Startup Funding Still Difficult, 2024 Momentum to Improve Business Fundamentals

Even though the digital economy is projected to continue growing in the next few years, the Indonesian startup ecosystem has still experienced difficult times in the last two years. Some indications include: Mass layoffs and business closures still ongoing starting in 2024. This situation will also trigger a decline in the investment climate throughout 2023.

In the discussion session "Navigating the Future: Investment Outlook 2024" held by Aspire and Trihill Capital, a number of VC representatives shared their projections regarding funding trends and several important notes for the Indonesian startup ecosystem.

Fundraising is still difficult

According to Trihill Capital Partner Anthony Tjajadi, liquidity from domestic investors is actually still quite good. Many VCs are still able to raise large amounts of funding from various investors. However, when tech winter happened, a number of investors began to be careful about disbursing their capital.

"Difficult times in fundraising will still occur compared to 2020, 2021, until early 2022. I think investors are still waiting for the situation new normal fully formed, because they are still looking for new standards in this industry, for example valuation metrics," he explained.

If referring to the report AC Ventures and Bain & Company, the number of investment transactions in the first half of 2023 only reached 110 deals, compared to 2022 in the second half of 344. Growth in funding transactions is still driven by the initial stage, while series B funding is decreasing.

Meanwhile, Intudo Ventures Founding Partner Patrick Yip highlighted the downward trend ticket sizes funding at several stages. The value of series A funding was recorded to have dropped significantly from an average of $10 million to $5,8 million, which caused startup valuations to fall as well.

According to him, para founder may face higher dilution. They must hand over a larger percentage of share ownership to investors. However, for early startups, the high portion of investor ownership is very crucial considering that at this stage there tends to be no definite results and therefore potential return becomes lower.

"There are probably a total of around 125 funding deals in Indonesia, and we have seen a decline in rounds at various stages. founder now it is much higher than before. I think ownership is very important in early stage funding because of the potential exit it won't be as high as before," said Patrick.

Big tech companies need to prove profitability

Skystar Capital Managing Partner Abraham Hidayat gave another opinion regarding the profitability that Indonesian technology companies that have been listed on the stock exchange have not been able to achieve. This raises market doubts about the potential of technology companies in the future.

At least until the third quarter of 2023, in large sectors E-commerce and on demand, a number of companies, such as GoTo, BliBli, and Bukalapak, have not yet made a profit.

"We need to see them become profitable first before the market is willing to change their perception of technology [businesses] in Southeast Asia. For early-stage startups, this is a momentum to build the right business foundation. And when the market improves, [next generation] stage startups "a well-built start will develop," explained Abraham.

He projects 2024 as the year bearish for the technology sector. According to him, many funding deals that occurred throughout 2020, 2021 and 2022 went to startups that were not ready, both in terms of business model and product. As a consequence, they cannot reap margins. Because of the business model and product.

"However, I see there will be a lot of innovation happening in the segment grassroot. VCs will continue to invest, especially at the early stages," he added.

Potential sectors and those experiencing decline

Both Anthony and Patrick agree that traditional and B2B businesses will be potential sectors for investors. This sector, which is now filled with many D2C or retail players, is said to offer the potential for greater profits by utilizing technology to increase cost efficiency and productivity.

Meanwhile, talking about other sectors, "The 2020-2021 period was a good year for fintech. However, last year fintech experienced a decline. The market talks a lot about the number of users or GTV, but are they focused on profits or have they really made a profit from their users? I "I think the market is starting to realize [fintech] has a lot of users, but there's no profit in it. So what's in it for us [investors]?" added Anthony.

However, Abraham argued, the decline in investor interest in fintech does not mean this sector will fail. He believes that the failure of the first wave of fintech does not mean there are no opportunities in the future.