An In­vestor’s Guide: Hot Ver­ti­cals in 2017

Savvy in­vestors in In­done­sia are po­si­tion­ing them­selves to mop the floor in spa­ces that or­bit e-com­merce. But other hot ver­ti­cals in­clude fin­tech, agri­cul­ture, food and bev­er­age, life­style and cre­ative ser­vices.

Indonesia Expat - - FRONT PAGE - By Leighton Cosse­boom

In­vestors who are ex­pe­ri­enced with In­done­sia as a mar­ket will tell you that they have mixed feel­ings about the ar­chi­pel­ago. En­trepreneurs, founders and fun­ders will throw the usual boil­er­plate stats at you about a huge pop­u­la­tion, steady GDP growth, an im­mi­nent de­mo­graph­ics pay-off (more than 50 per­cent of the pop­u­la­tion is still un­der the age of 30 and tech-savvy) and an econ­omy propped up by con­sump­tion. In other words, In­done­sians like to shop, no se­cret there. The same group of peo­ple will also tell you the mar­ket is a tough nut to crack. What look like re­ally sexy de­mo­graph­ics at first glance be­come splin­tered by deep di­vides of ge­og­ra­phy, ed­u­ca­tion, re­li­gion, class, lan­guages and ac­cess to the In­ter­net. In this re­spect, In­done­sia is in fact made up of many sub­mar­kets.

That said, there is still a lot to be ex­cited about when it comes to the idea of in­vest­ing in In­done­sian com­pa­nies. Jeff Quigley is an Amer­i­can ex­pat di­vid­ing his time be­tween Jakarta and Tokyo. He is also the South­east Asia Re­gional Man­ager for US-based ven­ture cap­i­tal gi­ant Fenox. For those who don’t know, Fenox is one of the largest VCs in the world, with more than US$1.5 bil­lion in as­sets un­der man­age­ment. Quigley is also a startup men­tor of Fenox’s GnB ac­cel­er­a­tor, a pro­gramme de­signed for the firm’s port­fo­lio com­pa­nies to en­ter a state of rapid growth af­ter in­vest­ment. In In­done­sia, Fenox has in­vested in com­pa­nies like HR soft­ware-as-a-ser­vice (SaaS) firm Ta­lenta, as well as on­line tech- fo­cused me­dia, events and jobs plat­form Tech in Asia. It has backed Is­lamic e-com­merce site Hi­jUp, along with BrideS­tory and ac­count­ing SaaS startup Jur­nal.

Quigley be­lieves it’s not hard these days for early-stage en­trepreneurs to raise a small amount of cap­i­tal in In­done­sia. The fund­ing crunch, he con­cedes, comes later down the line. “There's still a lot of ac­tion at the seed and pre-A stage, and younger star­tups with strong teams and a com­pelling prod­uct don't seem to be hav­ing a hard time rais­ing a first round,” Quigley tells In­done­sia Ex­pat. “How­ever, the A stage is be­com­ing more com­pet­i­tive, with in­vestors de­mand­ing stronger trac­tion and lower burn rates. At the B stage and above, it's al­ways been dif­fi­cult in South­east Asia, mainly be­cause few re­gional VCs have large enough tick­ets. But it may get even harder to raise later stage money in 2017.”

Quigley says the ver­ti­cals he is most bullish on in In­done­sia for 2017 in­clude com­pa­nies that en­able In­done­sia’s bud­ding on­line retail sec­tor. “With Ama­zon en­ter­ing SEA this quar­ter – cer­tainly eye­ing In­done­sia de­spite an ini­tial launch in Sin­ga­pore – I'm more in­ter­ested in star­tups that em­power e-com­merce. De­riv­a­tives re­lated to lo­gis­tics, ware­hous­ing, cross-plat­form list­ing, and so on could get a big boost as the ex­ist­ing play­ers bulk up to pre­pare for war with Jeff Be­zos.”

But peo­ple like Quigley will surely tell you that e-com­merce and ev­ery­thing in its or­bit is a no-brainer for in­vestors keen on In­done­sia. What is less ob­vi­ous is the realm of fi­nan­cial tech­nol­ogy – ‘fin­tech’ as the in­dus­try stake­hold­ers call it.

