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Venture Capital in Indonesia

Venture Capital

Small and upcoming businesses with the potential to grow usually lack funds to jump start their operations and might not easily get access to banks for the same. Hence, there is a need for external non-bank financing. The financial aids that investors offer to startup companies and firms are known as venture capital. Often, the venture capital firms which provide such funding believe that the ideas, products, and other startup dealings in which they are investing will eventually give them a return on their venture investments. These venture capital firms include banks, well-off investors, and other financial institutions.

It is also worth noting that venture capital does not only include monetary boosts but can also include ideas, technical advice, and business planning assistance. Though the investors are at risk when giving private equity, the potential returns are often attractive as they gain equity, implying that they can become key decision-makers in such companies.

In general, we can define venture capital as a high-risk, high reward business industry.

 

How Venture Capital Helps Startups

Venture capital gathered from investors usually by venture capital firms, and then deployed to startups, help those startups to:

Obtain Finances

Financial support is crucial for startup businesses. They need the initial capital to market their operation through advertisements, acquisition of employees, and other early-stage business requirements including assets.

 

Spread Risks

Venture capital helps upcoming businesses to spread risks. It implies that when investors and business angels step in to offer their private equities, after these are added to the owners’ share they will bear losses in the proportion of their contribution. Losses which are not mitigated by venture capital will often be too costly and risky, thus discouraging ventures into a new area, especially highly competitive areas.

 

Improve Management

Venture capital firms offer not only financial support but also managerial skills to upcoming businesses. This is because the management and incorporation of workers is essential for the success of the firm.

 

Plan

Venture capital firms help in planning. A business plan can be tiresome and challenging to a new operation. The processes of creating ideas, managing people, and operating assets require proper planning and operational strategies. In such areas, venture capital firms can be of assistance.

 

Grow Talents, Economy, Innovation

Tech hubs have risen with the Internet economy projected at US$100 billion by 2025, according to Google-Temasek. Jakarta, the country’s capital, is a startup hub in Southeast Asia.

 

Reasons for the Increase in Indonesia’s Venture Capital Firms

Indonesia has not been identified with startup innovation because the nearby country of Singapore has traditionally been referred to as the “Silicon Valley of Southeast Asia.” However, the venture capital firms in Indonesia has been in the rise, recording US$3 billion in collected venture capital in 2017, which was twice the amount that was collected in the previous year. According to Kearney’s study, the Indonesian startup ecosystem is exponentially growing, although it is younger compared to other Asian countries’ VCs such as those of China, Japan, and India. Sebastian Togelang, an investor in Kejera Ventures, confirmed that Indonesia was little-known in Silicon Valley as it was not spoken much about. Furthermore, other Asia-Pacific investors did not have much interest or simply did not take notice of the Indonesian venture investments as they do today. Some of the reasons for this include the following:

 

High Technological Demand

Due to the world’s need for technological improvement, the demand has led to the need for new ideas which need sponsors. When such an idea in the fields of Internet and other technological areas that Indonesians are interested in pursuing comes to fruition, the market size increases. Sebastian noted that fintech is one of the leading areas of interest.

 

Data mining and management

Data mining and management have been growing in tandem with the ideas which call for venture capital and subsequently venture capital firms in Indonesia. The management of data requires AI and machine learning, which leads to rapid growth in and need for venture capitalist and convergence ventures which have primary focuses on technological products and startups.

 

Existence of wealthy groups

Since venture capital comes from individual wealthy investors who are willing to sponsor sprouting ideas with the potential to gain market penetration, the existence of these able and willing individuals in Indonesia has also been one of the reasons for the growth of venture capital firms.

 

Increase in number of startups

Finally, Indonesia has a rising number of startups, especially those dealing with Internet and technology products which require investors in their early stages. Many Indonesians are exploring new ideas, leading to the rise of venture capital firms.

 

How to Start Venture Capital Firm in Indonesia

Indonesia was recently listed by a BBBC survey as one of the world’s best places to start a business, even ahead of the US and Australia. Starting a business originates from an idea and a willingness to try. To commence a venture capital firm either as a foreign or local operator, there a few standards which the potential investor should meet, which are as follows:

 

  • Registration of business 

The initial stage to starting not only a venture capital firm but also any company is registration. The process confirms the business’s capabilities for operation, and it also assures the authorities that the firm intends to operate within the stipulated country’s requirements and that it will not engage itself in other illegal businesses which are in breach of the law. Furthermore, registration will prove that the company pays its taxes to the Indonesian government as per its declared profit.

 

  • Investment plan

Planning is critical for successful operation. To gain access to the Indonesian venture capital investment as a foreign investor, one has to present a plan of not less than US$1 million. Out of this, 25% must be paid-up capital, which does not have to be in the form of cash. Proper planning will equally lead to success in this regard.

 

  • Shareholders 

To get the firm running, there must be at least two shareholders. Through this, the firm’s stability is assured, and legal procedures to funds’ access are more likely to be transparent for smoother operations and management.

 

Laws regarding capital firms in Indonesia

Capital investment firms are forms of foreign and domestic companies venturing in assets-like firms to perform business in the Indonesia

Some of the Capital Investment regulations include:

Law No. 25 of 2007 regarding investment (26 April 2007).

Presidential Regulation No. 44 of 2016 on List of Business Fields with Requirements for Capital Investment.

Regulations from the Capital Investment Coordinating Board (Badan Koordinasi Penanaman Modal (BKPM), which are:

  • BKPM Regulation No. 6 of 2018 on Guidelines and Procedures for Capital Licensing and Investment Facilities
  • BKPM Regulation No. 7 of 2018 on Guidelines and Procedures for Capital Investment

 

Furthermore: 

– A firm is expected to undertake corporate social responsibility

– A firm is to apply accepted corporate governance principles as spelled out in the corporate agreement terms

– A firm is subjected to submit its periodical reports on its capital investments

– A firm should uphold the traditional cultural beliefs of its location and comply with the regulations

 

Meanwhile, Indonesian administrative authorities are obligated to provide venture capital firms with the following:

– Warning letters in case of breaches of contract agreement
– Restrictions
– Temporary suspensions
– Revocation of licenses or punitive legal action for gross misconduct.

 

FAQs:

Which industries in Indonesia have the most venture capital firms?

Digital industries dealing in technology contents and e-commerce including cloud services.

 

Can a foreigner start a venture capital firm in Indonesia?

Indonesia accepts foreign investors either independently or through partnership with a domestic firm if they abide by the rules and regulations governing the capital firms.

 

What are the main risks of owning a venture capital firm?

The main risks include:

Poor management by the startup owners which can lead to failure and loss of contributed funds by business angels.

Market trends which can shift the needs and make venture capital firms operate at losses.

 

Paul Hype Page & Co – OSS service provider and Asean Chartered Accountant.

Paul Hype Page & Co. have 3 physical offices in Singapore, Malaysia and Indonesia

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Posted on July 1, 2019 at 10:58 am
Categories: Business In Indonesia

1 comment

[…] all investors can be classified. The first group is that of angel investors; the second, venture capitalists. Angel investors and venture capitalists are people who invest their money into new businesses. […]

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