Venture Capital 2024 Comparisons

Given the “tech winter” described in 1.2 Key Trends, Indonesia has not seen any deal of pre-pandemic landmark size. The closest was the USD1.1 billion public raised by GoTo in 2022, which was the third-largest IPO in Asia and the fifth largest in the world at that time. Despite this, there have been several transactions in 2023, including the USD270 million Series D funding in Kredivo by Gmo Global Payment Fund, Jungle Ventures and Mizuho Bank, among others.

According to the 2023 e-Economy South-East Asia Report jointly issued by Google, Temasek and Bain & Company, private funding for digital businesses in the South-East Asia region has declined to its lowest level in six years, which is in line with global shifts towards higher cost of capital and issues across the funding life cycle. During this “tech winter”, Indonesian start-ups have been struggling to secure funding as investors become more cautious amid global economic uncertainties. Those with enough runway also avoid fundraising due to lower valuations.

Further, Indonesia witnessed massive lay-offs in most of its big tech start-ups in 2023, including the likes of GoTo (ride hailing and e-commerce), Shopee (e-commerce), Ruangguru (edutech), Sayurbox (online groceries), as companies pursue profitability. Other companies such as JD.ID (e-commerce) and Fabelio (furniture) had to close permanently and even applied for bankruptcy.

Given the foregoing, more venture capitalists are asking for greater protections in the event of down round, including more anti-dilution rights, a higher liquidation preference multiplier, additional governance requirements and more information rights. Transaction structures remain largely similar for purely domestic players where it is mostly Indonesian limited liability company (Perseroan Terbatas, or PT)-to-PT investment in Indonesia. Where transactions involve foreign venture capitalists, an offshore holding vehicle of the Indonesia company would be set up to receive funding or foreign venture capitalists would directly invest in the PT.

Lately, investors tend to not have preferences for specific industries but rather focus on the sustainability aspect of the potential investee. Companies that are already profitable or have a clear roadmap towards profitability are more attractive for investors compared with those that are not yet profitable. However, there are indications that fintech continues to dominate the space of recent financing rounds (eg, Xendit and Kredivo). Other notable fundings include emerging tech companies (eg, eFishery and Halodoc). At the same time, more venture capitalists are looking to exit later-stage tech companies or getting partial liquidity.

The operation of venture capital funds is specifically regulated by the Indonesian Financial Services Agency (Otoritas Jasa Keuangan, or OJK). Pursuant to the relevant OJK regulation, in order to establish a fund, the relevant entity must apply to the OJK for a venture capital licence and fulfil the relevant requirements, such as minimum paid-up capital requirements. Although there are several options, most local venture capital funds are organised as a PT, with a very few firms operating as a Sharia business unit.

Further, the establishment of a venture capital fund for the pooling and management of investors’ funds must be made through a mutual investment contract entered into by the licensed venture capital company and the appointed custodian bank. This mutual investment contract serves as an underlying for:

• the licensed venture capital company binding the investors, pooling and managing the investors’ fund; and
• the appointed custodian bank performing collective custody related to the fund.

The relevant interest within the venture capital fund is divided into a number of investment unit.

In managing the fund, the licensed venture capital company has the duties of, inter alia:

• taking any decisions in good will for and on behalf of the investment unit holders;
• managing and maintaining all book-keeping and any other important records of the fund;
• providing necessary information regarding the fund’s investment risk;
• preparing the fair market value of the fund’s investees and submitting to the custodian bank every month;
• preparing the calculation formula for the fair market value of the fund’s investees in a consistent manner and preparing the net asset value of the fund; and
• implementing the AML/CFT and prevention of proliferation of weapons of mass destruction programmes.

The book-keeping and any other important records of the fund must be separated from the book-keeping and any other important records of the licensed venture capital company (at company level).

In supporting the fund, the appointed custodian bank has the duties of, inter alia:

• performing collective custody of the fund’s assets;
• calculating the net asset value of the fund every month;
• making payment of the fund’s expenses;
• managing and maintaining data regarding the investment unit holders; and
• representing the investment unit holders collectively for the placement of the fund’s investments.