“I ex­pect fin­tech to be huge in 2017,” says Quigley. “Mo­bile wal­lets are go­ing to boom, and I'm ex­cited to see what hap­pens with P2P [ peer-to-peer] lend­ing now that the In­done­sian gov­ern­ment has started lay­ing out reg­u­la­tions. Banks are also tak­ing note. Even Mandiri es­tab­lished a ded­i­cated fin­tech fund. Lazada In­done­sia also teased bring­ing Ali­pay to the ar­chi­pel­ago af­ter its bil­lion-dol­lar ac­qui­si­tion by Alibaba, so a lot of eyes are on the pay­ments space.”

Adryan Hafizh is the co-founder of an or­ga­ni­za­tion called Ko­lab­o­rasi, a net­work and in­cu­ba­tion pro­gramme that fo­cuses on founder devel­op­ment in In­done­sia. Over the past four years, Ko­lab­o­rasi has in­cu­bated 15 star­tups in mul­ti­ple in­dus­tries, in­clud­ing agri­cul­ture, fi­nance and in­vest­ment, prop­erty, culi­nary, life­style and more.

“As we talk about in­vestor trends, I try to split them up be­tween sev­eral ma­jor cat­e­gories: an­gel in­vestors, ven­ture cap­i­tal firms and other in­sti­tu­tions,” ex­plains Hafizh, adding that he is able to cur­rently ob­serve a shift in be­hav­iour be­tween in­vestors in In­done­sia three or four years ago and the play­ers we see to­day.

Ac­cord­ing to Hafizh, in­vestors on the ven­ture cap­i­tal and in­sti­tu­tional lev­els used to be com­fort­able putting money into com­pa­nies that took a while to be­come prof­itable. To­day, how­ever, the trend is mov­ing more toward back­ing star­tups with ex­plo­sive growth po­ten­tial – ones that likely have the short­est path pos­si­ble to prof­itabil­ity and exit via IPO or merger and ac­qui­si­tion. He cites tech con­cepts like Go-Jek and Trav­eloka as poster­chil­dren for this kind of mind­set.

“But a unique thing is hap­pen­ing in the an­gel in­vestor model,” says Hafizh. “The an­gel or po­ten­tial an­gel now sees star­tups and SMEs as one of the choice ways to in­vest their money. There are sev­eral fac­tors at play, but one is the slow­ing down of old in­dus­tries like prop­erty, coal, palm oil and oth­ers. Many of my fel­low an­gels used to put their money – or rather their par­ents’ money – in safer choices like prop­erty. But with the slow­ing down of cap­i­tal gains in al­most any kind of prop­erty, now they are look­ing for a new field to in­vest in. Most of them still avoid ‘fully tech-based star­tups,’ but find they are more tol­er­ant of con­ven­tional and cre­ative ‘half-tech’ star­tups.”

Hafizh says pop­u­lar In­done­sian ver­ti­cals to in­vest in on the an­gel level may in­clude but aren’t lim­ited to in­dus­tries like food and bev­er­age, fash­ion and cre­ative stu­dios (de­sign, film, ar­chi­tec­ture, and more) which five years ago were con­sid­ered quite far from ‘in­vest­ment ma­te­rial’ of the ar­chi­pel­ago’s sec­ond gen­er­a­tion of big money.

From Hafizh’s point of view, the tech ver­ti­cals to put your money on in 2017 are agri­cul­ture and fin­tech, bio­med­i­cal, ar­ti­fi­cial in­tel­li­gence and cy­ber se­cu­rity. For non-tech re­lated spa­ces, he says, “Fash­ion and life­style busi­nesses like bar­ber shops, sa­lons, spas and more are good. Cre­ative-based stu­dios like dig­i­tal agen­cies, de­sign stu­dios and oth­ers are also be­com­ing more pop­u­lar.”

Zoom­ing back out to the idea of in­vest­ing in In­done­sia as an ex­pat, Quigley of­fers a piece of ad­vice for new­com­ers in 2017:

“Learn about the rules and reg­u­la­tions be­fore you even think about en­ter­ing the mar­ket. Get to know the ex­ist­ing play­ers, as early stage in­vest­ments are all done via syndicate. As com­pe­ti­tion heats up, you need to pro­vide more than just cap­i­tal – ‘dumb money’ – and be able to con­nect founders to po­ten­tial busi­ness part­ners and other in­vestors. Most im­por­tantly, you should be will­ing to pro­vide men­tor­ship and insight. With an un­known exit land­scape, you've also got to be com­mit­ted to the long haul.”

“De­riv­a­tives re­lated to lo­gis­tics, ware­hous­ing and cross-plat­form list­ings could get a big boost as the ex­ist­ing play­ers bulk up to pre­pare for war with Jeff Be­zos.”

Jeff Quigley

Adryan Hafizh

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