February 8, 2012

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eCommerce Ventures in Indonesia – A Sucker’s bet

by William Henley

Looking back at 2011, I am amazed by all the activities and excitement which were observed in Indonesia’s start-ups & technology sector. Several high profile deals were observed, involving the acquisition of several local start-ups by global interests, namely the acquisition of DisDus.com by Groupon.com and the acquisition of DealKeren.com by LivingSocial.com.

Apart from the above mentioned high-profile deals, there were others which garnered a very high degree of attention due to the parties involved, namely the investment made by GDP Ventures, an investment vehicle owned by one of Indonesia’s wealthiest family, in KasKus.us, Indonesia’s poster boy for technology start-ups, and the acquisition of Detik.com by Para Group, which already has extensive interests in local, financial, retail, resources & media sectors.

Despite the high profile nature, information regarding the value & valuations of those deals were not made public, which resulted in a fair bit of ambiguity on the issue of how Indonesian technology startups should be analyzed & valued.

e27-ecommerce companies in IndonesiaOne thing is for certain, those high profile deals has resulted in a flurry of investments in Indonesia’s technology sector. In many instances, new investments were made in eCommerce, as well as in several other consumer related sectors.

Investment in eCommerce startups were made by large business groups, as well as by smaller investors keen on betting in the revival (or emergence) of Indonesia’s large consumer base.

With regards to this particular issue, I could be one of the few people in Indonesia who is publicly skeptical about this for the following reasons:

1. With the absence of a ubiquitous payment infrastructure, it is almost impossible for Indonesia to have a proper & robust eCommerce ecosystem. There are many local startups trying to fill the need for eCommerce payment facilitation. However, I believe that in Indonesia, this role will fall on regulators and any attempt to circumvent the regulator’s role will not gain enough traction,
2. Being the largest archipelago, Indonesia with its 17,000 islands faces insurmountable logistic issues when it comes to eCommerce. There are logistic companies with the capability to servicing the whole expanse of the country, the question is whether it can be conducted in a cost effective way so that eCommerce can flourish,
3. Most investors look at investment in Indonesia as a simple arithmetic calculation along this line: This is a nation of 250 million people. If a product can be consumed by two percent of the population, it will have a customer base larger than the population of Singapore.

Needless to say, the oversimplification in point #3 above tends to prove fatal for investors old and new, trying to crack the Indonesian market. All successful business owners in Indonesia will attest to the hard work and investment required to build a network of infrastructure to support their businesses.

Anyone trying to operate in Indonesia based on assumption presented in point #3 above will be shocked at the costs involved in getting access to the Indonesian local market.

As far as eCommerce is concerned, it is true that Indonesia is indeed a very lucrative market to crack, but one also needs to understand that the cost of getting traction in Indonesia can be prohibitively high. And if you combine that with the absence of a ubiquitous payment infrastructure and logistical challenges in servicing the market, these will support my argument that eCommerce ventures in Indonesia are indeed a sucker’s bet for now… For now…

About the Author

This guest post was written by William Henley, co-founder of Tapestrix, a customizable, white-label social media platform. William is a senior investment banker and now runs his own investment fund which actively invests in technology and other sectors.

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  • http://rafer.tumblr.com rafer

    William, I am still new to the region, but I rarely hear people make the mistake of believing #3 above. I hear a lot about the 80M people on the island of Java as the actual Indonesian market, which still makes it the largest market in SE Asia.

  • http://motochan.com/ James Chan

    In the absence of an ubiquitous payment solution, which I’m sure several Indonesian startups are trying to work on as we speak, I still think eCommerce is viable as a venture category, and that the services won’t be what we envision such services to be. I’m confident emerging markets will find their own ways of getting around any limitations. 

    That’s entrepreneurship for you.

  • Anonymous

    Another requirement for e-commerce brands is a fairly big marketing budget , just like most consumer products . One can’t get away with just social media presence and word of mouth and search engine optimisation. Businesses have to get real and fund ” marketing’ sufficiently too . 

