Kaskus co-founder Ken Dean Lawadinata has broken his silence after marching out of one of Indonesia’s most prominent technology platforms, citing higher “risk” in the industry and even “a little bit of a bubble”.
“I think right now the IT market is in a bit of a bubble in Indonesia, with everyone asking ridiculous valuations without any signs of profit in the near future,” local media quoted the 30-year-old, who brought Kaskus to fame in 2008 with his cousin Andrew Darwis.
This — just days after Go-Jek co-founder Michaelangelo Moran also announced he had quit his popular company — has generated concerns over the state of Indonesia’s young and thriving startups, companies that have seen many investments flow in with little details and no guarantees about their revenues and profitability.
“There is a marginal bubble forming because of the involvement of foreign investors, hence the global nature of the industry’s fears,” says Naveen Menon, head of communications, media and technology practice at A.T. Kearney.
Foreign investors are flocking into startups operating in the country, with the biggest funding ever for a local startup rounded up by Go-Jek in August worth US$550 million from American private equity firms KKR and Warburg Pincus.
“Indonesia’s startup scene is starting to look crowded, but compared to other markets such as India or the USA, it’s relatively small and still generating huge interest among investors,” he added.
There are over 2,000 startups in Indonesia, most of which are valued at less than $10 million, according to a Google-Temasek report. The middle-income segment of the country is flourishing and internet users are expected to double by 2020 from over 100 million users at present, the world’s fifth largest figure.
Even if startup investors are running higher risks, Naveen explained that it was very common for them to invest in unprofitable companies due to a scale effect, or a network effect.
“Basically, investors in the startup system are giving up short-term gains for massive long-term gains. They just need one of their invested startups to become successful in order for them to say that they have succeeded,” he said.
Startups and venture capitalists (VCs) have told that they see no bubble bursting in the near future as they are banking on the growth potential of the young industry.
“I would see it not as a bubble, but more of a challenge of market and price adjustment,” said Sebastian Togelang, founding partner of Kejora, a local VC firm that focuses on building companies.
The technology industry is well prepared to prevent bubbles from bursting because of lessons learned from the 2000 dotcom bubble burst, when tech firms in developed countries crashed and burned after going public based on unrealistic valuations, he said.
“Everyone is being cautious and that’s a good thing for both parties,” Sebastian added.
These days, fewer tech companies are going for initial public offerings (IPOs) and when they do, it takes more time and more maturity to do so, according to data from McKinsey Indonesia.
Over 50 companies in the US are targeting IPOs in 2014, versus 371 in 1999, while median years to IPO stood at 11 years in 2014 from four years in 1999. In terms of networks, there are now 14 billion connected devices worldwide from half a billion in 1999.
Metra Digital Innovation (MDI) Ventures CEO Nicko Widjaja said Indonesia was far from a bubble because many startups were funded by corporate ventures with big scales that had yet to reach their optimum levels.
Local corporate ventures into the digital startup sector include those operated by Bank Mandiri and Bank Sinarmas, along with Telkom Indonesia’s Indigo Accelerator program, which Nicko and MDI are aligned with.
The concerns over a bubble burst in the tech scene may have emerged in the first place because of a perceived “winter” for venture capital in Indonesia. For almost a year, fundraising has been more difficult due to a more cautious approach taken by both investors and startups in seeking profitability, VCs said.
Startups admit that their focus is indeed on growth and eventual profitability, but the main aspect of their operations revolves around the effects of their business in changing the way people shop, travel, transact and use a wide range of services online.
“From the start, one of our main focuses has always been on growth,” Go-Jek’s chief marketing officer Piotr Jakubowski said, admitting that satisfying investor returns on investment remained a “process”.
“Our best takeaway is the fact that we continue to inspire new businesses and we are also innovating and growing in a way that’s beneficial for consumers.”
E-commerce firm Blibli.com is of the view that the startup scene will continue to grow so long as enterprises serve to benefit the public.
“In the end, it’s about educating the market, especially in e-commerce, which is something relatively new. It’s teaching people to try online shopping,” Blibli.com senior marketing manager Deny Agsana said.