Minimizing the risk-reward of startup funding

The shrinking of venture capital funding over the past four years has not diminished East Ventures’ commitment to funding startups in Indonesia.

Bisnis had the opportunity to speak with Willson Cuaca, Co-Founder and Managing Partner of East Ventures, about the firm’s future funding strategies for startups. 

The transcript of the interview below has been edited.

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What is East Ventures’ future investment strategy?

At East Ventures, even though we invest in high-risk probability, we execute these steps with discipline. This discipline includes aspects of good corporate governance.

We are cautious when selecting the founders we invest in. When making investments, we evaluate the risk-reward balance: Is the reward proportionate to the high risk? Are the profit returns high? Or could they be negligible? So, the risk and reward must be balanced.

Meanwhile, many investors were actively investing capital during the period of low interest rates from 2009 to 2022.

For sure, when capital is abundant, there are mistakes when investing. They might close their eyes. They do not care about inflated valuations, and the business model is not running well, so they do not care either.

From East Ventures’ perspective, we will continue to invest in startup funding in Indonesia with excellent founders who can solve problems with innovative products.

What kind of challenge is faced by a Venture Capital firm?

After 2022, the Fed raised interest rates, and money was no longer as ‘plentiful.’ What used to be easy funding has now become more challenging.

In this situation, investors play a role in informing startups that the funding landscape has changed, prompting them to adapt by improving the unit economics of their business operations.

In tough conditions, every aspect of a business unit must be correct. This doesn’t mean that unit economics were ignored in the past.

When the funding was plentiful, companies could afford to spend more on marketing activities.

However, when the money is limited, it should not be spent on marketing anymore. There has been a change of mindset.

Should there be a shift in the model, considering the sluggish performance of startups?

Investors who understand the cycle and help mentor startups to adapt to new conditions, such as high interest rates leading to tighter funding, will see their startups survive. On the other hand, investors who fail to adapt their startups effectively risk seeing them fall.

At East Ventures, we have shifted our focus toward the fundamentals of a business, such as profitability and any related elements. As a result, our growth portfolio startups have shown significant improvement. Impressively, 70% of the growth-stage startups in our portfolio are now profitable.

What are the options for startups to go public (IPO)? Is an IPO the only way to boost the financial performance of venture capital investors? What other options are there?

The IPO option is important, but does it mean VC investors like East Ventures must exit at the IPO stage? The answer is no. The companies we build should be long-lasting and sustainable.

IPO is merely one milestone in a company’s journey, primarily used as a fundraising concept. After going public, the company must continue to operate and remain sustainable. That’s the proper cycle.

So, the purpose of an IPO is not to facilitate investor exits but to signify that a company has matured and reached a level of consistency in executing its business model.

An IPO provides transparency and establishes good corporate governance. It’s not a startup maneuver to manage portfolios and realize profitability.

What is the outlook for venture capital businesses in the future?

With interest rates beginning to decline, Donald Trump is likely to adopt a more protectionist stance, avoid investments in China, and increase tariffs on goods from China.

This shift means the United States will seek alternative countries for production. Isn’t this a golden opportunity for Indonesia’s manufacturing sector? The question is, does Indonesia have the human resources, as well as the digital and non-digital infrastructure, to support this? And could we leverage digitalization to enhance our human capital? This is a golden potential moment for us.

Our portfolio startup has already been aligned with this direction. Indonesia, as a neutral country, is in a prime position. It can engage both China and the US. Moreover, Indonesia is further advantaged by its large domestic market. This is why East Ventures continues to invest actively to capitalize on these opportunities.

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 The original article was published on Bisnis, on 20 January 2025.