David vs Goliath: How Indonesian SaaS startups can win

East Ventures’ thesis on SaaS startups

Over the past decade, software-as-a-service (SaaS) has emerged as a successful model for software delivery globally. 

Both businesses and consumers have been demanding more software tools, and the question has always been – “How to sell and deliver what the customers want at scale?”

The hallmark of SaaS – a centrally hosted, web-delivered, multi-tenant architecture (i.e., built once, sold many times) fit into the growing digitalization theme and was the core engine of tech adoption in the US and many developed economies. Gone are the days when large businesses spent millions in creating and maintaining their own bespoke software.

Indonesians adopted and embraced SaaS: mom-and-pop printing houses which used to run pirated Adobe software have now moved on to Canva and Figma, and large businesses and government offices that used to run pirated Microsoft Office are now on Office 365. 

Research by RedSeer estimated that Indonesia’s SaaS market would grow from US$ 200 million in 2020 to over US$1 billion by 2025. Globally, the average company has about 110 SaaS subscriptions, while a cursory estimate for Indonesia would be 15-20 SaaS subscriptions per company, indicating not only growth potential but more importantly, a heavily underserved market. 

Unfortunately for Indonesia, Southeast Asia and many emerging economies are more well known for consuming SaaS products made in other developed markets and have lagged behind in our own SaaS development. 

The question, then, “Is there any opportunity for Indonesian SaaS champions to emerge? Can Indonesian startups compete with the Silicon Valley giants?”

We argue that not only are there ample opportunities for Indonesian SaaS companies to flourish but there are also already local champions in the making. Funding in Indonesian SaaS companies showed high interest in the industry, reaching a total of US$ 400 million in 2021.

East Ventures’ presence and outlook in the SaaS industry

Over the past decade, East Ventures has invested both in vertical SaaS – companies that provide specialized software within e-commerce, financial services, logistics, and marketing – as well as horizontal SaaS – companies that provide general, non-purpose built software for all industries. 

Our SaaS portfolio had played a critical role in the growth of Southeast Asia’s digital economy, and a lot of our initial bets were on startups addressing problems faced by our own portfolio companies. 

Early on in the Indonesian tech boom, there were no localized and affordable HRIS, accounting, and tax reporting software for our portfolio companies to use; this led East Ventures to make an early bet in Mekari. Similarly, we invested in Qapita after witnessing first-hand how time-consuming it was for our portfolio companies to maintain their ESOP and cap table after multiple rounds of fundraising. To support our portfolio companies’ logistics vehicle management and tracking, we invested in McEasy. More recently, we invested into Pintarnya to address our portfolio’s hiring needs of blue-collar workers. 

This created a feedback loop whereby our SaaS portfolio addressed the needs of our other portfolio companies and would receive feedback early on, allowing them to further iterate and improve their products.

East Ventures continues to see opportunities for more SaaS solutions, given that most industries in the region are now receptive towards adopting and, more importantly, paying for software tools. We are also currently seeing and actively supporting software penetration across the more traditional sectors such as agriculture, healthcare, education, logistics, and manufacturing. 

Vertical SaaS in the agri sector could assist in precision farming and optimize agricultural inputs, improving yield and reducing wastage. Within healthcare, localized solutions for medical record management, diagnostics, and research are still scarce. Furthermore, within the sustainability sector, software tools are needed to optimize resources used in operations, calculate carbon footprints, identify decarbonization strategies, and manage nature-based projects. Nascent sectors in Southeast Asia, like cybersecurity, are seeing increasing demand as well.

Identifying SaaS opportunities in Indonesia

Indonesia is generally not a priority market for most global SaaS companies, and looking at them – more specifically at what they do not do – can provide insight into the opportunities of SaaS in Indonesia. 

With very few exceptions, global SaaS companies do not sell locally. They benefit from being in the same region as the headquarters of large enterprises and thus would have access to their customers’ global HQ and decision-making process. As a result, large enterprises commonly have an existing global SaaS platform for their systems. 

