Indonesia Needs to Strengthen Startup Ecosystem to Ensure More Companies Survive the ‘Valley of Death’

Ride-hailing and payments firm Gojek became Indonesia’s first unicorn—privately held tech startups valued at $1 billion or more—in 2016. In just 3 years, in 2019, it became a decacorn as it joined the ranks of tech companies with valuation of more than $10 billion.

Thanks to Gojek and other tech startups, Indonesians can now order food, hail a taxi, move money, arrange travel, watch entertainment, shop for most things, and even consult a doctor or take courses using digital methods.

A study by the Asian Development Bank (ADB) says Indonesia needs to further strengthen its startup ecosystem to help tech companies grow, particularly those that are development-focused as they have the potential to contribute to the country’s development.

Emergence of startups

Indonesia’s startups began to emerge in the 2000s, with their number rapidly increasing the following decade. As of 2022, Indonesia has 2,431 startups.

The increase in startups has been aided by the development of the ecosystem. There are now about 120 incubators and accelerators in Indonesia, as well as 200 financing institutions that cater wholly or partially to startups, according to the report. Digital infrastructure is improving, and the population is becoming more accustomed to buying products and services online offered by or through startups. Governments at the national and city levels have played a role in introducing programs for startups and incubator programs to support them.

The report says there is a buzz about startups that did not exist 10 years ago, and they have become part of the business and consumer culture.

However, most startups do not advance beyond the early stage of development and face challenges of sustainability and scalability. “They enter the ‘valley of death’—a high-risk period in which they try to reach scale in an environment of competition, uncertainty, and creative disruption,” says the report. “Some survive the valley; others succumb to it.” For instance, the COVID-19 pandemic dampened demand for many startups, leading to failures.

While fintech and e-commerce dominate the digital ecosystem in Indonesia, startups focused on such areas as edtech, healthtech, agritech, and greentech (also known as cleantech) are emerging more slowly, according to the report.

Startups engaged in these areas generate both economic and developmental benefits. Tech innovations in education and health improve human capital and well-being. Agriculture employs a large share of the poor population. Greentech provides solutions to combat environmental degradation and climate change. However, these areas are often seen as risky by investors and traditional financial institutions. Investors also lack knowledge about them compared with the popular fintech and e-commerce sectors. As such, dedicated support to these four sectors is needed, says the report.

Challenges

While Indonesia has produced some unicorns and even a decacorn, the ecosystem has weaknesses. One of these is funding, according to the report. Funding is scarce in the early stages. Although the number of incubators and accelerators has increased, the quality of some of them remains questionable, especially in providing sector-specific and real-world business advice. More experienced mentors are needed to guide startups in their early and growth stages.

Funding and support are spread unequally across the country, with startups in Java and Bali having access to good support, while those in other regions are not as well serviced. One of those interviewed for the report, a manager of an agritech startup in East Indonesia, said that while he is satisfied with the facilitation he received from a government incubator in South Sulawesi, he believes that excellent incubators are still concentrated in Java.

Digital infrastructure also needs to be improved to increase internet speeds and expand coverage of high-quality services beyond the major cities.

Given such challenges, the report said three areas can be focused on to improve Indonesia’s startup ecosystem: the quality of incubators and accelerators, financial access for early-stage startups, and talent development. Incubators and accelerators could benefit from improved staffing, especially employees with more business knowledge, and mentors with sector expertise and experience. Early-stage startups are finding it difficult to convince equity investors to provide funding, highlighting the urgency to find and develop alternative sources for capital and support. Finding good talent has also been a challenge because of short supply and competition from large companies in hiring. This is on top of the need for better geographic distribution of support.

Sector recommendations

The report recommends the following for the four market segments: agritech, edtech, greentech, and healthtech.

Agritech

• Improve local government support to link startups with farmers. By getting closer to the sector, startups can better understand farmers’ needs and the farming context.
• Nurture skilled talent in agriculture. To encourage talent to use agritech in farms, the curriculum at vocational schools under provincial authority can be modified to include technology subjects, and teachers should be trained to teach these subjects.
• Increase investment in farms. Bank officers can be trained to understand tech-based products and services so that banks are more willing to lend to farmers to purchase the innovations of startups.
• Boost demand through policies to protect the environment and combat climate change. This will encourage sustainable agriculture and increase demand for solutions from agritech and greentech startups.

Edtech

• Increase media coverage of edtech performance and benefits to attract more investors. Edtech startups should “sell” themselves better and highlight their social impacts to impact investors.
• Explore the use of technology, including edtech products, to improve the quality of education. Greater use and experimentation of edtech products should be encouraged by education managers in schools, colleges, and universities. Edtech startups should do their part by helping school authorities and teachers improve the quality of teaching and learning.
• Improve teachers’ awareness and skills in using digital technology. Effective use of digital technologies should be included in teacher training to encourage teachers to use edtech in the classroom.
• Use edtech to deliver public training programs. Future government training activities may be conducted in partnership with edtech startups, either fully online or in hybrid form.
• Improve internet access at the school level. The government can ensure that all schools have internet access, allowing them to use the products and services of edtech startups.

Healthtech

• Encourage incubators and the use of mentors who specialize specifically in healthtech. Mentorship that combines business, tech, and health can be very helpful, as can dedicated rather than generic incubator and accelerator programs.
• Introduce healthtech to early adopters to increase demand. Greater government support in linking healthtech startups with early adopters (e.g., hospitals, clinics, health-care professionals, patients) allows startups to expand their customer base and better understand the problems for which solutions are needed.
• Promote disruption and innovation to transform the health-care sector. To accelerate technology adoption, key players—governments, end users, health-care providers, insurance companies, and pharmaceutical firms—can be educated on how innovation and technology can transform the sector.
• Emphasize promotive and preventive solutions—alongside curative ones. Transforming the health-care industry means shifting to greater emphasis on promotive and preventive solutions. Healthtech startups can offer such solutions.
• Ensure interoperability of health data while protecting patient privacy. It is essential to regulate electronic medical records as shareable data while protecting patient privacy.

Cleantech

• Provide cleantech-specific incubators and accelerators. Given the techno-specific nature of the sector, startups need incubators and accelerators, and associated mentors who can provide a deep understanding of cleantech and related markets.
• Develop networks and platforms to consolidate cleantech expertise—domestically and abroad.
• Promote impact investments in cleantech. The low level of funding for cleantech startups could be reversed through impact investments, which prioritize positive social and environmental impact over financial return.
• Demonstrate the social value of greentech and other impact investments. Methods can be devised to measure and publicize the social value of impact investments and their financial performance. Success stories could be disseminated to inspire stakeholders to invest.
• Enforce environmental regulations to stimulate demand for greentech. This entails having clear implementation guidelines in enforcing regulations.
• Ensure that decentralization policies are cohesive. Overlapping authority under decentralization policies pose a challenge for cleantech. Clear agency access points for greentech startups are needed at both the national and regional levels. This will ensure a more continuous engagement process with all levels of government.
• Create a national sector road map for greentech. This would bridge regional differences in regulations and policies for the greentech sector and its subsectors, and offer policy guidance to regional governments to align their policies with those at the national level.

This article was first published by BIMP-EAGA on 4 October 2023.