Indonesia’s homegrown tech start-ups struggle to compete on funding and innovation

JAKARTA - Indonesia’s start-ups are struggling to compete against their cash-rich foreign rivals, with the nation’s two largest unicorns GoTo and Bukalapak seeing their valuations slide substantially this year.

Investment in local start-ups have also slowed by about two-thirds, from around US$3.5 billion (S$4.7 billion) annually in 2020 and 2021, according to a November 2023 joint report by venture fund AC Ventures and management consultancy Bain & Company. This places more pressure on local companies to innovate, stop burning cash and become profitable, say analysts.

GoTo, formed by the merger of ride-hailing firm Gojek and e-commerce giant Tokopedia in 2021,has seen its share price fall by 55 per cent year to date. It is currently valued at 60 trillion rupiah (S$4.98 billion)on Indonesia’s stock exchange. Meanwhile, e-commerce unicorn Bukalapak is down by 33 per cent, bringing its market capitalisation to 14 trillion rupiah.

Both companies have significantly underperformed the exchange’s broader composite index that has declined around four per cent this year.

Tough competition from their larger, regional rivals as well as slower innovation are largely to blame, say experts.

Key competitors such as Sea Limited’s Shopee and Grab have access to a wider pool of funding, regional reach and more aggressive tactics.

Sea is listed on the New York Stock Exchange and has a market capitalisation of US$43.6 billion, while Grab is worth US$14 billion on Nasdaq.

“Being listed in the US market allows you to raise US$1 billion relatively easier. This is a small figure compared to the total market capitalisation there. While for GoTo, which is listed on the Indonesia Stock Exchange, such size is an upper value,” said senior equity analyst Henry Pranoto.

These rivals can also use cash generated from their other profitable businesses to gain market share in Indonesia. Shopee’s parent Sea Limited has said it is fully committed to using the group’s global gaming subsidiary Garena to fund cash-burning strategies for its main e-commerce market in Indonesia.

Meanwhile, Grab is eating into GoTo’s share in Indonesia’s ride-hailing sector, using back-up funds from the markets outside Indonesia such as Singapore, which is already operating profitably.

The continuous need to innovate is also key, say analysts. Bukalapak, for example, has raised investors’ eyebrows for sitting on its 20 trillion rupiah cash pile instead of deploying it to draw new e-commerce customers.

“The inability to channel funds into businesses shows it’s lagging in technology and innovations,” said an analyst with Jakarta-based investment bank BNI Sekuritas, who declined to be named as they were not authorised to speak to the media.

There have also been missteps. In January 2022, Bukalapak spent US$81 million to buy a 11.5 per cent stake in Jakarta-based digital bank Allo Bank, but the initial boost to its profits turned into unrealised losses a year later. An attempt starting in 2020 to get Indonesia’s thousands of mom-and-pop shops to use Bukalapak’s app for their business processes also failed to properly take off.

Being innovative however, is no guarantee of profitability, as GoTo has discovered. In 2015, it introduced GoSend, pairing its ride-hailing drivers with Tokopedia’s e-commerce customers who wanted their orders shipped instantly.

“Gojek was the first ride-hailing company in the world that catered to e-commerce customers,” said Jakarta-based hedge fund investor Leontinus Alpha Edison.

Due to its prolonged losses and unclear path towards profitability, GoTo has recently taken downsizing measures. It has cut employee headcount by more than a thousand and stripped off business units to prioritise profitability over its previous aspiration for high growth.

The challenges faced by these two early Indonesian unicornsunderline problems in the country’s tech start-up landscape, observers have noted. Scores of Indonesian tech companies even failed in the early stages, they say, due to heavy reliance on providing copycat services, a lack of technological innovation and offering services for which there is a lack of demand.

Economist Wijayanto Samirin said that the majority of tech companies are funded by investors whose investment time frame ranges between five to seven years. After that, the companies are expected to turn a profit and be financially independent.

“Indonesia’s technology sector has just entered a consolidation phase, marked by the decline in the number of players because many did not survive due to competition... After this phase is over, the surviving ones are set to enjoy huge profits,” Mr Wijayanto, who was an economic adviser to Indonesia’s former vice president Jusuf Kalla, told The Straits Times.

“The surviving companies must do efficiency drives, cut operating costs, end cash burning,” Mr Wijayanto stressed. “Investors are now less concerned about companies’ valuation and more concerned about profitability.”

Jakarta-based e-grocery stores such as TaniHub and Sayurbox – Covid-era born digital platforms that bridge farmers and consumers, thereby cutting out the middleman – are struggling with their cash flows.

TaniHub, for example, failed to honour its debt services to creditors after it financed farmers who promised to deliver their harvest but defaulted.

“Tech companies tended to throw money at the farmers in need of cash without the usual prudent lending practice,” analyst Mr Henry told ST, adding that such a role is predominantly carried out by local middlemen who know which farmers are honest and could be given loans.

Looking ahead, Indonesia’s start-ups will have to stay nimble and move quickly, with competition only set to ramp up.

“The prize of winning the Indonesia market is so big. They(foreign tech companies)are making Indonesia the last battleground in South-east Asia and using the ammunition they have collected elsewhere to rule the Indonesia market,” said Mr Henry.

Jakarta-based East Venture, one of Indonesia’s leading venture capital firms, told ST in an e-mail reply that the country’s digital sector is entering a new cycle, after start-up valuations rose and reached their peak between 2020 and 2021.

“In 2022 to 2023, we entered a new phase where there are continuous increases in interest rates in the US, inflation that is difficult to control, geopolitical pressures... So the entire technology ecosystem globally is facing pressure,” it added.

“Investors are becoming increasingly careful in providing funding. However, it is always worth remembering that money is still available for good companies,” it said.