Indonesia Venture Capital Outlook Google-A.T. Kearney Study September 2017

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Indonesia Venture Capital Outlook 2017 Google-A.T. Kearney Study September 2017

Objectives 1. 2. 3. 4. Highlight key global and regional trends in VC investments Review the VC investor and startup landscape and growth in Indonesia Showcase the VC investor confidence and outlook for Indonesia Give recommendations to further strengthen the startup ecosystem in Indonesia 2

Context This study provides a deep dive into the Indonesian startup investment environment by analyzing investment flows and directly engaging the investors. While on the right trajectory, future investment in startups is highly dependent on investor confidence in the market and can fluctuate drastically, as seen in other markets like India. While the startup landscape in Indonesia is still young in comparison to other Asian markets such as China and India, it s nevertheless growing rapidly. This growth is primarily driven by the e-commerce category. Given the recent entry of Alibaba, the imminent entry of Amazon, and potential additional regulatory changes, it s important to understand the investor outlook and identify areas of improvement to further stimulate the investment environment. Several foreign venture capitalists (VCs) and local investors (many in partnership with foreign VCs) have invested in the market over the past five years. They remain extremely bullish on Indonesia s outlook, driven by the growing economy and a growing population of digitally savvy youth. 3

Google and A.T. Kearney s joint study on Indonesia s venture capital (VC) outlook Methodology More than 25 VC interviews Data inputs from VCs A.T. Kearney research Google research Thirdparty research 4

Executive summary Global investment values have continued to soar over the past five years, although deal flow has stabilized and shifted to later stages (Series C+) as VCs focus more on the path to profitability versus topline growth. Asia has seen the fastest growth on the back of China and Southeast Asia (SEA) investments. The 2017 YTD investments in SEA have reached $10.1B with Singapore capturing the most deals, but other countries led by Indonesia are quickly catching up. The Indonesian startup ecosystem is young but growing rapidly. Most deals are still in the early stages, but they generate only a small portion of the value. We also see a slight decline in the number of early stage deals from 2015 to 2016. This highlights a shortage of attractive startups where there is a clearer path to profitability. As a result, late-stage investments are generating most of the value, driven to a large extent by private equities. E-commerce and transport categories dominate deals and investment values, and the largest funding rounds have been led by companies such as GoJek, Traveloka, and Tokopedia. Both local and foreign VCs are optimistic about the Indonesian market. The positive outlook is driven by the fact that Indonesia is still under-tracking regional peers on investment value versus GDP and Internet users, which indicates high room for growth. VCs are also confident in the strong macroeconomic fundamentals and favorable demographics in Indonesia. Most VCs are looking to diversify from e-commerce because of potential market consolidation, major new entrants, high investments, and the long lead time for profitability. As a result, fintech and healthcare are emerging as top investment categories in Indonesia. VCs have highlighted four key focus areas for accelerating the growth of the startup ecosystem in Indonesia: talent development, fiscal incentives, funding/exit options, and facilitation. Government has to play a strong role, as evidenced by mature markets. 5

Content Global and regional investment trends Indonesia investor outlook and priorities Indonesia investment overview 6

The U.S. remains the international startup hub with more than 50% of the deals and investment value globally Global deals trend 2012-2016 $ 21,688 673 1,306 12,733 63,924 2,010 $104B $7B $7B $225B $524B $5B $ Number of deals Investment value ($B) Note: Deal value represents only reported deal value. Sources: Crunchbase; A.T. Kearney analysis 7

But, Asia is catching up quickly Global deals trend Total deals (in thousands) 14.2 18.7 23.9 24.2 21.3 Total investment value (&B) 73 107 212 209 274 4% 8% 18% 4% 10% 20% 4% 4% 4% 11% 15% 16% 20% 22% 24% CAGR (2012-2016) 1% 13% 11% 2% 15% 12% 1% 2% 3% 21% Others 46% Others Asia Europe North America 30% 19% 5% 11% 31% 10% 33% 15% CAGR (2012-2016) Asia Europe North America 0% 74% 50% 26% 69% 65% 65% 60% 56% 75% 72% 66% 57% 56% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Note: Percentages may not resolve due to rounding. Sources: Crunchbase; A.T. Kearney analysis 8

