Investors Respond to Indonesia's "Environmental Impact" Startup Funding Gap

Indonesia's startup industry is mostly filled with business models that are customer-centric. The most popular are e-commerce, ride hailing, fintech, logistics, EdTechand healthtech. Of all these verticals, Indonesia managed to pocket I ENA unicorn and this number is predicted to continue to grow.

However, there is something missing from this phenomenon. We see that in recent years more and more startups are concern to environmental improvement. The products developed are varied, such as renewable energy (renewable energy), biodegradable packaged products (biodegradable), or waste/waste management (waste management).

This phenomenon shows that not only social impact is the main mission carried out by startup actors in Indonesia, but also the environment (environmental impact). In fact, usually this kind of activity is mostly carried out by large-scale corporations through CSR programs, foundations, or non-profit institutions.

However, the growth of this startup has not been matched by venture capital (VC) when compared to other business verticals as mentioned above. How are Patamar Capital, New Energy Nexus, and Kolibra Capital responding to this investment gap trend?

Waiting for each other to see who takes the first step

It seems that the investment gap is not only experienced by perpetrators startups in the early stages. There was a time when it was difficult for this startup to find funding because investors were increasingly selective in investing. Instead, they have expanded their portfolio in advanced startups scalability business is clearer.

For Investment Directors New Energy Nexus Indonesia Yeni Tjiunardi, this gap is also felt by environmental startups. He believes that there are still many perceptions that investment in this field is difficult to achieve profitable. This means that profitability is predicted to be realized only in the long term. This perception makes the number of interested investors limited.

In Indonesia, if you refer to the table below, it can be seen that not many VCs are involved in funding. Precisely institutions nonprofit, angel investorsand accelerator go first to close gap the. As of the third quarter of 2020, DailySocial noted that only two environmental startups received funding, namely Xurya and Bina Usaha Lintas Ekonomi (BLUE), which houses Warung Energi products.

Source: From various references / DailySocial 

New Energy Nexus is one of several companies that focuses on funding environmental startups. Even institutions nonprofit Several months ago launched the "Indonesia 1 Fund" program which targets renewable energy startups in Indonesia from the start-up stage seed up to series A.

The Indonesia 1 Fund will focus on ten main areas, including renewable energy, smart grid, energy efficiency, energy management, customer experience, e-mobility, business model innovation, Internet of Things (IoT) & digitization, as well energy access & energy storage.

"We are trying to build a bridge gap investment, especially in early stage Karena investors are waiting for each other to see who will make the first move. In fact, the same as early stage investment "In other categories, what differentiates the success and business journey of each company is the team's execution ability and market understanding," he said.

In fact, according to him, the pandemic situation has become a momentum for everyone to think about innovation and business alternatives. With this situation, he sees that more and more parties understand and believe in the economic potential of renewable energy. "This investment can help accelerate Indonesia's transition to a renewable energy-based economic system," he said.

The business model is difficult toscale up

There is a reason why technology is the main key for startups in developing products. Traveloka and Gojek being a successful case where technology succeeded in driving service traction significantly.

Based on his experience investing in Southeast Asia, Partner Patamar Capital Dondi Hananto said that entering a business that involves technology can be encouraging scalability faster. This is why the party is not yet interested in investing in startups that focus on environmental impact.

“Actually, you don't have to [develop a product] fully tech, but at least there is tech enablement Karena most of our business challenges "Most of them are in operations, not technology," he explained to DailySocial some time ago.

According to him, if you want to enter here, startups need to do it blended-finance whose capital does not only come from investors. This means there needs to be collaboration with foundations, CSR programs, or providing social funds.

Meanwhile, according to INDEF Economist Bhima Yudhistira, there are several factors why startup investment in the environmental sector is hampered. First, consumer or market awareness in Indonesia regarding environmental concerns is still low.

For the application of renewable energy alone, he gave an example, its share in the national primary energy mix is ​​still below 15%. As much as 37,5% from coal and 33% from petroleum, aka dominantly fossil. "This indicates that the government's own commitment to environmentally friendly energy is still low," he said in a short message to DailySocial.

Second, he assesses that the environmentally friendly financing ecosystem in the country has not yet developed. Although there is environmentally friendly financing or green banking, In fact, most credit distribution still goes to the mining and palm oil plantation sectors.

Large capital expenditure, commercialization of old products

Senior Investment Analyst at Kolibra Capital William Auwines tried to elaborate on several crucial things in responding to this phenomenon. First, Environmental startups generally require a long period of time, both from human resources and the R&D process.

In that time period, they were still trying to find the positive impact they wanted to produce. Due to time problems, this actually delays the product commercialization process and will put investment at risk.

Second, Product development requires large capital expenditure (capex).. Take, for example, energy-based products. This kind of solution is considered to require capital expenditure (capex) big. Energy startups usually have specific capacities and defined expenses. This is compared to traditional companies.

"This is not suitable for you nature VCs generally target more scalable tech startupsscale up. To be honest, we have been approached by a number of startups trying to develop environmentally friendly products, such as power plant or plastic recycling plants," he said to DailySocial.

It cannot be denied that a business investment is not 100 percent perfect. This means that if a product has a broad social impact, there will definitely be something that needs to be sacrificed. For example, greater costs or poor quality.

He gave an example of how environmental startups abroad succeeded in securing large funding to reduce food waste, namely Too Good to Go and Karma from Europe. They were able to perfect the formula to be profitable while remaining focused on social impact.

Source: From various references / DailySocial 

Until now, he admits that he has not found a startup in the environmental sector in Indonesia that is able to measure and maintain financial metrics. "Once a startup like this appears, we will definitely be interested," said William.

In the end, it is difficult for the company greentech to stand out due to a number of factors above. Since VC is a platform for alternative investments, backed by investors seeking returns, financial metrics will be one of the top priorities.

"We're going there because we see green products, waste management solutions, renewable energy devices getting better. VCs don't need to completely avoid this category even though the risks are big. This is the future and there are a lot of great opportunities, but the problem is timing," he explained.