What makes digital start-ups in Indonesia continue to be in the 'burning money' stage?

Many start-ups are still dependent on funding even though funding continues to decline in Q2 2022.

Even startups that have already achieved unicorn and decacorn status, like GoTo and Grab, are still bound to operate at a loss. They are in the “burn money” stage wherein the overhead costs for production, marketing, logistics, etc. are larger than their profits. The solution lies in the funding, the Institute for Development of Economics and Finance (INDEF) said.

Based on CB Insights data, in the first quarter of 2022, the value of start-up funding shrank 20.3% compared to the previous quarter to US$141.6b (Rp2.12q). This figure shrunk again in the second quarter of 2022 to US$108.5b (Rp1.62q) or down 23% compared to the previous quarter.

“Investors have started to be selective in their funding. They can't splurge anymore like last year. Investors are starting to be more observant in looking at the roadmap for start-ups in making a profit," said Nailul Huda, Head of Center of Innovation and Digital Economy, Institute for Development of Economics and Finance (INDEF) to Asian Business Review.

At the same time, the cost of funding for digital start-ups is now increasing in value because the Federal Reserve Board’s (FED) benchmark interest rate ranging between 1.5% to 1.75% rose 75 basis points. By the end of the year, FED's interest rate hike is estimated to be in the range of 3.4%, or up from the 1.9% projection in March 2022. "So, it will also increase the cost of distributing capital," said Huda.

Because of this, investors today prefer startups that can provide quick profits. "If not, investors will prefer to put their money in banks," he added.

Funding must continue

But start-ups seem to have no other choice when it comes to consumers in Indonesia. “Indonesian consumers being price-oriented triggers startups to compete at the best prices. As a result, startups must provide incentives so they can give discounts and continuous promotions to consumers. But of course, this results in overhead costs, therefore funding must continue," Huda said. 

With serial funding from series A to series G, startups running their businesses tell their growth story to investors or venture capitalists. They share their growth in the number of users, expanding demand, to increasing technological innovations so they can attract investors, said Huda.

But if we talk about trends, Huda believes that funding for digital startups will continue. Based on the 2022 Startup Ranking data, with 2,379 startups, Indonesia is still the highest in ASEAN and fifth in the world, below the US, India, the UK, and Canada. This indicates that Indonesia is still a very potential market. Especially when talking about fintech where online shopping activities continue to increase and transactions via digital payments in Indonesia are also getting higher.

Citing the results of PWC research in 2019, Huda said that digital banking platforms, e-banking, and fintech collaboration are amongst the sectors that are in demand by investors. There are 46% of national banks interested in collaborating with fintech.

Our job is to disrupt

One fintech company, Finantier, shares the same belief. To the Asian Business Review, the co-founder & COO of Finantier, Edwin Kusuma said that fintech plays an important role in all sectors. "Our role is so essential, that what is currently happening in digital start-ups in Indonesia has no significant effect on us," said Edwin.

“We are really here as an innovation to encourage financial inclusion in Indonesia. Namely, the availability of access to various financial institutions, products and services in accordance with the needs and capabilities of the community as also expected and encouraged by the government," he added.

So Edwin stated that their job was to disrupt. "Preparing a mature digital economy ecosystem," he underlined.

Investors not only look at start-ups in terms of profits but also in terms of how start-ups can provide solutions for the community. Digital technology-based innovations that start-ups continue to develop are still good enough reasons for investors to remain interested in burning their money.