Software or Hardware: The Existential Question Facing Indonesian Start-Ups

In 2010, a small company began operating a small call centre in Jakarta employing just 20 motorcycle drivers. These bikes would prance around the vast Indonesian capital, waiting for the call centre to dial in, telling them that a caller was looking for the nearest Ojek (motorcycle taxi) in the area. The humble beginnings of Gojek is often an obscure fact. Today’s local digital tech titans, Gojek, Traveloka, and Tokopedia, are fine samples of Indonesia’s (and indeed Southeast Asia’s) unprecedented quantum leap in its start-up ecosystem. However this hot streak is also signalling to another trend, the increasing market concentration in Indonesia’s tech scene. With the crowded room, what lies ahead for the gutsy venture capitalists and budding entrepreneurs?

Venture funds are watching these developments very closely and anticipating what the future holds. With the recent merger of Gojek and Tokopedia to form the GoTo group, a ground-breaking development unfolds. GoTo has officially become Indonesia’s super app encompassing ride-hailing, last-mile delivery, online marketplace, payments system and much more. Its regional competitors are watching too with Grab’s CEO, Mr. Tan Hooi Ling, declaring that his company is “like Uber, DoorDash, and Ant all wrapped into one.” It is evident that a tech convergence is appearing in the region with clearer market leaders offering similar services in everything from food to finance.

According to Dealogic, an estimated US$26 billion has been pumped into the ASEAN region by VCs, tech conglomerates such as Google and Southbank, and Wall Street private equity leviathans such as KKR. This strong appetite had chosen the winners in the digital market race with clear victors showing and solidifying. GoTo is already eyeing a potential IPO in a Jakarta and New York dual listing with an estimated $40 billion valuation. Tokopedia is already operating its marketplace at such a scale that it is difficult for potential entrants to compete in the e-commerce market. The same goes for ride-hailing, so much so that even foreign tech titans Uber could not compete with local ride-hailing giants that it closed its Southeast Asia operations in 2018.

There is no doubt that Mobile-First business models along with other digital market services have been the apple of VCs’ eyes, especially in Indonesia. However, with more market concentration, budding entrepreneurs and investors will have to look elsewhere for opportunities. After all, there is a finite number of Mobile-First platform ideas that can be executed. That limit seems to be closing, further Mobile-First products may simply seek to provide minor product differentiations to the incumbent. Even with the differentiations, there is still no guarantee that new players can compete in scale with the existing market leaders. What now? This next leap remains ambivalent. To look to the future, we can (rather counter-intuitively) look to history.

When we look at the excitement of the times, we find VC portfolios to be largely filled with the most exciting Mobile-First applications. It’s easy to forget that the origins of venture funding lies in the realm of traditional hard tech. Prior to silicon valley and the internet bubble of the 1990s and early 2000s, VCs invest in potential breakthrough technologies. These technologies went beyond just software. After all, venture opportunities exist beyond Mobile-First models, the challenge is always to look out for what the next technological breakthrough is.

The future of venture capital allocation may be in the new and exciting potentials for hard tech. With the rise of more pressing real needs, hard tech may lead these solutions. For example, the global commitments to cut carbon emissions have brought out the demand for innovative solutions. Electric vehicles (EVs) and its constituent ecosystems is a field that may potentially grow in importance, even in Indonesia.

Moreover, as Indonesian labour becomes more expensive as growth persists, the age-old tale of automation that we see in the developed world may be inevitable. The prevalence in automation of rote work will likely push for a greater demand for hard tech ideas that require fresh rounds of funding to materialize.

At first glance, it is understandable why hard-tech has less appeal these days. They are on average far more capex heavy than their software counterparts and their products may not even have a market fit just yet or in some cases, have no commercial applications yet. Moreover, with the recent SPACs boom and the skyrocketing number of IPOs that has taken many unicorn Mobile-First firms public, investors are awestricken with the fancy valuations of these firms. They become eager to fund the next GoTo or the next Didi Chuxing. However, lest we forget that these companies too were once looking for gutsy investors to fund their seed and series A rounds. In their times, these founders were asking for investors’ vote of confidence to take a leap of faith to fund a new frontier technology, ideas nobody was sure would work out at that point. That same risk-taking and faith in moving the needle forward in technology, should not be an attitude denied to the promising hard-tech start-ups of today. A crowded market in software and Mobile-First applications might just be the signal to incentivize a new bolder risk appetite in hard-tech start-ups in their early stages.

However, sceptics may argue that Indonesia and its surrounding neighbours still have vast opportunities in the periphery. After all, cities outside of Jakarta exist, and they are teeming with problems and opportunities. The biggest challenge for Gojek’s expansion beyond Jakarta and tier 2 cities, is the lack of public infrastructure in other parts of the country. A good 45% of the Indonesian population still live outside urban areas and that percentage is greater for those living outside urban megacities such as Jakarta. This vast population with a lack of rudimentary services still presents a wealth of opportunities for start-ups to capitalize on. The move to hard-tech may be slower than we might expect, instead it is possible to see a more aggressive push by existing software giants towards setting new enterprises to cater to the needs in not only tier-2 cities but to the rural needs as well.

Moreover, Indonesia’s market is still largely informal. According to the International Labour Organization (ILO), an estimated 70 million Indonesians are still considered informal workers, so much so that their productivity is not included in GDP calculations. With this arises the issue that many sectors still remain fragmented with no easy one-stop solution to meet the demand that is already present. The issue of informal blue collar work comes to mind. The formalization of blue collar labourers still remains a persistent challenge that requires the creative solutions that Mobile-First companies offer in other aspects. Integrating the still large numbers of informal and fragmented sectors into creative one-stop solutions may just be the new frontier for the Indonesian start-up ecosystem. The proliferation of Mobile-First may not be slowing after all in this perspective, rather it is spreading beyond the confines of the largely cosmopolitan and middle-class market segment.

The new frontiers of tech is as big of a philosophical question as the Aristotelian question of ethics. Indonesia’s tech scene is still in many respects a young one. However, it is growing and changing rapidly. The march towards hard tech is likely inevitable, however so will the expansion to meet more rudimentary needs beyond Indonesia’s urban landscape. Which force will subdue the other is a question for future analysts to declare. After all, everything is always clearer in hindsight.