The Pros and Cons of Running A Startup in Indonesia

All about running a startup in Indonesia.

Startups are growing considerably in Indonesia, but there are several characteristics with its regulation, market, and investment landscape that can either boost or hinder startup development. This article will outline what you need to know about starting a new business, especially a startup, In Indonesia.

How active is Indonesia’s startup landscape?

Indonesia has one of the most active startup communities in the world. It’s difficult to pinpoint an exact number due to the volatile nature of the industry and different criteria of what actually defines a ‘startup’, but many sources offer a consistently high amount of active startup companies.

In 2018, the Indonesia Digital Creative Industry Society database compiled 992 active startups, over half of them based in Jakarta and its surrounding suburbs. Meanwhile, international sources like Catcha Group and Startup Ranking place the number at well past 2,000 active startups.

Why is Indonesia a good place to run a startup?

Investments have multiplied over 60 times since 2012.

While Singapore is still the Southeast Asian leader in terms of number and value of investment deals, Catcha Group predicts that Indonesia’s startups will surpass it within the next two years. Behemoths like Expedia, Alibaba, and Tencent are pumping billions of dollars into Indonesia, trying to take a piece of the ever-growing pie.

In late 2017, research from AT Kearney found that startup investments in Indonesia had grown 68 times in five years, reaching US$1.4 billion in 2016 and hitting at least US$3 billion in 2017. At that time, Indonesia’s startup landscape was still in its baby steps; imagine how much it’ll grow in the next few years.

It has 143 million Internet-savvy consumers.

Although only 53.7 percent of Indonesian citizens use the Internet, its large population means it still has a market of 143 million internet users; 26 times larger than Singapore’s. Much of this is concentrated in Java island – especially Jakarta – but affordable mobile devices are helping the rest of Indonesia catch up.

Easy access to devices also means that 44% of Indonesians use the Internet exclusively through mobile phones; good news for people who want to start a new business through integrating mobile apps and tech platforms.

The government is committed to helping startups grow.

The Indonesian President Joko Widodo has been very vocal in his belief that startups can greatly benefit economic growth, especially through facilitating small and medium enterprises (SMEs).

In 2016, his administration promised to facilitate at least 1,000 digital startups with a total value of US$10 billion to start new businesses in Indonesia by 2020 through providing funding, community building, and regulatory support.

What are the challenges of running a startup in Indonesia?

Most of the population is still unbanked.

About 66 percent of Indonesian citizens don’t have bank accounts, and even fewer people own credit cards. It’ll be a challenge for startups in Indonesia to financially engage potential customers, especially in rural areas.

However, this also makes Indonesia a major untapped market for more flexible and convenient channels for cashless transactions. E-wallet products in Indonesia such as GO-PAY, OVO, and DANA are already engaging unbanked customers through partnering with offline merchants.

There’s a shortage of skilled talent.

Indonesia has a massive productive-aged labor force. However, it only has about 10 million tertiary education graduates and even fewer skilled, qualified professionals. The deficit is especially visible in the science, technology, engineering, and mathematics (STEM) fields as well as soft skills like leadership and management.

In the case of startup companies, finding managers and IT developers will be especially difficult. One way to mitigate this is to consider headhunters and executive search firms.

The regulations are challenging to navigate.

The rapid pace of the startup industry and Indonesia’s complex bureaucracy means that the country is relatively slow in adapting. In the World Bank’s Ease of Doing Business Index, Indonesia pushed forward from 91st place globally in 2017 to 72nd place in 2018 and finally slipping to 73rd place in 2019.

There’s a high regional gap in infrastructure and logistics.

In the case of infrastructure – particularly transportation and technology – there’s a large disparity between the westernmost islands of Java and Sumatra and the rest of Indonesia. Over half of Indonesia’s Internet users are in Java, while in the more remote islands Internet and phone signals are limited to major towns.

On one hand, this is a big opportunity for startups that aim to provide easily-accessible transportation like Grab and GO-JEK. On the other, e-commerce startups that depend heavily on logistics will have problems in scaling nationwide.

The market is slow to trust new brands.

Many Indonesian consumers lean towards familiar products or services, particularly from local brands. Indonesians are generally very faithful to well-known brands; startup companies that focus on pilot projects and unconventional business models will have some difficulty getting traction.

However, research from McKinsey notes that it’s only the perception of being local that matters. Many foreign companies have been able to capture the market through localisation or acquisition strategies.

So, what’s the conclusion?

Running a startup is hard. Running a startup in emerging markets is even harder.

Indonesia, in particular, is a fascinating case because it has massive potential as one of the world’s emerging economies. However, great returns will come at great risks; aspiring entrepreneurs will need to study up and get good partners before they should touch this archipelago.

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