DISCLAIMER: This is not intended as an authoritative nor academic review, but mostly a summary of personal observation and experience.
For the past 2 years, Kinara has been actively involved in the Indonesian entrepreneurship ecosystem. We started with the intention to focus on seed or early stage investment. For the record, there has never been a clear difference of early investment stages in Indonesia, as the investment market to startups & SMEs is never defined. Investments in small private companies is not commonly done outside the small circle of the founders’ own network.
The increased interest to invest in Indonesian startups is a very recent phenomenon, started around 3-4 years ago, and mostly are done in the IT sector. A local technology blog Dailysocial (www.dailysocial.net) has been the leader in reporting about the local IT startup scene and regularly reports about the investments that happened in the sector. There has been very few institutions focusing on non-IT sector early-stage investments like what we do in Kinara.
Through these 2 years, we found that the availability of investment fund is not the main problem for the Indonesian entrepreneurship scene in general. Kinara is now involved in a lot of capacity-building activities by default. Although we are very new to the scene, we happen to spend our previous careers in the banking industry, where we met a lot of entrepreneurs with a range of business scales, from micro to mid-sized businesses. We also witnessed first-hand the success and failures of these entrepreneurs, having to deal with some failures to work out their outstanding liabilities in our managed portfolio.
We felt that the capacity-building activities is crucial as many startup entrepreneurs are not fully ready to receive external investments to leverage their business. Our investment concept has always been set to act as a business partner, and not just a passive investor. As partners we are ready to be involved to work with our investees to grow their business. The reality is that we felt the need to dive deeper into the businesses than what we anticipated. We often found cases where we needed to start working with the business even before we struck the investment deal with them. Such is the need to strengthen the foundation of the business before starting to build additional layers of development.
This was the first major difference from countries where the entrepreneurship ecosystem is much more mature. Not many angel investors or early-stage venture capitals would work with the business before the due diligence and deal is completed, unless perhaps in the cases where the angels act as advisors to the companies prior to investing. If we used the standard of due diligence criteria as used in more developed markets, Kinara may end up with no deals for the past 2 years.
It was interesting to find that Kinara is not the only one finding the readiness of the Indonesian entrepreneurship ecosystem an issue, especially in early-stage companies. A regional VC based in Singapore (founded by some Indonesians) recently announced that they have decided to stop their accelerator program in Indonesia. The same program will continue in other markets (mainly Japan and Singapore). They have started investments in Indonesia since 4 years ago and will reportedly still continue their early-stage investments here, but no dedicated accelerator program. The readiness of the ecosystem was quoted as one of the main reasons, and also the abundance of similar accelerator programs (for tech sector), while the number of eligible companies are spread too thin.
Although many here regret the decision, we can understand their situation as we faced the same issues. With a regional portfolio they can decide to focus on different markets, while our only choice is to contribute to improve the ecosystem. This post will outline some of the main issues.
Firstly, the mindset of the entrepreneurs. This is also linked to the purpose of starting the business. Our philosophy has always been that economic profit is a very important goal, but not the only goal. Most of the entrepreneurs we respect has a larger purpose than just profit. Profit becomes a positive side effect of their entrepreneurship ventures. We always believe the credo to ‘invest in people first, not in the business.’ The get-rich-quick virus is one of the biggest problems plaguing the local entrepreneurship scene.
This mindset also brings the next problem: starting a business because it is a trend. Many followed this trend just for the quick easy money, with no regard about sustainability and purpose. A recent nationalism trend brought about a lot of traders selling the traditional batik fashion. However the real purpose to save the culture and the traditional batik artisans got lost. Most batik clothings sold in the market are printed batiks produced in China. For those who are really passionate in traditional batik, this is a very unfortunate situation. However this also presents a challenge for us to find ways to empower the traditional artisans to survive and prosper commercially. This was one of the reasons we decided to back a batik entrepreneur.
The next thing we felt very important is the lack of collaboration between the technical and the business skills of the founders. We always look for both ‘hustlers’ and ‘engineers’ in a founding team. Without a hustler, we found many businesses struggling to market their product despite the outstanding quality. We met so many engineer type that gets stuck with their inventions and refusing to think about businesses for the reason of not wanting to be ‘too commercial’. Without an engineer the business may run by recruiting an expert, but often the creativity is lacking due to the fact that the engineer has little involvement, no ‘skin the the game’. This lack of collaboration spirit is particularly worrying for a country taking pride in its friendliness and teamwork spirit.
The 3 issues outlined above can be summarised into one big item: culture. The entrepreneurship culture is in its infancy, giving birth to so many opportunistic types wanting to follow the trend, get rich and lacking the collaboration spirit among the entrepreneurs. Competition is normal in business, but we feel that the collaboration and networking amongst the startup and small business community is still lacking.
Another case for the lack of collaboration and networking is that there is no habit of having a Board of Advisors in a startup. In Kinara, we have a network of people we consider our mentors, who are experts in their own domains. However we do not appoint them formally as the company’s Board Of Advisors. We came to realise that even having informal mentors or advisors is not something very common for new businesses. We often found startup entrepreneurs who are doing the journey alone without a support group. They even find difficulties to meet other people to simply discuss their problems or bounce off ideas. This is why we truly appreciate the founders of Indonesia’s biggest entrepreneur community, Tangan Di Atas (www.tangandiatas.com). As far as we know, the community is very much alive and the spirit of sharing and mentoring is held as one of their most important value.
We regard this culture as a very important component in the entrepreneurship ecosystem. And the change can only be gradual, so it is crucial to start now.
Other things lacking in the entrepreneurship ecosystem is the technical support system for the entrepreneurs themselves. It is very tough for someone to learn to do business while having to also think about a lot of things outside their expertise, such as legal, accounting, finance or taxation. While we believe entrepreneurs need to learn to be a ‘jack of all trades’, they need expert guidance in the learning process. With their limited network, many startup entrepreneurs we met had difficulties finding the right people to ask about these issues, and end up taking the wrong steps. On the other hand there are consultants and freelancers for legal, accounting or tax issues but their cost is often considered too high for a startup business. This issue is a challenge for us and we need more inputs from the domain experts to solve this.
Another prohibitive factor in the entrepreneurship ecosystem is the rampant corruption in the country. It is not uncommon to hear new entrepreneurs complaining about the difficulties to handle their company licenses with the bureaucratic authority, and forced to resort to give gratification. This problem do not only exist with the public service, many private companies are also having this problem. An anecdotal experience came from a friend who acts as a supplier to a large multinational company. Problem rose during the invoicing as they faced issues with inexplicable demands from the purchasing department. They later found out that the large suppliers to the company has a habit of providing ‘kickbacks’ to the people processing it. As long as this habit is common and considered normal, it hinders the ability of small companies to grow with the hidden costs. Those who grow are those who support these corrupt practices for their business.
There may be more issues that are still far from ideal in the Indonesian entrepreneurship ecosystem. This article attempts to sum up Kinara’s experience and observation from the past 2 years. We are doing whatever we can to improve it, and looking forward to see more parties getting involved.
There is so much potential in a country with ~240 million people and growing strongly year after year, but there is also a lot of homework to be done before that potential can be realised. We will be more than happy to collaborate with you on this!