Investors Betting on Already Winning Horses in Indonesia: MDI Ventures’ Widjaja
As the Indonesian government continues to make serious efforts to attract startups to be listed at the Indonesian Stock Exchange (IDX), it will have to fight off a new trend in startup consolidation which may prove to be a preferred exit option for startups, according to MDI Ventures CEO Nicko Widjaja.
The startup scene in Indonesia, Widjaja predicts, will see a growing trend of smaller exits thanks to buying sprees from giants in the region, signalled by Grab’s acquisition of Kudo and Go-Jek‘s purchases of payment startups Kartuku, Midtrans, and Mapan.
“The recent acquisitions by these two are signalling the new era of M&A by the region’s tech giants,” he said.
Widjaja, who has over 10 years’ experience as a venture capitalist, believes that startups are likely to be more inclined to such exits given the challenging “regulatory hoops” of IPO and also because of the incredibly tough competition in fields that are already dominated by big players.
“It is true that a lot more money is pouring into Indonesia, but 60-70 per cent of it is coming in at already mature stage companies. As a result, earlier stage startups are finding it hard to grow because investors are trying to bet on the already winning horses,” he said.
In an exclusive interaction with DEALSTREETASIA, Widjaja shares his views on exits, founders and valuations, as well as an insight into MDI Ventures, the venture capital arm of state telco firm Telkom Indonesia boasting over 30 portfolio companies and an international IPO despite only starting in 2016.
MDI is affiliated to Telkom Indonesia. Are your investments strategic or financially focused?
Our thesis is straightforward – synergy with Telkom Indonesia’s resources. Basically, Telkom has a massive infrastructure, end user and enterprise customer base, and data. We would want to invest in tech companies that could partner with us to utilize the resources mentioned above.
In terms of industry, we are looking at three classifications: (i) Now, (ii) New, (iii) Next. We invest only in Series A and above, with geographical focuses on Indonesia, APAC, and Silicon Valley. We go to Silicon Valley due to the maturity of the ecosystem, Telkom has to think global.
We currently only invest in companies with proven business models and healthy unit economics, these traits alone already de-risk a potential investment. Our investment mantra is: Access, Upside, and Impact. As we are an independent entity, we are a for-profit organization. It means that we are in principle need to make profit (just like any other VCs).
But, finding good companies is really hard. These companies are usually cash-rich, with astonishing growth and performance, they usually don’t need our money. Then clearly our money has to be ‘smart money’ or ‘strategic money’ in order to compete with the likes of Sequoia Capital, and so on.
In this case what we offer companies is to collaborate strategically with Telkom Indonesia’s massive infrastructure, business network, and customer base. This is what I call access. As money becomes a commodity, we create a valuable revenue opportunity via channel engagement with Telkom Indonesia and other corporate partners.
When it comes to bargaining, our access to those resources becomes upsides in our investment terms. The two above points are related to your question: Yes, we invest strategically. ‘Spray-and-pray’ model clearly doesn’t work anymore. I don’t believe even traditional VCs nowadays invest solely in financial only as the return rates are in fact so questionable in this region.
Unfortunately, none of Indonesia’s VC has ever published their return rates. Quantitatively speaking, this makes it difficult to find any hard data regarding their returns for LP. However, we can make some rough estimates by looking at their portfolio performance.
If we try to roughly calculate the current marked-to-market values for VCs in Indonesia, assuming that currently most of them have at least two portfolio companies valued at $50 million with between 8 per cent and 10 per cent fully diluted ownership (as most of them have started investing since the seed level), then the values of their “champions” likely weigh in somewhere between $8 million and $10 million. This does not justify the $30 million to $50 million investment that their LPs initially made.
Now, since investment for a pure financial gain is almost impossible in this region, we need to strike a balance between financial gain and immediate impact through collaboration in our portfolio construction. This means we diversify in core, adjacent and new category to balance the allocation for collaboration doubling-down and new technology adoption.