Deal flow seems to have stabilized in the past three years though it has shifted to later stages while investment values continue to grow Global deals trend Total deals (in 000s) Total investment value (&B) 23.9 24.2 5 274 22 Seed Series A 1.5 0.7 14.2 5.0 3.7 3.4 1.8 0.9 18.7 7.2 3.8 5.0 1.1 21.3 8.0 8.6 6.8 2.2 2.4 2.1 1.2 1.1 5.2 5.1 5.0 7.4 6.9 6.4 2 7 7 73 29 28 11 4 10 107 29 54 4 13 212 209 5 20 17 24 60 76 118 84 28 71 148 Series B Series C or later Others Non-VC Others category makes up ~50% of total values 1 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Note: Numbers may not resolve due to rounding. 1 Others includes debt financing, crowdfunding, and private equity. Sources: Crunchbase; A.T. Kearney analysis 9

As deals shift to later stages, new investment sources such as PE firms and debt financing are rapidly gaining share Global non-vc investments Non-VC total investment value ($B) Large start-ups are turning to debt financing as an alternate source of funds 148 Debt financing 54 118 22 64 84 17 23 31 61 Post IPO debt and equity PE, angel, and convertible note Others 1 Mar 2016: Raised a five-year, $3B syndicated loan with a set of eight lead arrangers Jun 2016: $1.15B leveraged loan led by Morgan Stanley Jan 2015: $1.6B convertible debt issue 28 15 4 7 17 12 3 8 2012 14 23 26 18 28 28 2013 2014 2015 2016 Mar 2016: Raised $1B in convertible debt led by TPG Capital and Dragoneer Investment Group Jun 2016: $2.5B syndicated loan from China Merchant Bank as part of a $7.3B combined equity and debt financing round Note: Numbers may not resolve due to rounding. 1 Others includes non-equity, grant, secondary market, and crowdfunding. Sources: Crunchbase; A.T. Kearney analysis 10

Deals stagnated in Asia in 2016, but investment values have soared in China and SEA Asia deals trend CAGR (2012-2016) SEA India China Others 193 38% 47% 13% 2% 1,197 262 278 524 1,906 237 463 385 821 Total deals 3,539 3,367 484 482 2,724 351 1,215 1,230 658 589 503 450 1,126 1,337 1,205 Average investment size in 2016 SEA: $14M India: $7M China: $128M 1.6 15.7 0.3 9.8 2.9 1.1 5.3 5.4 3.0 5.9 Total investment value ($B) 1.7 45.4 9.3 25.4 8.9 2.9 64.6 12.3 33.4 89.9 6.8 8.1 450 15.9 17.6 CAGR (2012-2016) SEA India China Others 119% 64% 81% 55% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Notes: Numbers may not resolve due to rounding. SEA is Southeast Asia. Sources: Crunchbase; A.T. Kearney analysis 11

SEA in particular is a high-growth market with increasing investment values, reaching $10.1B in 2017 YTD Number of deals and values, Southeast Asia ($B) Value ($B) Number of deals 10.1 6.8 0.3 1.6 1.7 2.9 133 237 351 484 482 252 2012 2013 2014 2015 2016 2017 (Jan-Aug) Average deal value ($M) Sources: Crunchbase; A.T. Kearney analysis 12

Within SEA, Singapore remains the main hub, but other countries are quickly catching up, with Indonesia leading the way SEA deals trend Total deals Total investment value ($B) 133 237 351 484 482 3% 4% 8% 8% 10% 5% 8% 8% 6% 10% 4% 9% 7% 11% 11% 15% 5% 7% 8% 7% 7% 7% 18% 16% 20% 14% Others Philippines Thailand Indonesia Singapore 68% 63% 54% 51% 42% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Notes: SEA is Southeast Asia. Percentages may not resolve due to rounding. Sources: Crunchbase; A.T. Kearney analysis 13

Content Global and regional investment trends Indonesia investment overview Indonesia investment overview 14