Comparing with typical venture capital fund structures in other jurisdictions, a licensed venture capital company acts a general partner (GP) and investment unit holders act as limited partners (LPs) in a limited partnership structure. Further, a mutual investment contract serves as a limited partnership agreement. 

Venture capitalists generally earn management fees from a venture capital fund and have the opportunity to negotiate the carried interest and hurdle rate. As discussed in 2.1 Fund Structure, in Indonesia, a licensed venture capital company acts as the fund principal. As the fund principal, the licensed venture capital company is not required to participate in the economics of the venture capital fund that it establishes but may earn fees from the management of the fund. Licensed venture capital companies who manage venture funds are also subject to more strict requirements, including having at least one manager with an investment manager representative licence, standard operational procedures on venture fund management and teams dedicated to risk management, internal audit IT, and AML (to name a few). They will need to consider these costs in negotiating the fee with investors. Further, if they also participate in an investment, they will also benefit from any capital gains when the fund is liquidated.

Separately, the relevant OJK regulation obliges the licensed venture capital company to have minimum equity (assets minus liabilities) of IDR50 billion (approximately USD3.3 million) to establish a venture capital fund. When applying for the venture capital licence, the applicant must also have a minimum paid-up capital of IDR50 billion (approximately USD3.3 million), which means that the shareholders of such applicant must have injected such amount before starting to operate.

As discussed above, venture capital funds are regulated by the OJK. The OJK has also recently enacted new regulation, POJK 25/2023, specifically governing the operation of venture capital funds. This regulation replaced prior regulations and introduced, among other things, two venture models ‒ namely, venture capital corporation (VCC) and venture debt corporation (VDC) and more detailed requirements for venture capital funds.

The OJK may also potentially require offshore venture capitalists to set up a representative office in Indonesia in a new draft regulation for greater oversight. It remains to be seen how this new regulation will be implemented.

An abundance of Indonesian-focused funds or Indonesian-based companies are establishing venture capital funds in foreign jurisdictions, such as Singapore, where tax regulations might be more favourable than in Indonesia. Apart from being established by Indonesian companies, these venture capitalists also heavily invest in Indonesia. One of the main reasons for choosing foreign jurisdictions is the capital gain tax regulations on the sale of share that is applicable under Indonesian taxation regulations.

Domestically, based on publicly released data by the OJK, several state-owned banks have established venture capital companies within Indonesia’s jurisdiction (as per OJK regulations) such as Mandiri Capital (Bank Mandiri), BRI Ventures (BRI), and BNI Ventures (BNI). Like other corporate-backed venture capital companies, the establishment of these venture capital companies is aimed at seeking portfolios that align with their core businesses.

This would depend on the risk appetite of the investors, industry of the target company and the funding stage of the target company. Earlier rounds would typically mean less diligence compared with later rounds. Highly regulated areas (eg, energy and financial services) would typically require a more comprehensive due diligence process. We have also seen very minimal diligence for venture capitalists that have a greater risk appetite.

In a similar manner to other industries, the due diligence process is intended to reveal the realistic condition of the target company for the investors’ consideration before they decide to proceed with the transaction or not. Several key aspects that must be reviewed during the due diligence process involve:

• corporate (and constitutional) documents;
• licences;
• material contracts;
• assets;
• employments; and
• disputes.

With regard to an investment made by venture capital fund investors, the degree of the scrutiny would depend on the development of the target company. By way of example, when representing the venture capital fund investors from a legal point of view, the authors would not put the absence of owned land assets in the red flag findings list for a tech start-up company.

Commonly, the main focus of the due diligence process is on the operations of the target company and whether the operations can justify the numbers, key metrics and/or achievements presented by the target company to the investors and whether there are crucial issues (eg, tax liabilities or key disputes) that may impact pricing.