I also believe that cash-poor companies only yield poor synergy performance. When companies are almost out-of-cash/runway, they will think vendoring/agency business model would be the easy way out. Sometimes big corporates misunderstood this as ‘collaborative attitude’ from the founders — until they find another large account and they’d leave you high and dry.
We discourage our companies to vendor to Telkom Indonesia, but promote to establish a dialogue to look at new opportunities and businesses as partner, not as employee, subcontractor, or agency.
Tell us a bit more about your investment strategy.
We are the only Indonesian team that has ever co-invested with Tier-1 Silicon Valley investors such as Google Ventures, Social Capital, Bain Venture Capital, Softbank Capital, Y Combinator, and global corporate venture investors such as Telstra Ventures, Deutsche Telekom Capital Partners, Singtel’s Innov8, and so on.
Venture investment is a high-risk business. If you don’t find the right co-investors, then most likely the company you’ve invested in is illiquid. Then for sure, the company will collapse in the next couple of years.
When our fund launched in 2016, many of the region’s VCs fed us their seed companies. If we weren’t experienced enough, we surely took most of them on board, but we’d become the validator of their seed investment. You have to understand that VC game is a validation game as the round of investment keeps rolling.
This is why I thought since the beginning of our existence, we only co-invest with Tier-1 only investors because we validate each other and not the other way around.
You work closely with incubators and accelerators. What is the thinking behind that?
We work behind the scene with incubators and accelerators. The problem with incubator/accelerator program is that there’s very little or almost no success in delivering good companies. Startup events, competitions, seminars, and hackathons are becoming like circuses. One-minute-to-fame sort of things.
The best incubator/accelerator program in the world is no doubt: Y Combinator, with companies such as Airbnb, Uber, Dropbox, Zenefits, Stripe, Instacart, and so on. There are 13 companies from Y Combinator that are worth over $50 billion today.
The success of any incubator/accelerator program should be none other than follow-on funding. Given the relatively small amount of capital to start, these freshman founders will need a new fresh of capital to achieve their next milestone (and subsequently raise another round of funding).
Before the founding of MDI Ventures, we worked initially with Telkom Indonesia (as consultants) for Indigo Incubator in 2015. We re-shifted the focus back into the growth of the startups. A key driver for determining the success of the program is that how helpful we are in making these startups “fundable.”
The common misunderstanding by corporates is that startups are vendors/subcontractors. If they can build and supply to us, then they won’t be needing any external funding, right? Wrong. The idea of incubator/accelerator is to promote innovation, not to scout for cheap vendors.
To help provide with a basic benchmark, we reviewed half of dozens of the most active incubator/accelerator programs in the region and in the US, such as Y Combinator (obviously), Singapore’s JFDI (Joyful Frog Digital Incubator — sadly no longer active now), Techstars, 500 Accelerator, Angelpad, and lastly, Indosat’s Ideabox (they were very active back then). Y Combinator and Techstars are the most successful one with more than 40 per cent follow-on rate at median total funding of $3.5 million and $3 million. Followed by 500 Accelerator and Angelpad with 35 per cent and 25 per cent follow-on rate.
Long story short, we achieved 40 per cent follow-on rate for Indigo Incubator that year, and maintaining the same rate in every batch. Companies like PrivyID, Kofera, Payfazz, Goers, Opsigo, Sonar and many more were born out of Indigo Incubator, and they’re worth more than $60 million in market cap today. In two years, we’ve incubated more than 50 companies with Indigo Incubator.
In 2016, we worked with Bank Mandiri to launch Mandiri Digital Incubator that focuses on fintech vertical startups. These two programs have been a great experience for us to understand the real nature of Indonesia’s startup ecosystem from the earliest foundation.
In a recent article you wrote in Forbes you mentioned about “overvaluation bubble brought on by hype and politics”. Can you elaborate on this?