While still young, investments in Indonesia are soaring, reaching nearly $3B in 2017 YTD 2X more than the previous year Numbers of deals and values, Indonesia ($B) From 2012-2017 (YTD), 244 companies completed 381 deals Value ($B) Number of deals 3.0 0.0 0.1 0.2 0.7 1.4 107 123 18 26 54 53 2012 2013 2014 2015 2016 2017 (Jan-Aug) Average deal value ($M) Sources: Crunchbase; A.T. Kearney analysis 15

Most of the investments are still in the seed or early stages, but late-stage investments are generating most of the value Indonesia deals trend Decline in seed and Series A shows a shortage of early-stage targets and a VC shift of focus to investing in companies with a clear path to profitability 4 18 12 2012 3 3 26 14 5 2 Total deals 54 31 11 4 107 63 26 7 13 123 10 53 2013 2014 2015 2016 2017 (YTD) 62 24 8 19 4 23 16 8 Seed Series A Series B Series C or later Others <0.1 0.1 Total investment value ($B) 0.1 0.2 0.7 0.5 1.4 0.4 0.9 3.0 2012 2013 2014 2015 2016 2017 (YTD) 1.3 1.2 1 Others includes debt financing, crowdfunding, and private equity. Sources: Crunchbase; A.T. Kearney analysis 16

In Indonesia, VCs largely fall into two broad categories VC funds in Indonesia Category Capital ($) % Value 1 Value proposition Local investors 54% 28% Some VCs are backed by conglomerates or state-owned enterprises and have the clear advantage of a strong local presence and knowledge of the Indonesian market Primarily participate in smaller, early-stage deals Foreign investors 46% 72% Typically originating from more developed startup markets (Japan, U.S.), these investors bring global expertise and networks Primarily participate in larger, late-stage rounds 1 Calculated based on sample of subset of VCs using number of deals involved and deal value participation (where reported) between 2012 and 2016. Sources: Crunchbase, Techinasia, company websites; A.T. Kearney analysis 17

E-commerce and transport categories heavily dominated deals and value (where reported) Indonesia deals by category (2012 Aug 2017) Breakdown of number of deals Breakdown of % of total investment value E-commerce 42% E-commerce 58% Transport 4% Transport 38% Finance 8% Finance 8% 1% Classified/ directory 10% Classified/ directory 10% 1% Payment 5% Payment 1% Others 31% Others 2% Grand total 100% Grand total 100% Note: Percentages may not resolve due to rounding. Sources: Bloomberg; TechCrunch, Techniasia.com, Crunchbase; A.T. Kearney analysis 18

The largest funding rounds are led by e-commerce and related transport companies Total funds raised (to date) ~$1.8B ~$1.4B ~$500M On-demand logistics service that started with Ojek (motorcycle taxi) transportation services $550M raised in one round from international investors, including KKR, Warburg Pincus, and Farallon Capital In May 2017, raised $1.2B from Tencent Holdings Online C2C e-commerce marketplace/platform $147M investment round with undisclosed investors; previous $100M investment round led by Softbank and Sequoia Capital Raised $1.1B with Alibaba-led investment Online travel aggregator and flights/hotels booking services $150M investment from JD, East Ventures, Hillhouse, and Sequoia $350M from Expedia, an American online travel company Sources: Press articles; A.T. Kearney analysis 19

In 2017, Chinese investors became heavily involved in Indonesia s startup environment, accounting for ~95% of its investment value Indonesia investment value ($B) 1.43 3.0 6% Others ~$1.2B 98% 94% Chinese - investors involvement ~$1.1B 2% 2016 2017 (Jan-Aug) ~$500M Note: The total investment cannot be attributed to Chinese investors, as there were also non-chinese investors that participated in the funding rounds involving Chinese investors Sources: Crunchbase; A.T. Kearney analysis 20

Content Global and regional investment trends Indonesia investor outlook and priorities Indonesia investor outlook and priorities 21

