will be cautious in mobilizing large investments in a potentially confusing regulatory environment where they feel unprotected or unwelcome.

The government seems to be moving in the right direction by announcing the elimination of e-commerce from the negative investment list for investment above Rp 100 billion. However, we are still waiting for the actual new regulation to be finally issued.

We tend to forget that we are dealing with risk capital in its purest form. The size of the prize for the successful players can be significant but the number of failures is far more significant. It would be good to remember that there are over 15 e-commerce players in Indonesia and the number seems to be growing daily.

The crash rate for startups is very high and only a very few companies actually make it to the digital unicorn status '€” actually less than 1 percent of the total startups. In addition, we can also clearly see that start-up returns abide by the '€œunicorn power law'€, which provide fantastic returns to only a very few companies. For example, in June 2015, only the top 10 unicorns were valued at $184 billion, nearly 50 percent the total valuation of all 113 private company unicorns (CBInsights). In addition, these were only the companies that made unicorn status. Thousands never made it.

So our Indonesian e-commerce entrepreneurs face a triple hurdle. First, they must launch and furiously grow the business. Second, they must continuously access funding to further accelerate the growth, and hopefully become the leader of the pack in terms of sales.

Finally, they must enjoy the disproportionate returns. In essence, e-commerce is a high risk winner-takes-all ball game for deep pockets, relentless operational execution and an effective customer proposition.
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The writer is A.T. Kearney Partner, Jakarta. Contributions provided by Shekhar Chauhan (Principal, Singapore) and Jeff Kuesar (Associate, Jakarta)