How Should Indonesian Startups Scale Towards Series A?

I’ve been working on what many will call the “startup industry” — which in this context basically means tech startups — since 2012, since starting to work at Wooz.in while at the same time building Ohdio.FM. While I’ve gone through the past 5 years with not many regrets, I can only guess that my own incapability, mainly, has not made either of the startups I work on into soaring successes. But this is not an introspective rant.

Various iterations of incubators, accelerators and seed VCs have come and gone through the years, also VCs for various other stages of investment. It took me trying to get connections to VCs and meeting them over months and years, to finally understand the whole story of investment stages, what VCs look for etc, and to arrive at an amateur’s conclusion of the current startup scene.

There’s a resurgence of seed/alpha programs as of late, mainly supported by networks or VCs from overseas, but as of last year there were basically only 2–3 major startup incubation programs left. Which is fine — managing incubators is tough, especially since many clueless startups think that by entering an incubator, they are on their way to certain success (newsflash: no). Then there’s a whole lot of nothing, until the Series A upwards boys come along and put money in the hands of the smart and capable.

From early upon entering the startup scene, I’ve heard many times that Indonesian startups have difficulty scaling up. So far, my experience shows that this remains the issue. Many factors contribute towards a negative effect on scaling up, so I would assume this is an industry-wide issue, and not just an issue with the founders (but yes, I admit that at least for me, this is an issue).

So there’s a disconnect between seed/incubator level startups, and moneybags Series A (which doesn’t sound as sexy once you get it, because in most cases, continued investment is contingent on performing well on data-based KPIs). Programs like Gerakan 1000 Startup, Telkomsel NextDev and others, to name a few, help people to get into the correct mindset and build from idea to a business execution (and yes, the emphasis is on business execution, not the programming). Afterwards, it’s all up to you, whether you have money or not and whether or not the business is ready to make money, until you can start talking to the Series A VCs.

Let’s get one thing clear: VCs are in it for the money. They generate value from increased shareholder value by investing in high-risk ventures, hoping at some point to sell their ownership stake in a startup at a multiplied value, or even enjoy IPO prices. This is why seed VCs sometimes look more at the founder rather than the business, because at the end of the day, it’s a calculated bet.

Series A VCs generally would only invest in a startup when:

• there’s a significant addressable market, with the numbers to back it up
• a fully-developed business cycle: the process from customer acquisition to sales needs to be at a point where there’s a clear customer acquisition cost, and it’s just the matter of “adding fuel to the engine”
• Preferably, a market with other players and/or similar businesses in other markets, which provides further validation to the business model
• Current trends in startups. This is not just following “buzzword of the month” or anything, but it has to do with follow-on funding and potential exits. The more people are interested in a certain industry, the higher the possibility for it.

Of course there are exceptions to the rule, but this is my conclusion after meetings and discussions with several VCs in an attempt to fundraise.

Now how do you get from a proven technology, to a repeatable business cycle, to scaling up towards being Series A-worthy?

This seems to be the problem with many startups here in Indonesia. There may not be enough mentors or networks to help the thousands of startups in the country, and there are not many VCs willing to spend on pre-Series A, which is more or less like betting on a seed funding, but with more money (hence more risk of no return on investment). So many startups that manage to survive early years, have reverted to emphasis on revenue rather than growth. Which is fine. But those companies won’t scale as fast.

And meanwhile, some VCs have found a way to utilise VC funds to invest into real estate — through co-working space networks. Good for VCs, but less money for other companies that need growth.

So how do we solve this? Let me know your ideas in the comments.