Funding in Q3 2023 Stretching, Tech Winter Starting to Wind Down?

*update: we have updated the quote given by Gani Lie regarding investment in climate tech (marked in bold)

The value of Indonesian startup funding in Q3 2023 has increased compared to the previous two quarters. According to the data collected DSInnovate Dalam Indonesia's Startup Handbook, this quarter recorded equity funding of approximately $501,6 million from 38 transactions. Previously, the Indonesian ecosystem only received $376,7 million in Q1 and $330,2 million in Q2.

This increase provides a positive indication for the industry, considering that it occurred in the first half of this year (H1). 74% drop in a manner yoy. This decline is one of the impacts of tech-winter, not only in Indonesia but also throughout the world. Macroeconomic turmoil has caused investors to put a brake on the flow of funds to startups (especially advanced stages).

The improvement in Q3 is certainly a positive signal for the ecosystem, but is this a strong indication that tech-winter will it end soon and the startup investment climate will return to normal? To answer this question, DailySocial.id tried to talk to a number of venture capitalists who are actively investing in local startups, namely AC Ventures, East Ventures, Mandiri Capital Indonesia, and MDI Ventures.

Review economic conditions

Starting the conversation, Co-Founder and Managing Partner of East Ventures Willson Cuaca trying to review economic conditions. From the data collected, the global economy is considered to be still uncertain due to high inflation and geopolitical conditions. This creates a number of challenges for the economy in Indonesia and other Southeast Asian countries, including for startup digital. This condition is predicted to continue at least until the end of this year.

In 2024, the ASEAN economy is expected to grow by 4,5% --- higher than the global economy. Inflation in this region is also under control. ASEAN countries can maintain interest rates and depreciate their currencies. This fact shows that this region has resilience to global challenges. ASEAN's economic growth continues to be a 'bright' and 'rare' place in the global market. Therefore, ASEAN will become the center of growth.

Indonesia is well positioned to lead this growth as the fourth most populous country in the world, with a growing young population and high internet penetration. Bank Indonesia also projects Indonesia's economic growth to be in the range of 4,5-5,3% with inflation falling to 3,0 ± 1% in 2023.

Overall, Indonesia's digital economy is projected to increase 19% per year until 2025 driven by the potential for internet penetration which has not yet reached its peak, population unbankable large, as well as innovation opportunities that can still be explored. Indonesia's digital economy is expected to quickly reach $290 billion in the next few years.

“In short, we see that in 2023 it will still slow down, in 2024 there will be a gradual recovery. Therefore, our advice, startup must be able to survive (have runway) until 2025," said Willson.

He continued, "In the midst of global uncertainty, regional leadership transitions, and scarcity of funding allocations for private companies, East Ventures will remain wise and optimistic in investing in this region. In the first half of 2023, East Ventures has distributed $56,6 million in funding to startup early stage (seed) and continuation (growth).”

Tech-winter it's still not over

Head of Investment MDI Ventures Gani Putra Lie said that tech-winter it's still not over. Compared to during the peak of the pandemic, investment activity has decreased quite significantly. According to him, investment activity in 2023 has returned to the 2017-2018 era, especially for the Southeast Asia and Indonesia regions.

Tech-winter This is mainly due to the increase in Central Bank interest rates which has made government bonds more attractive to invest in compared to venture capital companies. By implication, a smaller supply of capital results in lower levels of investment. Another domino effect of rising interest rates is lower valuations, as most investors use the DCF (Discounted Cash Flow) model to value businesses [in the DCF model if interest rates go up, valuations go down].

"We have seen an increase in the amount of investment in climate technology (climate tech) in Southeast Asia with total investment increasing from $2 billion between 2014-2021 to $1,2 billion in 2022 alone. "In 2023, climate technology investment will account for 7,8% of total investment in Southeast Asia (vs. 0,6% 5 years ago)," explained Gani.