The startup scene is still full of misinformation and irrational valuations. There’s too much hype and noise around startups these days. Almost anyone can technically be startup founders. Almost any idea could be a million-dollar idea. Reality bites when it comes down to the execution part.
Corporate executives and politicians love talking about Indonesia’s demographic dividend, a point in time when more than 50 per cent of the country’s 250-million-plus population would enter their prime spending years. This demographic is young and would understand the Internet well by the time their wallets would have a tangible effect on our economy.
Indonesian politics became well-infused with the rhetoric of web startups and their potential to revolutionize the emerging market as we know it. Corporate wants to be part of this vibrant community so that they don’t feel left behind with all the excitements.
Lastly, you have people promoting their own agenda by tapping into the enthusiasm surrounding startups without any objective other than just creating the buzz itself.
Making profit should be cool again everywhere.
What is your view on the quality of startups and founders in Indonesia? Where are we compared to the likes of Singapore?
In my years as a venture capitalist, I have seen all sorts of startups. I’ve met, perhaps, some of the greatest and some of the worst startup founders in any given countries.
We have invested in more than 10 countries including Indonesia, and before MDI Ventures, I have invested in more than a dozen startups since the earliest day of Southeast Asia’s startup investment via my first venture capital fund (Systec Ventures) in 2010.
Since most of our portfolio is mature stage companies, many of the founders are engineers from Stanford, Harvard, Berkeley, and the usual suspects with years of tenure working for Microsoft, Facebook, Google, Airbus, NASA, and so on. (You can imagine how stimulating the conversation is every time we met)
However, I’ve met more interesting startup founders in the early stage companies out of Indonesia. Our ecosystem is relatively much younger than mature markets like the US, India, and China, different challenges and opportunities are facing our Indonesia’s startup founders.
These guys not only build products but they invent the supply and demand. How crazy is that? These Indonesia’s startup founders will emulate what Go-Jek had done with creating the market for on-demand or Tokopedia had done with shifting the entire traditional retail and wholesale into online.
Irzan Raditya of Kata.ai started the whole AI Chatbot revolution for Indonesia’s enterprises from the ashes of YesBoss; Marshall Pribadi of PrivyID created the demand for digital signature and identity management platform that were almost non-existent before 2016; Bachtiar Rifai of Kofera implemented prediction-based marketing automation that is the envy of many big advertising agencies; Hendra Kwik of Payfazz wanted to build a network of distributed bank agents in Indonesia; and so on.
What is MDI’s exit strategy? Any exits so far and any in the pipeline?
We’ve just started in January 2016, and we already have one international IPO (Geniee Inc) in our pocket almost two years later in December of 2017. Isn’t that mind-boggling? We realize that time is very limited, therefore we have to move fast.
Several more IPOs are definitely brewing as we speak, I guess, you’ll just have to wait and see.
The bigger strategy would be identifying potential acquisition target for Telkom Indonesia. Corporate venturing is one way to reduce risk and gain access to information about the vertical, but a successful inorganic acquisition by the group would the next challenge.
What do you think of IPO for startups? Why do you think Indonesian startups seem hesitant about becoming publicly listed?
The IDX was initially thought as an exit opportunity for Indonesia startups, but I believe there’s a new kind of consolidation in Indonesia when Go-Jek acquired Kartuku, Midtrans, and Mapan, similar to Grab acquired Kudo earlier in the same year. There will be a growing trend of smaller exits thanks to buying sprees from new Indonesia’s unicorns.
Most of Indonesia’s startups aren’t even in Series B yet. It is true that a lot more money is pouring into Indonesia, but 60-70 per cent of it is coming in at already mature stage companies. As a result, earlier stage startups are finding it hard to grow because investors are trying to bet on the already winning horses.
For Indonesia’s unicorns, we’ll definitely see them at the board of our public market or abroad.
MDI recently published a report about its thesis ‘Bit-by-brick’. Can you elaborate on this thesis?
