The recent merger of Indonesia’s two most valued startup companies, Gojek and Tokopedia to merge as GoTo Group has caused many investors and foreign entrepreneurs to set their eyes on this country as a promising ground for startups.
What makes the Startup Ecosystem in Indonesia such an optimistic place is credited to its size, growth opportunities, and vibrant startup ecosystem. According to Amvesindo, startups in Indonesia had secured US$1.9 billion in funding through 52 funding rounds by Q3 2020. This archipelagic market has indeed many advantages when doing business!
All about running a startup in Indonesia
While many startups are growing considerably in the world’s largest archipelago, there are several characteristics related to its regulation, market, and investment landscape that can either boost or hinder startup development. This article will outline what you need to know about starting a new business, especially a startup.
How active is Indonesia’s startup ecosystem?
This archipelagic market has one of the most active startup communities in the world. It’s difficult to pinpoint an exact number due to the volatile nature of the industry and different criteria of what actually defines a ‘startup’, but many sources offer a consistently high number of active startup companies.
In 2018, the Indonesia Digital Creative Industry Society database compiled 992 active startups, over half of them based in Jakarta and its surrounding suburbs. Meanwhile, international sources like Catcha Group and Startup Ranking place the number at well past 2,000 active startups.
So, let’s dive into why the country is seeing one of the highest startup growths in Southeast Asia.
Why is Indonesia a good place to run a startup?
Largest economy in Southeast Asia
You’ve probably heard before that this archipelago with over 17,000 islands is the fourth most populous country in the world. That is indeed right! This means that you will have a population of at least 270 million customers. Setting up your startup company here can allow you to experiment and try out your new product or service in a diverse community.
Moreover, the country has signed many Free Trade Agreements (FTAs) with other countries which opens up your business to opportunities for expansion. Indonesia is a member of ASEAN and has many other FTAs with European countries like Norway and Switzerland.
As such, beginning your business there will allow you to not only reach out to a huge market within the country but also to the region!
Investments have multiplied over 60 times since 2012.
While Singapore is still the Southeast Asian leader in terms of the number and value of investment deals, Catcha Group predicts that Indonesia’s startups will surpass it within the next two years. This is because behemoths like Expedia, Alibaba, and Tencent are pumping billions of dollars of investment, trying to take a piece of the ever-growing pie.
In late 2017, research from AT Kearney found that startup investments there had grown 68 times in five years, reaching US$1.4 billion in 2016 and hitting at least US$3 billion in 2017. At that time, the startup landscape was still in its baby steps; imagine how much it’ll grow in the next few years.
As mentioned earlier, startups received US$1.9 billion in funding in just Q3 alone in 2020.
It has 143 million Internet-savvy consumers.
Although only 62.6 percent of Indonesian citizens were connected to the Internet in 2020, its large population offers opportunities for an additional market of 143 million internet users; 26 times larger than Singapore’s. Much of this is concentrated in Java island – especially Jakarta – but affordable mobile devices are helping the rest of the archipelago catch up.
Easy access to devices also means that 44% of the citizens use the Internet exclusively through mobile phones; good news for people who want to start a new business through integrating mobile apps and tech platforms.
The government is committed to helping startups grow
The Indonesian President Joko Widodo has been very vocal in his belief that startups can greatly benefit economic growth, especially through facilitating small and medium enterprises (SMEs).
In 2016, his administration promised to facilitate at least 1,000 digital startups with a total value of US$10 billion to start new businesses by 2020 through providing funding, community building, and regulatory support.
Low startup costs when you set up as a local company.
There are many business entities to consider when setting up your business in Indonesia. They are mainly:
- Local Limited Liability Company (PT PDMN)
- Foreign Limited Liability Company (PT PMA)
- Representative offices (KPPA)
We have also previously written an article on the Types of Company Registration in Indonesia 2021 (Updated List). Do read more to find out the differences and requirements necessary to set up your business.
While most foreign investors will choose to set up a foreign company or PT PMA, there are two main financial requirements needed:
- Investment plan valued at a minimum of IDR 10 billion or about USD 700.000
- Paid-up minimum capital investment of IDR 2.5 billion or about USD 175.000
However, we would like to draw your attention to setting up a Local PT or PT PMDN because of how significantly cost-effective it is. With a Local PT, no minimum capital investment amount required. You’ll just need to have two local shareholders, one local or foreign director with a tax ID, and one local commissioner.
As such, the process is fairly straightforward without having to invest too much.
Unfortunately, there are some infrastructures there are still developing and may hinder fast growth for startups in Indonesia. Below are 5 disadvantages of doing business as a startup that you may want to consider.
What are the challenges of running a startup in Indonesia?
Most of the population is still unbanked.
About 51 percent of the population don’t have bank accounts, and even fewer people own credit cards. It’ll be a challenge for startups there to financially engage potential customers, especially in rural areas.
However, this also makes it a major untapped market for more flexible and convenient channels for cashless transactions. E-wallet products such as GO-PAY, OVO, and DANA are already engaging unbanked customers through partnering with offline merchants.
There’s a shortage of skilled talent.
Indonesia has a massive productive-aged labor force. However, in 2019, only 0.8% of its citizen are tertiary education graduates and even fewer skilled, qualified professionals. The deficit is especially visible in the science, technology, engineering, and mathematics (STEM) fields as well as soft skills like leadership and management.
In the case of startup companies, finding managers and IT developers will be especially difficult. One way to mitigate this is to consider headhunters and executive search firms.
A “Talent in Asia” report by RGF International Recruitment that this tension between finding a skilled employee while being within the low hiring budget makes this task a difficult one.
The regulations are challenging to navigate.
The rapid pace of the startup industry and complex bureaucracy means that the country is relatively slow in adapting. In the World Bank’s Ease of Doing Business Index, the country pushed forward from 91st place globally in 2017 to 72nd place in 2018 and finally slipping to 73rd place in 2019.
Although President Joko Widodo did set sights for the country to reach the 40th rank on the index by 2020, she still remains in 73rd place in 2021.
The complex bureaucracy and red tape is also an ongoing process of ratification. Investors will have to interact with many different organizations and ministries in the process of doing business in Indonesia. Although the Online Single Submission system in 2018 was introduced to simplify processes, generally businesses still need a few weeks before their company is ready to launch.
There’s a high regional gap in infrastructure and logistics.
In the case of infrastructure – particularly transportation and technology – there’s a large disparity between the westernmost islands of Java and Sumatra and the rest of the country. Over half of Indonesia’s Internet users are in Java, while in the more remote islands, internet and phone signals are limited to major towns.
On one hand, this is a big opportunity for startups that aim to provide easily accessible transportation like Grab. On the other hand, e-commerce startups that depend heavily on logistics will have problems scaling nationwide.
The market is slow to trust new brands.
Many Indonesian consumers lean towards familiar products or services, particularly from local brands. They are generally very faithful to well-known brands; startup companies that focus on pilot projects and unconventional business models will have some difficulty getting traction.
However, research from McKinsey notes that it’s only the perception of being local that matters. Many foreign companies have been able to capture the market through localization or acquisition strategies.