To navigate this, we can note that global SaaS providers typically create one product with as little variation as possible to sell to as many customers as possible. Hence, the opportunity in Southeast Asia, particularly Indonesia, is to offer a differentiated, localized solution addressing local problems which are not easily solved by the global players and to sell locally and win customers and decision-makers who are based here in the region.

The SaaS industry is not a winner takes all market, and there are various niches and opportunities where up-and-coming SaaS startups can compete. Instead of addressing a “global” problem, East Ventures advises our SaaS portfolio companies to focus on more local pain points, which they have better expertise in solving.

Examples of these include:

1. Addressing regulatory factors

Indonesian SaaS startups can take advantage of regulation that makes it difficult for global SaaS companies to enter the market. For example, if there is a requirement that data must be stored or processed locally in Indonesia or compliance with certain rules (e.g. Indonesia Satu Sehat application for medical record processing).

2. Addressing fundamental differences

There are fundamental differences that make localized SaaS solutions a better fit to serve some sectors. This could be a tax reporting software that needs to be tailored for each country’s tax reporting regime. Another example would be a hospital information system software that needs to be customized to follow Indonesian insurance reimbursement processes. Identity verification, e-KYC, and e-signing (including provisioning of e-meterai/e-stamp duties) are also emerging sectors with strong local components still untapped by global SaaS players. Another simple differentiation that a local SaaS company could provide is more flexible pricing/payment terms compared to the more rigid plan usually offered by global SaaS providers.

3. Ability to iterate and listen to customer feedback

Being on the ground, Indonesian SaaS startups can better engage and listen to their customers. They must ensure that their product roadmap addresses a specific pain point and comes from a good understanding of the sector and customer. Successful SaaS companies are often founded based on intimate knowledge of enterprise/sector-specific pain points and how to solve them. The technology/solution required to solve these problems are often already available and proven, and the reasons why large enterprises can’t solve the problems are often structural. Being able to listen and understand these is key for local SaaS startups.

It is important that the SaaS solution addresses a specific pain point and that the cost structure of the SaaS offering is less than the amount that customer is willing to pay (i.e., Customer lifetime value–CLTV substantially larger than Customer Acquisition Cost – CAC). It is okay to have overlaps in features with other SaaS solutions and we have seen SaaS companies getting acquired/merged at a very healthy valuation by their competitors because their growth and unit economics are superior to the incumbents, even though the key features are largely similar.

What can Indonesian SaaS startups do?

1. Be a first mover

Indonesian SaaS startups can address existing local pain points with existing/proven technology before global SaaS players can move into the local market. Indonesian SaaS startups can learn from successful case studies and past mistakes and gain a first-mover advantage by providing localized solutions better fit for Indonesia’s needs (e.g., regulatory requirements, corporate reporting structure, pricing mechanisms, etc.)

2. Be more nimble to fit local market needs

Indonesian SaaS startups must find product-market fit faster than the global players. Due to the sticky nature of SaaS products, it is important to lock in early customers to start generating recurring revenue. Indonesian SaaS startups can find the right product-market fit by being agile in addressing localized problems and offering customized solutions and product packages to local companies.

3. Play the local card

Enterprise solutions often require on-premise or local support. Hence, Indonesian SaaS startups can leverage their physical availability and accessibility to their enterprise users. Engage prospective customers and key decision makers, be on the ground to solve customers’ problems, and create non-transactional and sticky relationships with the clients for sustained advantage.

4. Leverage government support

Indonesian SaaS companies will be surprised to find that they have overlapping interests with local governments. Government agencies are often measured by how much they can develop home-grown industries, so SaaS startups can identify opportunities of aligned interests to get support and value from government projects and programs.

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By Zhengyi Zhu, Senior Investment Associate at East Ventures & Pascal Christian-Sarana, VP of Investment at East Ventures