Global inflation: Will Indonesia’s startups survive the storm?

Sinta, news . 12 Sep 2022
startup strategy

Heaptalk, Jakarta — Several startups operating in Indonesia laid off their employees starting in early 2022, spanning JD.ID, Zenius, TaniHub, LinkAja, Pahamify, and Mobile Premier League (MPL). The startup strategy of reducing these employees is often associated with the bubble burst phenomenon which not only happens in Indonesia but also globally.

According to Richie Wirjan, Executive Vice President at Kejora Capital, in a discussion with Indrawan Nugroho, the wave of layoffs that occurs at startups is common as part of the business cycle. Besides the layoffs, startups are facing valuation corrections as well. The issues may lead the startup bubble to leak or burst onward but Richie stated that this time is too early to justify.

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Tough conditions but this too will pass

According to a Euromonitor report, global inflation is projected to reach 7.9% in 2022, and towards 5.0% in 2023, compared with the 2001—2019 average annual global inflation of 3.8%.

The trend of global inflation tends to increase since early 2022 along with the Russia-Ukraine war exacerbating the supply chain complexities and commodity price squeeze, as stated in Sequoia’s presentation titled Adapting to Endure. Compared to the current inflation, verily the increasing long-term expectation for inflation is more crucial. The bond market revealed that 5-year forward inflation expectations are at the highest levels in decades.

At the moment, investors from venture capital are more selective in disbursing funds considering the global economic condition. There are many considerations before distributing funds, including startup strategy such as cash burn. Investors prefer founders who are more deliberate in deploying the funds rather than solely burning the cash.

The current decline in investment disbursed is relatively similar to what happened at the beginning of the covid-19 pandemic. “In 2020, funding (for Indonesia’s startups) reached around US$3.3 billion deployed to around 100 investments. In 2021, the number rose to US$5.3 billion, about 200 deals that occurred in Indonesia, or almost double up from the previous year with an increase in funding of around 60%,” said Richie.

The covid-19 pandemic has shown the double-sided coin. For the investor, it is time to measure how well the business performs by managing the startup fundamentals well, clear operations, and transparent costs. Meanwhile, for the founders, this is an opportunity to show how well the companies survive during the storm. Richie emphasized that those who do not have strong fundamentals will likely fail.

The moment does not mean the end of startups, particularly those who are the quickest to adapt to the new game. Rather than making a fuss on the issues, Richie suggests founders of startups maintain their business better by operating the business line more efficiently and retaining growth to go through this tough condition. The storm is signaling the proper time to shift the startup strategy.

Cash burn becomes irrelevant

Before the covid-19 pandemic, many startups applied the strategy of cash burn to acquire users which further made them easier to obtain investment. The strategy may work for some companies as long as they also bring strong value and maintain startup fundamentals well. Richie calls it the hypergrowth phase which describes a rapid increase in valuation without being followed by an equivalent fundamental performance.

At present, the cash burn strategy may become irrelevant since the investors will question the high valuations, which are likely to be unreasonable, while the business is underperforming. The investors, as well as Richie, prefer companies with reasonable valuations but very well-performing. These companies can gain stable earnings making them have a longer runway.

With the tough situation, the length of the period to obtain funding is longer than before, from an average of 3 months to 6 months or more. Thus, extending the runway comes to be more necessary rather than boosting valuation. “During that period, are they strong enough to wait? As investors, we remain positive at the moment. We have the funds and startups. All is set but currently, we choose the best company that has strong fundamentals and a capable founder,” uttered Richie.

The competition to obtain funding comes to be tighter as venture capital (VC) may reduce the number of investments. The kind of approach is taken by Kejora Capital. Richie gave an example if the VC has 100 million dollars, now it will invest only in 1,000 companies, from previously more than 10,000 companies.

Investor’s consideration in assessing startups

Despite the tougher competition, Richie admitted VCs are still actively investing. According to him, there are some factors considered by investors in assessing startups to be invested in. First, investors will look at the founders to find out the reasons for choosing the problem to be solved and how big the opportunity is to be able to solve it. This factor is commonly used for screening early-stage funding such as pre-seed or series A.

Second, investors will examine the product-market fit aligned with the idea and background of the company. During the tough market, the company does not have much time to conduct product trial and error as it has to extend the runway. Therefore, the product-market fit must be sharp and accelerated from the beginning. After that, measuring the performance will be the next factor to consider in granting investment.

Entering series B and forth, the investors will observe the economic unit and its potential for development. The element of risk is slightly different when assessing either from the initial stage or at the further stage.

In his conclusion, Richie is optimistic that Indonesia’s startups will survive the tough conditions by shifting to a more relevant startup strategy. Investors, not only from Indonesia but also many from abroad, are exploring opportunities because they know Indonesia is a big market. There are even overseas startups targeting Indonesia for expansion of the tempting market potential. Those who have strong fundamentals, founders with relevant backgrounds, solid teams, and clear business operations, will be successful.