We interviewed more than 25 local and foreign investors about their outlook and priorities Respondents By category By fund size By role 13% 21% 21% 42% 42% 58% 38% 29% 38% Foreign Local $50-100M <$50M Partner/director Founder/CEO >$500M $100-500M Investment officer/manager Note: Percentages may not resolve due to rounding. Source: Google - A.T. Kearney Indonesia VC Outlook Survey (2017) 22

Investors are generally optimistic about the outlook of the Indonesian market, even compared with other Asian markets What is your investment outlook for Indonesia? (% of responses) How does Indonesia s outlook compare to other Asian markets? (% of responses) Note: Percentages may not resolve due to rounding. Source: Google - A.T. Kearney Indonesia VC Outlook Survey (2017) 23

One key reason for the positivity is that Indonesia has a strong macro-economic outlook and favorable demographics Indonesia consumer trends 2016 vs. 2021 GDP per capita (USD) Upper and middle class Banked population Smartphone penetration Online shopper base Highereducated base 2021 5.7K 128M 150M 148M 42M 23M 2016 3.6K 63M 88M 85M 11M 13M Sources: BPS, Bappenas, EIU, Nielsen, World Bank, UN, Statista; A.T. Kearney analysis 24

Another reason is that Indonesia is still under-tracking peers in VC investment, which indicates high room for growth Country comparison (2016) VC investments as share of GDP (%) VC investments per internet user ($) 1 SEA consists of: Singapore, Malaysia, Indonesia, Vietnam, Philippines, Thailand, Cambodia, Laos, Myanmar, and Brunei. Sources: Crunchbase, World Bank, Internet World Stats, Statista; A.T. Kearney analysis 25

Fintech is emerging as the top investment category in Indonesia, with most VCs looking to diversify from e-commerce Top categories in Indonesia Top two categories to invest in ( % of responses) Top two categories to decrease investment ( % of responses) Local investors Local investors Fintech Healthcare E-commerce Social media Foreign investors Foreign investors Fintech Healthcare E-commerce Social media Source: Google - A.T. Kearney Indonesia VC Outlook Survey (2017) 26

The opportunity in fintech is spurring a growth of startups in this category Indonesia fintech market outlook High potential opportunity in the market...... results in large number of fintech players (total ~150 players) Inonesia financing outlook ($B, 2016) Financing gap Payment 40-50% GCI, e2pay, OVO, IPAYMU, DOKU, t cash, GO PAY is ~$70B while P2P lending is still under $0.01B Lending 10-20% investree, uangteman, MEKAR, cicil, modalku, amartha Financing need Financing capacity Aggregator 10-20% bareksa, PremiKita, cermati, TEMAN USAHA, cekaja, KreditGoGO Number of SME (M unit, 2016) Personal finance/planning 5-10% ONLINE PAJAK, Dompet Sehat, akunting mudah, Finansialku ~80% of SMEs are unbankable Crowdfunding 5-10% KAPITALBOOST, gandengtangan, WeCare, WUJUDKAN Others 1 5-10% privyid, Ruma Total SME Banksable SME 1 Includes digital transaction support and other types of fintech (for example, asset management) Note: SME is small and medium-size enterprise. Sources: Indonesia Fintech Report 2016 by Association of Fintech Indonesia; A.T. Kearney analysis 27

The fintech category has attracted many investors, but regulation remains the key challenge Indonesia fintech investment and regulatory trend Investment in Indonesia fintech in 2016 reached more than $30M (disclosed)...... but regulation remains the key challenge 2016 fintech funding Series Capital ($) Investors EasyPay Modalku Moka KinerjaPay Cermati JojoNomic Redivo Ethis Undisclosed Series A Series A IPO Series A Venture Seed Seed >15M 5-10M 1-5M 1-5M 1-5M 1-5M 1-5M <1M Foreigner Local + foreigner Local + foreigner Public (IPO) Local + foreigner Local + foreigner Local + foreigner Foreigner Payment gateway E-money Know your client P2P/online lending Digital signature Data security Financial product sales Cloud service Others Area for clearer or increased regulation (% of fintech players) 3% 26% 49% 46% 61% 58% 57% 57% 54% Sources: Indonesia Fintech Report 2016 by Association of Fintech Indonesia; A.T. Kearney analysis 28