As companies become less likely to receive funding, owing to lower valuations and venture capitalists becoming more cautious amid macroeconomic uncertainties, the timeline for getting a new financing round may take longer than before the pandemic. However, this primarily depends on whether the company has sufficient runway or whether there is access to funding. The relationship between investors would depend on how the management communicate/manage the narrative (eg, is it a friendly co-investor or strategic buyout?) and whether or not the rights of existing investors are adversely affected in the new round. If the rights of existing shareholders are adversely impacted, the dynamics would be harder to manage.

Usually, each co-investor would retain a separate counsel. Most investors now also have in-house counsels managing transactions without external counsel (depending on the size/complexity of the deal). Most deals require majority approval unless there is a down round or a major liquidation event (eg, merger or trade sale).

Although the OJK primarily recognises only two types of instruments (ie, primarily equity and loan), Indonesia has also seen instruments such as Simple Agreements for Future Equity (SAFEs) and mandatory convertible notes that are usually structured through investments in offshore holding companies.

If the investment is made directly through an Indonesian company, Indonesian law applies a minimum paid-up capital of IDR10 billion (approximately USD700,000) for companies intending to have foreign shareholder(s)(either foreign individual and/or foreign entities) (“FDI Co”), regardless of the amount being invested by such foreigner. Once shares are issued to foreigner, the minimum paid-up capital must be fulfilled. Moreover, under Indonesian law, a subsidiary of a FDI Co would be considered as a foreign person/entity when it intends to acquire shares in another company. Therefore, in order to onboard foreign investors, companies must make sure that their paid-up capital meets the applicable requirement.

In light of this, the structure commonly used is the issuance of a convertible loan by a target company to be subscribed by the foreign individual, foreign entities and/or FDI Co. With this structure, there are no shares issued for the receipt of fresh funding. Therefore, early-stage target companies are not required to become a FDI Co and the minimum capital requirement is not triggered. The loan can be converted into shares once the start-up company is ready to become a FDI Co.

For shares issuance, the typical key documents are:

• term sheet, which outlines the financing structure including the exclusivity period during the due diligence process;
• shares subscription agreement, which governs the issuance of shares including the conditions that must be met before and after the disbursement of the funding, as well as warranties given by the company and the founders regarding the company; and
• shareholders’ agreement, which essentially provides the investors with minority protection in the event the investors choose to maintain the founders’ majority shareholding position.

For convertible loan structure, the typical key documents are:

• term sheet;
• convertible loan agreement, which governs the requirements for the disbursement of the funding, key aspects of the loan (such as maturity and interest) and loan conversion mechanism;
• securities documents, which are a set of documents provided by the founders to secure the company’s and founders’ performances based on the convertible loan agreement with regard to the number of shares that can be obtained by the investors in the intended convertible loan, including shares pledge agreement, call option agreement and power of attorney to sell shares and vote on the founders’ behalf; and
• pre-agreed shareholders’ agreement, which will be applicable upon the conversion of the loan into shares and the investors becoming a shareholder in the company.

More venture capital investors are asking for broad-based weighted average anti-dilution in the form of a certain type of compensation for existing investors in the event of a down round in venture capital-funded companes’ shareholders’ agreements. This was not the norm prior to the pandemic. Some even started asking for full ratchet protection. The use of road-based weighted average mechanism is more favourable, as a full ratchet mechanism is more draconian in nature. More stringent pre-emption and subscription rights have also become more prevalent.

In terms of winding up or the liquidation process, venture capital investors are usually protected with some liquidation preferences pursuant to the preferred shares held by them. These privileges include the right to receive the liquidation proceeds prior to any payments to the holder of ordinary shares. In a general liquidation process, when a liquidator is appointed to manage the company’s assets, the appointed liquidator is under obligation to apply for bankruptcy in the event that the remaining assets of the company are not sufficient to settle its liabilities, unless there is a contradicting regulation and the company’s creditors agree to settle outside the bankruptcy process.

