‘Indonesia will soon see a proper credit boom for businesses, consumers’: AC Ventures

AC Ventures is one of Southeast Asia’s most active VC firms, investing in early-stage startups focused on Indonesia and ASEAN. Formed in 2020 after a merger between Agaeti Ventures and Convergence Ventures, AC Ventures has over US$500 million in assets under management (AUM), invested across five funds.

The firm is run by Adrian Li and Michael Soerijadji (both Founders and Managing Partners), Helen Wong (Managing Partner), and Pandu Sjahrir (Founding Partner), who together have invested in 100+ companies.

In this interview, Adrian Li speaks about the fund, its thesis, investments, COVID-19 and funding winter crises.

Edited excerpts:

What is AC Ventures’s vision? What is your thesis?

AC Ventures combines operational experience, industry knowledge, deep local networks, and resources to create value for startups. Our vision is to be a generational partner to founders driving positive societal change and economic impact in Indonesia and beyond.

Our thesis places a premium on founding team quality at a high level. At the seed and early stages of the startup journey, we evaluate team quality and potential value creation in the market. Higher quality teams generally have higher market rate valuations as a startup progresses.

Also Read: AC Ventures hits final close of Fund III at US$205M to back early-stage Indonesian startups

We are interested in early-stage, Indonesia-focused founders who take a hands-on approach to company building. Our core investment thesis plays on four key megatrends: the country’s rapid and increasing user adoption in e-commerce, financial technology, digital media, and MSME enablement.

What are your key focus verticals and average cheque size?

We utilise a thematic approach to investment using local solid data sets and a deep understanding of proven digital business models to inform our investment decisions. ​We have built expertise in specific sectors, such as fintech, logistics, e-commerce, MSME enablement, and consumer tech.

Our average first cheque size is US$2 million. From a macro standpoint, we look to invest in the digitisation of Indonesia’s economy as the share of digital GDP in Indonesia expands to a forecast of US$350 billion by 2030. This includes early-stage companies with proven digital disruption models from more mature markets. Still, our approach is generally to back the best founders building in large multi-billion dollar potential markets.

How many deals has AC Venture sealed so far?

AC Ventures manages a portfolio of over 100 investments across five funds, of which two — Xendit and Carsome — have already become unicorns. Our partners’ track records also include prior investments in companies including Gojek, Bukalapak, SEA, and Akulaku.

Additionally, many of our portfolio companies gained massive traction during the COVID-19 pandemic. These include Shipper, Stockbit, Ula, Aruna, Bukuwarung, Astro, Kargo, Majoo, ESB, and CoLearn. These companies have already reached ‘centaur‘ status, which means they’re now valued at US$100+ million.

How does ACV pick startups for potential investments? What are the different selection criteria?

Our investment team is meticulous and methodical in its process. We go through more than 1,000 opportunities each year. We have well-established relationships with accelerators and early-stage facilitators locally and globally. This enables us to generate a robust deal flow of high-quality, early-stage investment opportunities.

We have several deal sourcing advantages (some proprietary) that give us an edge in seeing deals. These include, but are not limited to, global Ivy League school networks, founder referrals, scout programmes, and active pre-sourcing activities with recruiters to identify high potential entrepreneurial talents who may have what it takes to be great founders. This is based on our proprietary founder attributes analysis).

Regarding selection criteria, we start with the calibre of the founders. We dive deep into their backgrounds and analyse why we think a particular founding team is right to tackle the problem at hand. This is undeniably the single most crucial part of our process. As mentioned, we are also thematic and research-driven. We meet founders with a prepared mind and a good understanding of the industries and, typically, the products and business models they build.

From there, if we decide to proceed, we will do deeper due diligence on the company potential, traction and metrics, funding size/dilution, and target stake, as well as look at international comparisons and case studies. I can say confidently that our analysis process at AC Ventures is among the most rigorous in Southeast Asia.

What opportunities do you see in Indonesia? How has the market grown over the years?

On the macro level, Indonesia’s internet economy presents a massive opportunity. Today, the local internet economy is valued at US$70 billion. Google, Temasek, and Bain project it will reach US$330 billion in value by 2030, almost double current Southeast Asia’s digital economy value of US$170 billion.