Most VCs are diversifying away from e-commerce by potential consolidation, long lead time, cash outflow, and major new entrants Key reasons for diversifying from e-commerce Potential consolidation of e-commerce Long lead time and cash outflow until profitability Potential major new entrants E-commerce market is already overcrowded, too many generalist e-commerce players for the size of the Indonesian market. Naturally, a maximum of two to three players will become the clear winners in the e-commerce market. Successful e-commerce players will require lots of investment and many years to establish a distribution network. As an investor, we want to invest in the startups that had a clear head start and more established infrastructure. Established e-commerce players are already invested in by foreign investors, so their valuation is already high. Everyone is in wait and see mode with news that Amazon will come to Indonesia. Selected quotes Source: Google - A.T. Kearney Indonesia VC Outlook Survey (2017) 29

Investors have highlighted four key areas for improvement: talent, fiscal incentives, funding/exit options, and facilitation Key asks from investors $ Talent development Fiscal incentives Develop more-qualified founders and technical engineers Streamline work permit process for foreign talent Lower capital gains tax to attract more investment into the tech sector Introduce tax shield for returning expats (or repatriation of skilled Indonesians) Funding and exit options Create an exchange to buy and sell privately held tech shares Create an Indonesian sovereign fund to actively invest in the tech sector Startup facilitation Simplify regulatory processes relevant to startups, (e.g. company incorporation, patent certification) Build startup parks with a conducive infrastructure and synergistic ecosystem Selected quotes Source: Google - A.T. Kearney Indonesia VC Outlook Survey (2017) 30

Currently, Indonesia faces challenges across these four areas Current status in Indonesia Talent development Fiscal incentives $ Funding and exit options Startup facilitation Indonesia is not producing enough talent. Every year, Indonesia produces only 278 engineers per 1M population, far behind Malaysia (1,834), Thailand (1,248), Vietnam (1,094), and India (1,159) No specific government programs or initiatives are in place to attract foreign talent or to retain local talent from going overseas Currently, there are no special fiscal incentives for investments in startups or in startup operations Government plans to develop two initiatives: 1) a special tax treatment for e-commerce players with less than IDR 4.8B in revenue and 2) a tax incentives scheme for VCs and angel investors Foreign companies are allowed to own 100% of e-commerce companies with investment value of more than IDR 100B No startup has yet gone to IPO, and there are no clear exits with high returns for any VC yet By end of year, government is planning to develop various funding schemes, such as: Grants for business incubators Reallocating SOEs CSR toward e-commerce No clear facilitation mechanisms for startups exist currently, even though relevant associations have now been set up and plans are in place Several associations have been established, such as Indonesia ecommerce Association (idea) and Indonesian Fintech Association Government is planning to develop a national incubator program for startups, especially in early stages Note: SOE is state-owned enterprise. CSR is corporate social responsibility. Sources: News articles, Ministry of Research, Technology and Higher Education, World Bank, UNESCO, Indonesia E-Commerce Roadmap 2017-2019; A.T. Kearney analysis 31

Government can play an important role to further stimulate the startup industry Recommendations Talent development 1. Work with educational institutions to develop engineers and entrepreneurs 2. Attract overseas entrepreneurs and talent French Tech Visa, a four-year visa for startup founders/employees/ investors French Tech Ticket, a one-year benefits package $ Fiscal incentives 3. Provide tax incentives for investments in startups and for startup operations 4. Set up government funds/government-led VCs aimed at startups Establish startup Intellectual Property Protection (SIPP) Various tax exemptions for investments by VC and incubator funds in startups Funding and exit options 5. Establish multi-tier system in the public market for high-risk, high-tech startups 6. Simplify legal/administration requirements to start and operate startups Set up national VC fund Set up SME Board/ChiNext/New Third Board, special board/market for high-tech and fast-growing enterprises Startup facilitation 7. Develop startup ecosystem to facilitate start-up growth (for example, mentoring) Start-Up Chile, a public startup accelerator that helps startups at all stages of growth by providing funding and mentorship Source: A.T. Kearney analysis 32

