Indonesian VC investments grew 6.3 percent year-on-year (yoy) to Rp 13.5 trillion (US$959.3 million) last year, Financial Services Authority (OJK) data shows, driven by the expansion of technology start-ups after countries imposed COVID-19 mobility restrictions in early 2020.

VC firms expect technology start-ups to continue growing this year and beyond as mobility restrictions in Southeast Asia spur the adoption of digital services for commerce, health, education and grocery shopping, among other areas.

“[The pandemic] has been an accelerator rather than a reset of the tech space, as overall digital adoption has grown immensely,” said Aldi Hartanto, investment vice president at MDI Ventures, the financing arm of telecommunications firm PT Telekomunikasi Indonesia (Telkom), on Feb. 19.

VC firms have also pointed to Indonesia as one of the key destinations for regional start-up investment going forward. As of the second quarter of 2020, the country had absorbed the biggest share – 45.8 percent – of the region’s $2.7 billion in fundraising, DealStreetAsia data shows.

Investment in Indonesia’s internet sector grew 50 percent to $2.8 billion in the first half of last year from $1.8 billion in the first half of 2019, according to the e-Conomy SEA 2020 report by Google, Temasek and Bain & Co.

VC firms helped the companies in their portfolios stay afloat during the pandemic, solidifying themselves as an integral part of the start-up ecosystem. But what exactly is venture capital? And what does the recent news of start-ups planning to go public mean for VC firms? 

What is venture capital? 

Venture capital is a form of private equity that is a popular choice for start-up financing. VC firms usually invest in technology companies. 

“However, VC and private equity are different in that the latter will inject a huge, one-time fund and take a majority share, sometimes also placing someone on the company’s management. Meanwhile, VC firms will disburse funds in rounds after a start-up reaches certain milestones,” said Chandra Tjan, cofounder and general partner at Indonesia-oriented VC firm Alpha JWC Ventures, on Feb. 5.

Some VC firms offer mentoring, training and networking opportunities for the companies in their portfolios, an important added value for start-ups, said Chandra, whose company has invested in café chain Kopi Kenangan and lender Kredivo. 

Read also: Alpha JWC Ventures expects more unicorn start-ups to emerge

Other options for start-up funding are bank loans, crowdfunding and angel investors, who are commonly family or friends. 

Willson Cuaca, cofounder and managing partner at East Ventures, which invested in Tokopedia and Traveloka, added that VC differed from bank loans because banks required start-ups to set loan terms ahead of time based on when the business expected to break even. 

However, technology start-ups, he said, needed to build their platforms and user bases before monetizing their businesses, making it difficult to predict when they would have positive cash flows.

“That is why VC firms invest with rounds of funding instead of just once. We also take minority shares because tech start-ups’ assets are in the form of the intellectual rights of their founders,” he said during an online event hosted by the firm on Friday.

How do VC firms gather funds and make profits? 

VCs have different ways of acquiring funds. Regular VCs receive funds from wealthy people, corporations and financial institutions, while corporate VCs manage money from their parent companies. 

Aldi of MDI Ventures said investors were considered limited partners in VC firms and that they fully entrusted their funds to the general partners.

Corporate venture capital (CVC) firms commonly have corporate structures, whether as a business unit or as an independent subsidiary of a parent company.

“CVCs typically only manage their parent company’s money or [that of] single investors with a relatively specific agenda that highly aligns with the parent company’s strategy. Parent companies can also consider this investment a research and development strategy to expand their future markets,” he said.

William Gozali, chief investment officer at BRI Ventures, a subsidiary of PT Bank Rakyat Indonesia (BRI), said that start-ups needed time to generate revenue.

“Risk is the nature of the game. There will always be risk, but the important thing is how we can measure these risks and invest in companies that match our risk appetite,” said William, who is also deputy chairman of the Venture Capital and Start-up Indonesia Association (Amvesindo).

Read also: BRI Ventures, Investree join hands in new debt financing

Meanwhile, East Ventures investments vice president Devina Halim said VC firms periodically invested in start-ups to get a share of the business. She added that a start-up’s value grew as it raised funds. 

“This is where a VC firm gets its capital gains from: the difference in a company’s valuation between when the VC started the fund and when the company has grown,” she said. 

Alpha JWC Ventures, for example, was able to return 20 percent of its $130 million second-round fund to investors in less than three years. The company has also returned 30 percent of its $50 million first-round fund.

The firm noted that its internal rates of return (IRR) were 30 percent and 60 percent of its first and second funding rounds, respectively. The higher the IRR, the more desirable the investment.

VC firms also charge management fees. The fee is usually 2 percent of the investment.

VCs upbeat during pandemic

Despite the COVID-19 pandemic, VC firms’ assets rose 4.3 percent yoy to Rp 19.5 trillion last year, up from Rp 18.7 trillion in 2019, according to OJK data.

Chandra of Alpha JWC Ventures said the company planned to raise around $200 million in its third funding round this year. The firm is considering investing in consumer technology, financial technology, educational technology and food and beverages.

Read also: Sky’s the limit for start-up funding in 2021 despite slowdown, VC association says

Aldi of MDI said 2020 was the company’s “best year so far as we managed to quadruple our investment activities and grow our portfolio value positively, despite the crisis.” 

“In 2021, we plan to continue our successful playbook by determining potential deals in the post-pandemic world, while also channeling that thesis to back more early-stage companies,” he said.

Aldi hopes that in the future VC firms will be more rational and invest in what he called “real actual business-building interesting tech”, or RABBIT for short.

“I hope VC firms will stop capitalizing and chasing vanity ‘unicorns’ and stop the sporadic cash burning. VC firms should shift to funding companies that will reach billion-dollar valuations based on free cash flow to the firm [FCFF] with a positive unit of economics and responsible cash burning,” he said.

VC firms on start-up IPOs

News about Indonesian start-ups preparing for initial public offerings (IPOs) has been circulating in recent weeks. Tokopedia and Gojek are in merger talks in preparation to go public, while Traveloka is considering using a special purpose acquisition company (SPAC) to hold a dual listing in Indonesia and the United States.

Willson of East Ventures said going public could increase a start-up’s transparency, discipline and liquidity, as well as validate its valuation on the market. However, going public was only part of the start-up cycle. It would not be the end point for VC firms.

“The question is: Does a start-up need to exit? Not really. VC firms can keep funding if the start-up is good. The other thing is that going public is not easy in Indonesia. Start-ups must be profitable over the past three years and conduct other due diligence, which can take some time,” he said.

Similarly, Aldi of MDI Ventures said the firm planned to keep its shares in a start-up that was slated to go public soon.

“We are planning an IPO for one of our portfolio companies around the second quarter of this year, and we are planning on keeping our share because we believe in its capabilities,” he added.

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