Also Read: NOBI raises US$4M in seed funding round led by AC Ventures

Supported by strong fundamentals, it has exceptional potential as the economic powerhouse in the region. The nation’s economy is also projected to become the fourth largest in the world by 2030.

The developed internet economies of the US and China provide a roadmap for Indonesia’s burgeoning potential. This reduces innovation risk for ventures in the tech sector. Much like China, Indonesia is driven by mobile internet. This means it can quickly catch up to developed internet economies.

Further, President Jokowi’s administration is boldly undergoing what it calls the nation’s “Industry 4.0” initiative. This includes better infrastructure and education as cornerstone policies. This will only further strengthen local tech companies.

The adoption of digital financial services has also accelerated as consumers and MSMEs shift away from cash. As online transactions increase and fintech use cases continue to unfold, we believe the nation will soon see a proper credit boom for businesses and consumers.

How did you and your portfolio companies survive the COVID-19 crisis? What was your key advice for them as the pandemic wreaked havoc worldwide?

The pandemic accelerated tech adoption. This benefited most of our portfolio companies. Nevertheless, it also forced founders to quickly adapt their business models to not pursue growth at all costs but to reduce burn and focus on quality metrics like retention, unit economics, and runway extension.

Also Read: Funding winter: VCs ask startups to focus on corporate funds from developed countries

Given the uncertainty at the time, our key advice was to maintain a healthy cash balance by reducing burn rate and cutting unnecessary costs. We said that continuing growth was important, but it had to be done with solid business fundamentals. Over time, it is clear that tech companies are being relied on more than ever to help people continue their daily lives. This includes things like shopping and entertainment. These things were quickly reflected in the public markets.

How do you and your investees deal with the ongoing funding winter?

In many ways, our portfolio companies have already been primed by the pandemic to operate during this economic downturn. Much of the same advice above applies yet again today. Many of our portfolio companies raised significant capital in the past 18 months. Most of our portfolio companies have over 18 months of runway and some over 30. This puts them in a position to focus on their business fundamentals and work on acquiring strong talent in the market to build their teams.

Being well capitalised in times of uncertainty affords significant growth advantages as well. In some cases, we advise founders on the importance of gaining market share strategically beyond just organic expansion. This could even mean strategic M&A of competitors in the market. It could also mean joining forces with companies that are complementary. Also, during times like this, we tell founders to focus on the quality of their in-house teams relentlessly.

How do you look at these two world events? What are the similarities and differences?

The situations are similar in that they both made global capital allocators nervous, which has created a ripple effect in the tech startup ecosystem. I would say, however, that the pandemic was far more of an unpredictable phenomenon, with economic turmoil following each big wave of infections.

Also Read: Indonesia is ripe for further disruption by tech-enabled firms: Adrian Li of AC Ventures

However, ultimately the impact of COVID-19 restrictions also drove digital adoption bringing forward three to five years of advancement in Indonesia of commerce and fintech adoption. This was reflected in the massive progress of technology startups in Indonesia in 2021 and the resulting wave of global interest in startups here.

Our current situation is largely caused by many factors, including the US Fed’s raising interest rates to combat inflation, recessionary drivers, and political uncertainty from China, the US, Russia, and Ukraine. It is more likely that this time with the need to control inflation, we will face a protracted downturn which will make it.

Do you think we should celebrate unicorns, most of which are burning cash with no profitability in sight? Do they deserve all the attention?

Businesses (and the teams who created them) that have an outsized impact on society and the economy should be celebrated. Starting a business, particularly a highly disruptive one at scale, is one of the most challenging things to do. The core indicators of this are the company’s financial metrics, loyal user base, and the quality of the business. A valuation can be a leading signal of this potential, but this is not always the case. Hence, while billion-dollar valuation companies have generally achieved significant traction, they may still be a long way from being profitable or sustainable businesses.

If unicorns can drive outsized returns for investors and stakeholders after changing the face of Indonesia’s business environment for the better, that is a truly wonderful thing. At the end of the day – and in the long term – not all unicorns are excellent assets to own, and not all tremendous assets to own are unicorns. Celebrate them if and when it makes sense.

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