He also highlighted the increasing trend that has occurred recently, "Investment value may have increased recently, but it consists of a few late-stage funding transactions (around 5-6 companies accounted for more than 60% of the total transaction value). The number "transactions have continued to decline since H1 2022. Global investors have greatly reduced their investments in Indonesia in recent quarters. This does not mean they have completely withdrawn, but may be slowing down and re-evaluating their strategies."

More time for due diligence

AC Ventures represented by Alvin Cahyadi as VP of Investment also agreed tech-winter still going on now, though investor confidence seems to be getting better. Based on this situation, he said that when investing, most investors need more time to do so due diligence, especially in terms of market validation. AC Ventures itself will see whether a company with its business model 'makes sense' to achieve profitability on a certain scale.

On the other hand, according to Alvin para founders also seems to have adapted to investor behavior. Founder currently prefer to be able to achieve breakeven so as not to depend on the injection of additional funds.

"In terms of portfolio, we are placing more emphasis on governance, such as conducting routine audits, management reports every month, and also transparency bank account. Our hope is that it can be a catalyst for the founder in our portfolio to form habit Dalam monitoring corporate finance [..] We have a preference for investing in a business that already has revenue, even though it's still small," said Alvin.

CIO Mandiri Capital Indonesia (MCI) Dennis Pratistha also agreed that investors will remain active in investing in a selective and selective process careful in choosing startup. MCI itself is always looking startups which has product market fit and path to profitability which is clear in any sector that is considered to have great potential.

He also believes that investors now look at two aspects of finance startup, that is topline and Bottom line. From the side topline, investors see how fast revenue from the company increases and also increases contribution margin-his. However, topline the good must be accompanied by Bottom line healthy ones. Bottom line It doesn't have to be positive, but you have to have it path to profitability clear.

MDI Ventures also did something similar. According to Gani, until now they have not completely changed their approach to investing. But they claim to have improved investment decision parameters by conducting a more in-depth analysis of the business and its strategy. Some of the benchmarks are set on a number of metrics such as solid unit economics, business model validation, strategic support potential, and value addition.

Next challenge

According to Dennis, tech-winter This is not just a temporary occurrence, but rather a phenomenon that may be a challenge for investors in the future. Therefore, he assesses that the challenges that venture capital companies will face include limitations in obtaining investment sources from viable startups, inaccuracy of data provided by startups because usually their documents are not audited, the need to maintain the overall health of the portfolio, difficulties in reach exit adequate, as well as difficulties in collecting capital from investors (LP).

Meanwhile, from a startup perspective, Alvin considers his biggest challenge to be forming an institution that makes this possible founder Put aside personal interests and start focusing on forming a healthy organization. Founder at some stage must learn to accept that the company must be handled professionally. Apart from that, the next challenge is to look for business expansion of existing businesses, in order to maintain the company's level of profitability. In the end, technology companies are seen as having to be bigger than traditional companies.

Will not stop investing

Despite the industry slowdown, Willson and the East Ventures team believe that the rhythm (cadence) in investing is an important thing. He likened it to a badminton player who has to keep playing to stay agile, investors also have to keep investing in order to experience it rhythm market and take the right decisions.

“East Ventures never stops investing. We don't care if it's sunny or rainy today, we will still invest in founder good ones and stop investing if there are no more founder a good one to invest in. We have seen an increase in the quality of para founder from time to time. They can build successful businesses faster than ever. "The time to scale digital businesses in Southeast Asia has been compressed and accelerated," said Willson.

Some strategies implemented during the Covid-19 crisis can be used by founder to face the current funding crisis. These strategies are different for each stage, including initial and advanced stages. Currently, 40% of East Ventures' advanced stage portfolio companies are EBITDA positive. For example, Fore Coffee, startup coffee retail, has recorded positive EBITDA since Q3 2021 and will expanding its operations in Singapore in Q4 2023.

"East Ventures still has sufficient funds to continue investing and supporting our portfolio companies, and we are very careful in facing this second crisis after the Covid-19 pandemic crisis," concluded Willson.