Government should develop programs to build and attract overseas talent to close the human capital gap Talent development Develop engineers and entrepreneurs Attract overseas talent and entrepreneurs Technology for Enterprise Capability Upgrading (T-Up): A program to boost innovation by seconding scientists/ engineers to SMEs Society for the Acceleration of Technology Transfer: A program to foster technology transfer Society for the Acceleration of Technology Transfer: A program to foster technology transfer French Tech Visa: A four-year visa for startup founders/employees/investors French Tech Ticket: A one-year benefits package (including grants, training) Note: SME is small and medium-sized enterprise. Sources: A STAR, Singapore MoM, CNRS; A.T. Kearney analysis 33

Preferential tax treatment can encourage startup investments Fiscal incentives Provide tax incentives Startups Intellectual Property Protection (SIPP) scheme provides up to 80% tax rebate on patent applications VCs investments are exempted from income tax, capital gains tax, and investments above fair market value (FMV) INVEST Grant Scheme reimburses angel investors for 20% of the investment value and compensates for taxes paid on capital gains (25% of the profit) Sources: start-upindia, Germany Federal Ministry for Economic Affairs and Energy; A.T. Kearney analysis 34

Active government participation in funding and exit options can also accelerate growth of the startup ecosystem Funding and exit options Provide state-based funding Establish multi-tier system in the public market National VC fund was set up by the State Development and Investment Corporation (SDIC) ChiNext, a NASDAQ-style board to attract high-tech and fast-growing companies SME Board, a special sub-board to cater to SMEs Local government-led fund was set up, i.e. Shanghai Science and Technology Investment Corporation New Third Board Market, an OTC market that serves as a platform for financing high-tech, high-growth enterprises Note: OTC is over the counter. Sources: China SDIC, Shenzen Stock Exchange; A.T. Kearney analysis 35

Administrative aid and knowledge-sharing platforms facilitates creation of a growing startup community Startup facilitation Simplify legal and administrative requirements Develop start-up ecosystem Simplify legal processes: Lower costs on legal support and fast-tracking patent exam Relaxed norms of public procurement for startups Introduce an online platform to allow company incorporation within as little as two days. Launched Startup India Action Plan that includes 13 startup centers and 18 technology business incubators. StartUp Chile, a public startup accelerator which helps startups at all stages of growth by providing funding and mentorship. Sources: start-upindia, InvestChile, Start-up Chile. Desk Research, World Bank Doing Business Report; A.T. Kearney analysis 36

Authors Alessandro Gazzini Partner, A.T. Kearney alessandro.gazzini@atkearney.com Henky Prihatna Country Industry Head, Google henky@google.com Shekhar Chauhan Principal, A.T. Kearney shekhar.chauhan@atkearney.com Mifza Muzayan Sales Operations & Strategy Lead, Google mifza@google.com Emmanuel J. Kuesar Manager, A.T. Kearney emmanuel.kuesar@atkearney.com Astri Suhaimi Senior Industry Analyst, Google astrisuhaimi@google.com 37

Glossary Term Definition Amvesindo Banked population Debt/PE Foreign investors Higher-educated base Local investors Smartphone penetration SME Upper and middle class VC Asosiasi Modal Ventura Untuk Start-up Indonesia Population that has an account at a financial/banking institution Deals that are driven by non-vc sources such as private equity, debt financing, IPO; VCs may be involved in the deals, but are not the lead investors Investors that are based and/or have majority of investments outside of Indonesia Population that has at least a university degree Investors that are based and/or have majority of investments in Indonesia Smartphone-using population Small and medium-sized enterprise Socio-economic group based on the number of households earning more than $10,000 per annum Venture capital 38

At IDR 40T (or $3B), investment in the start-up sector is one of the top drivers of investment growth in the Indonesian economy Investments in Indonesia by sector (H1 2017, Rp T) Note: VC start-up investment value is Jan-Aug 2017, while other industries are Jan-Jun 2017 Sources: Crunchbase, BKPM, SKK Migas, web search; A.T. Kearney analysis 39