‘Indonesia’s digital economy in 2022 looks promising’: David Fernando Audy

As the end of year is coming, Indonesia ought to gear up for the approaching year. Despite going through two years of crisis due to the COVID-19 pandemic, the looming year sheds a light of hope, as the pandemic is somewhat a blessing in disguise — it acts as a catalyst that accelerates Indonesia’s economic growth and digital adaptation.

The future of Indonesia’s tech scene looks promising, more unicorns are making their debuts and soon, we might start talking about decacorns. Additionally, as we recover from the pandemic, a handful of local startups are also opening themselves to be listed for an Initial Public Offering (IPO).

In a webinar on 19th October 2021, entitled Market Outlook 2022: Indonesia Reopening (A New Hope) held by BTPN, Operating Partner of East Ventures, David Fernando Audy shared insightful information about the challenges of IPO and the near future of Indonesia’s startup scene. Here is the edited excerpt from the session.

What are the major challenges for startup companies to get an IPO in Indonesia?

One of the major challenges that these startups face is Indonesia's company’s law and shareholding regulations that do not accommodate Multiple Voting Shares (MVS), which is inherent in tech startup legal ownership structure. Essentially, it is startups’ nature to continuously fundraise — thus, founders must maintain their voting power in the structure even though their financial benefit is diluted. Nevertheless, regulators are currently working to adjust the capital market regulations for listed public companies to support tech companies by accommodating MVS.

Since our country has yet to accommodate MVS, this has also become another challenge. This is one of the major reasons that many tech startups were incorporated off-shore by utilizing a Special Purpose Vehicle (SPV). In order to get an IPO, therefore, a company must be re-structured locally and verified by a local auditor. Of course, these processes will take time, especially in the auditing process.

In addition to these, the depth of Indonesia's capital market, meaning the trading volume and liquidity, also presents a challenge for mega tech companies who want to go for a sizable IPO. Stock price tends to fluctuate wildly due to sizable selling or buying pressure. Currently, Indonesia is less than 1% of the MSCI World Index, which means the market depth is relatively shallow. One of the main reasons is the lack of tech sector weighting in the Indonesia Stock Exchange (IDX).

However, this will soon change as Indonesia’s regulators and capital market leadership have been working hard collaboratively to bring the big tech corporations to be listed on IDX, so that Indonesia’s capital market will become larger and deeper. The larger Indonesia’s tech weighting in IDX, the more likely that it will be sufficiently represented in MSCI, and hence the more foreign capital will flow to Indonesia as well.

It is also important to remember that technology is all about human capital. Being the fourth most populous country in the world, Indonesia is populated by 270 million people with an internet penetration rate of 73.7%. This makes up over 195 million internet users in Indonesia, and half of the entirety of Southeast Asia’s internet users. This accelerates the growth of tech companies in Indonesia, and Indonesia is best positioned to capitalize it. This is why Indonesia is the home of unicorns in Southeast Asia.

What is the ideal size for a company to go for an IPO?

In terms of company size, the recent ideal number should be a minimum of US$ 1 billion market cap post-money valuation, with a minimum IPO size of US$ 200 million. This, I think, is the minimum value needed to attract the market's attention. Of course, a higher size should and would do better.

What has been happening recently in Indonesia’s capital market, the bigger the company who went public, the higher the demand for the IPO would be. This happens because the size requires fund managers from various institutions and mutual funds to buy the stock, due to the requirement to have an allocation, valuation comes after. Mutual funds are tied to index performance benchmarking. When said company’s market float is sizable and it represents a relatively big index, fund managers inevitably have to include it in their mutual funds products, else they are subject to tracking errors.

Aside from that, the bigger the company size, the bigger the ‘hype’ in the street. This will create excitement amongst public investors, thus making them rush to buy the IPO. This is what we like to call ‘FOMO’, or ‘Fear of Missing Out’.

Bankers and underwriters surely like big IPO better. When you do an IPO above a certain size, you put the same amount of time and effort into doing a big job or doing a small job. So, it’s better to do a big job, the difference is just the numbers. You don’t get paid by the hours, you get paid by the value you create.

We heard about The Fed’s plan about tapering, will investors’ interest in the tech sector die down?

