Startup Ecosystem in Indonesia: Key Ingredients, Challenges, and Strategies

In my experience, Indonesia is the second most attractive market for foreign businesses in Southeast Asia after Singapore. The main reasons are its size, growth opportunities, and vibrant startup ecosystem. If that comes as a surprise to you, consider the following, a report by the IMF and the World Bank projects that Indonesia will become the 5th largest economy by 2024.

Indonesia is expected to become the world's 5th largest economy by 2024

In the past 10 years, Indonesia’s growth seems to have been accelerated by its dynamic startup ecosystem and fast-growing internet economy. When speaking of the internet economy, I am referring to a digital and knowledge-based economy. Businesses that are internet or, in general, digitally-enabled fall in this category.

This article provides a summarized overview of these aspects of the Indonesian market:

Key Ingredients of a Healthy Startup Ecosystem

  • Size of the Internet Economy
  • Invested Capital in Indonesia
  • Average Deal Size per Investment
  • Top Sectors by Invested Capital
  • Internet Penetration
  • Startup Ecosystem and Success Cases

Fastest-Growing Internet Economy in Southeast Asia

Indonesia’s internet economy is thriving, with an average growth rate of 49% a year since 2015. This growth pace has exceeded all expectations and has positioned Indonesia as the largest and fastest-growing Internet economy in Southeast Asia, well on track to cross $130B by 2025.

Graph of internet economy growth vs GDP penetration

The four sectors experiencing the most growth are e-commerce, online travel, online media, and ride-hailing.

Startup Ecosystem: E-commerce has the highest growth in Indonesia's internet economy

Healthy Capital Investment in Indonesia’s Startup Ecosystem

The capital invested in the Indonesian startup ecosystem is remaining healthy despite the global pandemic and trade tensions between global superpowers. Large funding rounds completed by unicorns like Bukalapak, Gojek, Tokopedia, and Traveloka lead the way.

During the first half of 2020, we saw $2B invested across 80 deals.

Startup Ecosystem: Capital Invested into Indonesia

Average Deal Size

A good indicator of investor confidence is the size of the early-stage deals, which has doubled over the last several years.

Unfortunately, I could not find data that reflects only Indonesia, so here I am, illustrating data representing Southeast Asia since Indonesia, alongside Singapore, are the two markets attracting the most capital.

In 2016, the average size was about $500,000, but this has increased to an average of $800,000 in 2019. The same growth followed at the Series A stage, from $2M in 2016 to $4M in 2019.

Startup Ecosystem in Indonesia: Average Deal Size

Top Sectors by Capital Invested

According to a Cento VC report, in the first half of 2020, Indonesia has attracted most venture capital in the “multi-vertical” sector, followed by payments, retail and financial services.

Multi-verticals refer to “super-apps,” companies like Gojek and Grab that are offering a wide range of services from ride-hailing to food ordering and online payments of bills.

Startup Ecosystem Capital Invested in Indonesia

Internet Penetration in Indonesia

In 2009, the number of internet users in Indonesia was only 30 million, whereas today the number is more than 150 million. The continuous increase of internet penetration and the on-going construction of telecommunication infrastructure make Indonesia an attractive market for internet-enabled businesses.

Word’s Most Valuable Emerging Startup Ecosystem

In 2020, Jakarta ranked as #2 on Startup Genome’s study of “Emerging Ecosystems”— the next 100 ecosystems after the top ones. Indonesia’s capital ranked ahead of popular hubs like Barcelona, Dubai, and Zurich. The reasons for this high ranking are the following:

  • Jakarta’s ecosystem value is estimated at $26.3B, positioning the city as the world’s most valuable emerging ecosystem.
  • Under the category of total early-stage funding, Jakarta has attracted the most capital, $845.9M, amongst other emerging ecosystems.

Even if you exclude early-stage funding, Indonesia has produced many companies with valuations of at least $100M; the graph below gives you a sense of how much the startup ecosystem has matured in the past 10 years:

Startup Ecosystem of Indonesia

In summary, we have got an internet economy growing at 49% year on year, a consistent flow of capital into startups, growing deal sizes, industry-agnostic VCs, internet penetration that has tripled in 10 years, and a capital that ranks as the world second most promising emerging startup ecosystem.


Challenges of Doing Business in Indonesia

Unfortunately, while the world’s largest archipelago offers many opportunities, doing business in Indonesia is not easy.

