Indonesia’s VC industry has experienced a significant transformation in recent years, with the past 12 months witnessing a market recalibration mainly driven by global macroeconomic headwinds, according to a new joint report by AC Ventures and Bain & Company.
While deal flow picked up quickly in 2021, increasing macroeconomic uncertainty urged caution in investing momentum, and the spillover effect from H2 2022 saw a lower number of deals and a decline in deal sizes.
The Indonesia Venture Capital Report 2023 offers deep insights into the industry’s prevailing trends, challenges, and future outlook.
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Despite a degree of cautious optimism at that time, projections for 2023 are now sobering, with an anticipated 70-80 per cent decline in deal value compared to the preceding year. The funding pace in 2023 remained sluggish through Q3, standing at 0.3x compared to Q3 2022.
While the year has been challenging for the VC sector, the overall growth outlook is positive, given that the Indonesian VC landscape is becoming more mature. Following the surge in VC investments driven by rebounding investor confidence during 2020-2021, investors are now more measured and rational in their approaches.
The report highlights a significant shift in investor priorities, emphasising startups that showcase strong unit economics, leaner valuations, and clear paths to profitability. This is further evidenced by the declining conversion rates from seed to Series A/B funding rounds.
One of the standout insights from the report is Indonesia’s resilience against global trends. While the global VC deal value declined by 20-40 per cent, Indonesia maintained a stable VC deal value in 2022 on a year-over-year (YoY) basis at US$3.6 billion. Further, the archipelago registered a 20 per cent YoY increase in deal volumes in the same year.
Attractive macroeconomic fundamentals suggest that Indonesia remains a bright spot in the region and will provide a favourable climate for startups. With a young and burgeoning middle class, Indonesia’s GDP per capita grew by 4.6 per cent in 2022. Household consumption, a significant economic driver, accounted for 55.6 per cent of the GDP. The digital economy is on an upward trajectory, reaching a notable US$77 billion in 2022.
For Indonesia to stay on its growth trajectory, it must navigate macro headwinds such as the ongoing US-China tensions, the upcoming 2024 elections, increased pressure on major tech players to achieve profitability, and the evolving regulatory landscape.
The report also provides deep dives into key investment themes. While platform-based businesses in sectors like e-commerce and mobility dominated pre-2020, there was a discernible shift toward fintech subsectors and new retail models such as direct-to-consumer (D2C) during 2020-2022, mainly driven by the rapid increase in digital adoption during the Covid-19 pandemic. The emerging investment themes for 2023 and beyond point toward an increased focus on ESG, climate tech, electric vehicles, health tech, and D2C brands.
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On the exit outlook, the traditional preference for trade sales gives way to a rising trend in initial public offerings (IPOs). However, market pressures and a post-2022 funding environment could dampen spirits around mega-IPOs.
The report suggests an imminent upswing in Indonesia’s VC industry. Early-stage deals, especially in burgeoning sectors like electric mobility and healthcare, are expected to dominate VC activity soon. Late-stage startups will likely update their strategies, emphasising profitability above all else. Global investors are optimistic about Indonesia, with the digital economy projected to touch US$360 billion by 2030 and initiatives like the IDXCarbon launch signalling Indonesia’s commitment to a net-zero future.
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