  • http://www.bizlosophy.com William Henley

    It’s kind of funny hearing that “80 million people on the Island of Java is the “actual” Indonesian market”… Some products are consumed by the whole population across the archipelago, some products have regional segmentations.. I just don’t see how eCommerce can be profitable operatingwise (does not include getting acquired by other investors) under the current set-up.. 

  • http://www.bizlosophy.com William Henley

    And then they will have to think about revenues and profitability… :-)

  • http://www.bizlosophy.com William Henley

    James, I am all for entrepreneurship… Honestly, I would love to be proven wrong… Let’s keep a close watch on this space and see how it pans out… By the way, do you have any “live” portfolio in Indonesia at the moment?

  • http://rafer.tumblr.com rafer

    You were referring to the cost-prohibitive nature of operating across such a vast archipelago. In that specific context, I am repeatedly told that it’s best to see Java as the actual initial market, often by people that have made money this way. Ecommerce businesses can be profitable across a region with 80M people and a GDP of (educated guess) USD350M, especially an upwardly mobile one. They can’t be big, but they can handily be in the black.

  • http://www.bizlosophy.com/ William Henley

    Can you share whom has made money this way? 

    Admittedly, I am skeptical, and may have appropriately earned the nickname “Dr. Doom” given by my local counterparts. 

    I am excited looking at all the recent development and watching closely. The Samwer brothers are also in the process of launching an eCommerce venture targeting Indonesian female shoppers soon… 

    I would love to see how and if this can be done properly & profitably in Indonesia, in order to set a working model in the industry. 

  • http://rafer.tumblr.com rafer

    Unfortunately, the people who’ve done so are the sharing types. They did then sell afterwards, which may invalidate them as data points for you (or allowed them to lie to me, certainly). The Samwer brothers are very interesting operators. I’d also keep your eye on multiply.com.

  • http://www.bizlosophy.com/ William Henley

    :-) … I have written extensively about Indonesian local tech-landscape, with emphasis on the financial / investment banking angles. Unfortunately my pieces are in Bahasa Indonesia (Haven’t tried Google Translate on my articles). 

    I’d love the opportunity to get connected via LinkedIn.. Maybe I could provide some local insights right from the trenches.. 

    This is my LinkedIn page:
    http://www.LinkedIn.com/in/WilliamHenley

  • http://rafer.tumblr.com rafer

    My email is mylastname at mylastname dot net. I’m happy to get acquainted. I reserve Linkedin for people I’ve met in person, as old-skool as that is. On the upside, I should be in Jakarta in April. Hopefully, our meat can meet then.

  • http://rafer.tumblr.com rafer

    My email is mylastname at mylastname dot net. I’m happy to get acquainted. I reserve Linkedin for people I’ve met in person, as old-skool as that is. On the upside, I should be in Jakarta in April. Hopefully, our meat can meet then.

  • Anonymous

    Yes , you’re right William about revenue and profitability . Most ecommerce ventures think it’ s just enough to build a large community and get first funding . This is true of India too , where I usually live.  Hybrid ” online ” and offline businesses seem to be more successful in th e medium to long term. 

  • Anonymous

    Yes, I agree with your point 1 and 2. Without a good payment infrastructure, it makes transactions difficult for the customers.

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    [...] platform for communities, corporates and brand owners. William has also wrote bluntly about the Indonesian e-commerce ecosystem and his opinions on the Indonesian tech startup [...]

  • http://twitter.com/iwanr2010 iwan rachmat

    Being also from a skeptical view I tend to agree with your points. Yet to have a fair assessment – we need to also mention that with all those market potential and proper infrastrucutre development & supportive regulatory environment, the Indonesia E-commerce should taking up.

  • http://sangatpedas.com/willis-wee-william-henley-dr-doom-the-verdict/ Willis Wee vs. William Henley aka Dr. Doom – The Verdict – Sangat Pedas

    [...] time finding the constructive part in your criticism. Second, stop calling me and my colleagues SUCKERS! Do research first and maybe ask me or other e-commerce entrepreneurs why we’re betting so [...]

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