Business Complexity

A few months back, one of our partners, TMF Group, released the latest version of their “Global Business Complexity Index,” mapping the entire world to assess three key areas of business operations:

  • Rules, regulations, and penalties
  • Accounting and tax
  • Dismissal and paying employees

Indonesia was ranked as the world’s most complex jurisdiction, ahead of China, Greece, and Argentina.

Next, I looked at The World Bank’s “Ease of Doing Business Ranking” to compare the findings. The Ease of Doing Business considers the following criteria when mapping countries around the world:

  • Opening a business (starting a business and employing workers)
  • Getting a location (dealing with construction permits, getting electricity, and registering a property)
  • Accessing finance (getting credit and protecting minority investors)
  • Dealing with day-to-day operations (paying taxes, trading across borders, and contracting with the government)
  • Operating in a secure business environment (enforcing contracts and resolving insolvency)

Indonesia, while experiencing significant improvement, still ranks around 70, whereas Singapore ranks second. The lower the rank, the easier it is to do business in a given geography.

Talent Shortage Despite Healthy Startup Ecosystem

The number one challenge for foreign and local businesses in Indonesia is the shortage of talent. In fact, a recent report by RGF International Recruitment Talent in Asia surveyed 3500 employers across 11 markets discovered that over 50% of Indonesian employers struggle with a talent shortage.

Another study by Monk’s Hill Ventures, and Slush Singapore, discovered that 90% of respondents believe the skills gap is a major issue. The study surveyed more than 100 key players in the regional startup scene.

The main challenges we have observed are the following:

  • Few suitable candidates, especially in technical fields like software engineers.
  • The lack of qualified candidates drives salaries up. Software engineers and digital marketers often command salaries three to five times higher than the median wags in Southeast Asia.
  • Job-hopping, I have personally assessed thousands of resumes and have noticed that a significant portion of all candidates stay for about 1 year before moving to a new job.
  • Most employees do not understand ESOP, which is a crucial strategy for attracting early employees to any startup.

Sometimes back, I stumbled on the phrase “Sea Turtle” being applied to Indonesian startup founders and executives. The term originated in China, explaining Chinese citizens who have returned to China after studying abroad for several years.

Similarly, the Indonesian startup ecosystem has developed a strong bias for “Sea Turtles.” In the past several years, prominent startup founders, VCs, and government officials have encouraged Indonesian citizens abroad to come back.

For example, Bukalapak (one of Indonesia’s e-commerce unicorns), has launched a campaign called “Buka Jalan Pulang,” or “Open the Way Home,” to attract Indonesians back.


How to Navigate Indonesia’s Complexity and Take Advantage of Its Startup Ecosystem?

Despite all challenges listed above, Indonesia remains the largest economy in the region and is expected to continue its relentless growth. Here you go a few tips on how you can navigate all the complexity.

Invest in relationships

If you are eyeing the world’s largest archipelago as a potential market for expansion, attending events, connecting with relevant people on LinkedIn/Twitter, and starting to initiate partnerships long before you make a move.

Test the market

Previously, I wrote a post where I described how many startups nowadays are hiring our Greenhouse services to help them with services such as business matchmaking, in-market representation, lead generation, and market research. Such efforts will help you validate assumptions and apply a few iterations to your product long before entering the market.

Start with a Representative Office

The paid-up capital requirements in Indonesia are steep. To avoid such a high risk, start with a Representative office, study the market, and only then invest in further expansion when you feel ready. Google is a well-known example of a company that used a rep. office as a point of departure when expanding to Indonesia.

Hire “sea turtles”

If you are able to tap into a community of such people, you will be able to quickly build a capable, culturally intelligent executive team that will give you an edge when growing your business.

Despite all challenges presented above, I’m still optimistic about the now and the future of Indonesia’s tech landscape. To succeed in a fast-growth market like the Indonesia, you need to focus on execution, iteration, and building relationships in the right circles.

“Running 1,000 miles per hour is what wins the day. In emerging markets, it’s not innovation that wins the battle; it’s rapid execution.”
Patrick Grove, Co-founder and chief executive officer of Catcha Group


This article was initially published in Viktor Kyosev’s (COO of Greenhouse) weekly newsletter, where he shares his views on the topic of startups, growth and fast-growth markets: viktor.substack.com