When we talk about tapering, there are two phases of tapering. First, the pre-tapering process that we are currently in. Second, the tapering process, which The Federal Reserve or The Fed would undergo in mid-November this year.

In the pre-tapering process, yields increase as the market starts to set their price in tapering expectation. The valuation of tech companies that have negative cash flow and bottom-line will be severely affected. This is due to the widely used Discounted Cash Flow (DCF) valuation model being very sensitive to the increase of yields. 

Right now, share prices for tech names are dropping due to sector rotation from tech back to the non-tech names. The booming in commodity prices has helped the economy, and it further creates trickle-down effects on consumers, bank loan qualities are far improving as well. Moreover, trade activities are also back alive and roaring as COVID-19 cases are dropping vastly. These factors accelerate the rotation of tech-based stocks towards cyclical stocks or better known as “old economy”. Just like the recent JP Morgan research title from early November 2021, “Old Economy Strikes Back”.

Once the tapering process starts in mid-November 2021 until June 2022, we must pay close attention to how the commodity price pressure and inflation are. Perhaps, inflation can still see an increase after November due to the cost-push factor from commodity prices and supply crunch. However, these pressures will gradually decrease as supply crunch is tackled and demand is normalized. During that period, yields are expected to decrease, sectors might rotate back to tech, and share price of tech companies can recover back to the upward trend again.

Finally, when we talk about the tech sector, we also have to be more specific as to which tech companies and which stocks. Profitable tech companies with stronger cash flow will have a less sensitive market valuation towards interest rate or yield. 

VC’s usually invest earlier than public market investors, say, before the rise of certain sectors. Which sectors do you think will attract the most attention among VC’s in 2022?

E-commerce would definitely still be one of the biggest plays in tech. Dare I say, the rise of e-commerce has just begun. We believe e-commerce is like a train locomotive for tech. When the sector is booming, the other sectors — in this case, train carriages — are being pulled by the locomotive to also accelerate and become booming. Other derivative businesses of e-commerce will also be benefited, such as:

First, e-Commerce enablers, or companies that assist other platforms, stores, or SMEs, to onboard an online e-commerce platform or marketplace. These companies provide solutions such as online onboarding, ordering, as well as omnichannel. For instance, the US has Shopify, and us Indonesians have SIRCLO — which is often referred to as the Shopify of Indonesia.

Second, e-Commerce logistics. Online shops need delivery services to buyers, hence last-mile logistics businesses are flourishing like SiCepat, JNE, and TIKI are booming. In addition to that, there are also first and mid-mile logistics companies that are thriving, such as Waresix, that also provides on-demand warehousing and marketplace platforms between trucking and businesses that need their services.

Third, Fintech and Digital banks, including Buy Now Pay Later (BNPL), P2P lending, microcredit programs (Kredit Usaha Rakyat or KUR) distribution via non-bank and financial institutions through the use of technology. In our ecosystem, we have the first B2B payment unicorn Xendit and Traveloka who recently launched its new financial solution Traveloka PayLater. Additionally, Komunal has also introduced the concept of “neo-rural bank” to upgrade and equip smaller banks with advanced capabilities through its product DepositoBPR, while KoinWorks offers a financial superapp with various products. 

And lastly, Healthtech. This sector flew sky high during the COVID-19 pandemic as high-touch activities were strictly limited and prohibited. Healthtech investment deals value increased 4x since 2017, the sentiment has never been better. What’s more, there are five sub-sectors in the healthtech category. First, research and development. Second, wellness and disease prevention. Third, screening and diagnosis. Fourth, care delivery — including telemedicine, assisted living, and online pharmacies. Last but not least, operational digitization. This last sub-sector is very interesting as we have not seen a lot of investments happening in this area, even though it holds a huge potential. Nusantics and Nalagenetics are two of our very own stories in the healthtech sector, and we believe that there will be more healthtech players in the sector, while existing champions will grow bigger. 

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We believe once Indonesia has overcome the current obstacles — including tackling down the COVID-19 pandemic as it eases — the digital technology sector can soar. Indonesia’s digital economy in 2022 looks promising and it opens more opportunities for both founders and investors who are building their business and investing for the future.