‘Bit-by-brick’ is the way we illustrate our strategy to form an alliance with high growth startups, push an ecosystem and stimulating demand for new technologies (the ‘bit’) by utilizing unused capacities, resources, reach, infrastructures (the ‘brick’).
We’ve accounted more than $20 million total value of collaboration since our first investment. As far as I know, we are the only CVC that closely measure and monitor every single collaboration that’s currently happening (or about to happen) between our portfolio and the group.
(Simply because we act as the intermediary between startup in our portfolio and Telkom Group)
Corporate Indonesia is still the best way to gain access to the network and intros to potential clients and partners. We are confident to assert that strategic partnerships between corporate and startups are proven to produce substantial value for both parties. We also see that these strategic partnerships may eventually lead to equity alliances or acquisitions.
Tell us about your investments outside of Southeast Asia. What is the thinking/strategy in that regard?
The new digital economy is a borderless economy. Disruption will not come from our backyard but from our neighbors, which in this case is the world’s best digital companies. Our ecosystem is not independent of global ecosystem.
Most of our portfolios have multiple market footprints in more than a dozen countries (some existed in three or four continents)
We build businesses with them and in the end benefitting both parties significantly. For our ecosystem, we can learn a great deal from them (beyond e-commerce related technologies).
However, our strategy is always a dual-track in this. The most important role of investors is to grow the portfolio value, de-risk and maximize return. The only way to do this is by inviting reputable investors (smart money investors) to participate in the rounds of investment in our portfolio.
In this case, we’ve successfully invited global investors to invest in our Indonesia’s portfolio. Payfazz is the first company out of Indonesia that had been invested by Y Combinator. Kata.ai, another great portfolio of MDI Ventures that had been backed by reputable global investors.
The partnership with global investors allows some of our Indonesia’s portfolio to also reach out to regional/international markets. For instance, Kata.ai has opened up markets in the Philippines, Taiwan, and Japan; Sonar Platform has opened up markets in Vietnam, Thailand, and the Philippines; and so on.
What do you think about the level of valuations for startups in the region? How do the valuations in Indonesia compare to its neighbours? What does this mean for investors like MDI?
One can’t help by comparing Alibaba and Tencent to Go-Jek and Grab. The recent acquisitions by these two (Grab acquires Uber Southeast Asia and Kudos; Go-Jek acquires Midtrans, Kartuku, and Mapan) are signaling the new era of M&A by the region’s tech giants.
Going public isn’t a bad choice, but an IPO requires a founder who is in it for the long haul. Also, an IPO can often be expensive, require you to jump through regulatory hoops, and is difficult to justify if your company isn’t already massive. That leaves startups with the option of getting acquired.
As far as I know, there hasn’t been any real $100 million exit on record yet in Indonesia. There are reports which suggest Grab acquired Kudo at this level, but no one knows for sure. (In my line of work, if the story’s too good to be true, then it’s too good to be true)
In MDI Ventures, again, we’re investing in good fundamental (revenue growth, lifetime value of customers, and so on). We’re not opportunistic, but rather strategic. So far, it’s proven to be a better thesis in our case.
What are MDI’s main goals this year? Is there anything new or different MDI will be doing this year compared to previous years?
We continue to think creatively on how to make the best possible investment for our stakeholders. Learning from past mistakes, diagnosing them, and designing better ways of doing things. This iterative and evolutionary approach had allowed us to continually refine the investment systems that we started at MDI Ventures.
Startup investment is no longer ‘investing-in-the-unknown’ like six or ten years ago. There are metrics and benchmarks like revenue growth, lifetime value of customers, total cost of acquisition and so on as indicators, so that we know how to predict the company success.
The era of spray-and-pray is no longer possible in today’s ecosystem. It was still relatively cheap to do so back in 2011, but today this model doesn’t seem to be getting the job done for new funds. Fund managers need to stop trying to mimic it.