How Venture Capital Can Help a Nation Thrive
28 May 2019
It might not be immediately obvious, but venture capitalists (VCs) bring a lot to the table in terms of economic and innovation potential for national economies.
In the US, there is evidence to show that Venture Capital has been had a major impact on economic growth over the last half-century. A 2015 study by Stanford economists in 2015 found that 20% of publicly-listed US companies received VC funding.
Southeast Asia alone has benefitted from US$10.1 billion of global investment value. Though most of that has been captured by Singapore, other countries are beginning to reap some of these benefits, especially Indonesia.
Indonesia has long been an appealing market to VCs due to its rapidly growing demographic of Internet users, and gaps in the market which will likely prove extremely lucrative. As a result, Indonesia has seen total Venture Capital investments in tech startups double between 2016 and 2017, signalling the region’s appeal as a site of tech innovation and growth.
“The growth of VCs in Indonesia during the past five years has been explosive, the number of investments have increased 60 times,” said Mifza Muzayan, Google Sales Operations & Strategy Lead, told local media in 2018.
Little wonder then that governments are thirsty for the influx of VC money. VC helps local businesses grow, which in turn leads to strong jobs growth rates and increased spending, all of which are key to healthy economies.
According to Bloomberg, the Chinese government has been pushing for increased availability of state-backed VC in 2016 in a bid to boost its economic growth rate. In Indonesia, President Joko Widodo’s government has driven policies to encourage VC investments through subsidy programmes and tax credits.
Redistributing international wealth
One key way VCs support national growth is through the introduction of global wealth into local startups that would otherwise struggle to find financing.
Generally speaking, Venture Capital money tends to plug the gaps that cannot be filled by existing businesses, traditional financial institutions, and government grants. These parties are largely limited by in-country market performance — VC money, especially those from foreign investors, have no such limitations.
According to a 2017 report by AT Kearney and Google, as much as 46 of VC capital invested in Indonesia has come from foreign investors, representing 72% of the investor market value. This money is reported to typically originate from countries with more mature startup markets such as Japan and the US, and are usually focused on late-stage businesses.
Some VCs buck this trend and trust their knowledge of local markets to carve their own niches in the Indonesian startup investment space.
We at East Ventures, focusing more on early-stage startups in Japan and Southeast Asia, especially Indonesia. We are the early supporters of two of Indonesia’s four unicorns — Traveloka and Tokopedia. Our Managing Partner Willson Cuaca calls Indonesia as “the story we believed in.”
Via the VC model, international money can be spread around in a more effective manner, as compared to government grants or traditional loan structures. Venture Capital firms tend to have large, diverse portfolios into which they allocate funding.
Supporting local needs
Yet another gap that VCs can address in supporting national development agendas: meeting local needs.
VCs are more prone to taking risks with their investments, and as is pretty evident today, tend to plug their money into “non-traditional” sectors in the digital and technology industries. Thus, VCs actually open far more doors for interesting tech ventures that feed directly into local issues and needs rather than those that will turn a profit.
Startups that are seen to disrupt a particular industry are of special interest; the granddaddy of these disruption success stories is of course, Grab. The ride-hailing company, whose birth was backed by VC money, has not only disrupted the taxi industry, but supported the generally-underserved transportation markets in Southeast Asia. The same can be said about Go-Jek, Grab’s Indonesian equivalent.
Another interesting case study is the rise of Tokopedia, which met local Indonesians’ thirst for e-commerce options. In 2009, Indonesia’s Internet penetration was only 12.5%, but smartphones were proliferating at an unprecedented pace: the archipelago nation was already home to the biggest Facebook and Twitter user bases in the world.
The consumer-to-consumer e-marketplace received backing from East Ventures in 2010, at a time when the number of Indonesian mobile shoppers was rising rapidly, but the infrastructure had yet to adapt to demand. We saw the potential Tokopedia had and tapped into the market at the right time to capitalise on Indonesia’s rise as an e-commerce juggernaut.
“We predicted that what happened in the US would also happen in countries like China, India, and Indonesia,” said Willson. “In those countries, e-commerce became the main locomotive for the digital ecosystems, pulling other interesting products behind it,” he remarked.
Indonesia’s issues are not the same as Malaysia’s or Singapore’s, which means that large multinationals used to certain business models may not necessarily be providing solutions fit for local audiences. VCs can afford to be hyperlocal by supporting companies providing solutions for specific needs.
According to a 2018 McKinsey report, Indonesia’s e-commerce sector supports a spending growth of around eight times, financial inclusion of female entrepreneurs, and an estimated 26 million jobs by 2022.
VCs and impact investing
In another industry, VCs are making a huge nation-building difference where traditional funds cannot: impact investing.
While most traditional investors are focused on pure profit returns, VCs may often have additional goals when it comes to deciding where to place their money. Impact investing has grown, thanks to the ability of VCs to diversify their interests into startups that generate social and environmental good.
For example, consider Warung Pintar, a fintech startup that is working on ironing out Indonesia’s financial exclusion issues through digitalization. The company, which received a US$27.5 million round of funding in January 2019, is working to digitalize roadside kiosk vendors, who form a major component of Indonesia’s informal economy, by giving them access to technologies such as point-of-sales equipment, Wi-Fi, LCD displays, and more — gear that would be otherwise inaccessible to these largely-analog businesses.
Impact investment can create market-based solutions to 21st century challenges faced by developing countries, such as Indonesia.
According to GIIN, between 2007 and 2017, private impact investors have plugged as much as US$148.8 million into various industries, especially those in the financial, agricultural, energy and manufacturing services. Seeing as how the services and industrial sectors are central to the Indonesian economy (accounting for a combined 86.2% of GDP), investing in impact-focused startups can create positive outcomes for the country’s population.