Indonesian company law adopts a two-tier management structure comprising a board of directors (BOD) and a board of commissioners (BOC). The BOD serves the executive function and is responsible for the day-to-day management and operations of the company. The BOC supervises the BOD’s duties and the articles of association of the company may require the BOD to obtain prior approval from the BOC before taking certain legal actions on behalf of the company. Both the BOD and the BOC are accountable to the shareholders of the company for their respective roles.

Given the applicable above-mentioned corporate structure, there are several types of influence over management/the affairs of the portfolio company in Indonesia. First, the investor is directly involved in the day-to-day operation of the company through the right to appoint a member of the BOD. Second, the investor has the right to appoint a member of the BOC to supervise the management of the company consisting of the founders sitting as the BOD. Alternatively, the investors may negotiate certain veto for a list of corporate actions that can be taken by the BOD (“reserved matters”).

For equity investments, legal recourse for contractual breach is available by law and contractually there are full or partial indemnities for breaches of specifically negotiated representations and warranties or undertakings. Ideally, there should be two types of representations and warranties, covenants and undertakings:

• general terms, such as “the company has obtained and will continue to maintain all licences, permits and consents from any authority to conduct its operations” or “there is no encumbrance over the company’s assets”; and
• specific terms that should be included based on due diligence findings, such as “the company undertakes to transfer the ownership of the relevant IP from the founder’s personal name to the company itself”.

If the funding is made in the form of loan or convertible notes, investors usually have the right but not the obligation to make all outstanding investment amount and unpaid accrued interest become due and payable. There is also a default interest rate enforceable upon default.

The most commonly seen example of indemnification made by an investee to its investor is the contingent tax liability, whereby the company will pay damages to the new investor when a tax obligation that has been accrued prior to the incoming of the new investor becomes due and payable after the incoming of the new investor.

The Indonesian government has been very proactive in incentivising financing in growth companies, ranging from tax incentives, streamlined regulations for start-ups, creating start-up accelerators and even enabling less stringent requirements for growth companies that wish to seek financing through IPO.

Please refer to a tax advisor on this matter.

The OJK has prepared clear initiatives through its 2024‒28 roadmap for venture capital companies. Some initiatives may be counter-productive, as the OJK introduced more stringent requirements for equity and corporate governance, which may reduce the number of new venture capital companies ‒ even though this will, in return, increase the oversight and financial soundness of venture capital companies.

Further, the participation of several state-owned enterprises in the venture capital industry (such as the previously mentioned state-backed venture capitalists) could be seen as government initiatives to increase the level of equity financing activities, from the perspective of both the funding amount and portfolio’s post-funding life. Those venture capitalists manage the funds from companies listed among the largest asset owners in Indonesia. Moreover, state-backed venture capitalists would be able to integrate their portfolios into their ecosystems with access to the wider market. Through this collaboration, several achievements can be attained, such as:

• the public can enjoy services according to their needs;
• portfolios can grow, leading to subsequent fundraising activities until they become profitable companies; and
• investors can experience economic benefits from the investments made.

Ultimately, the government can indirectly play its role as a facilitator for boosting economic growth.

Performance-based incentives include offering management/founders stock grant that are tied to company performance. Vesting schedules, where ownership accrues over time, can also encourage key individuals to stay longer to fully benefit from their equity. Key employees may also be bound by other incentives tied to long-term employment, such as tenured bonuses and leaves.

The implementation of an Employee Stock Option Programme (ESOP) remains the most-used tool to engage employees’ long-term commitment to the company. Commonly, the ESOP is issued with a vesting period requiring the ESOP holder to stay with the company for a certain period of time to receive the shares option in full (usually four years). Moreover, the ESOP is used to incentivise the intended individuals to grow and develop the company so that their stakes resulting from the ESOP exercise will be worthy.

For those individuals owning shares in the company (usually the founders), their shares are commonly tied to the reverse vesting provision under the company’s shareholders’ agreement. The reverse vesting provision works in the opposite way to an ESOP, whereby the company has the option of repurchasing some of those shares if the intended shareholder (founder) leaves the company during a predetermined period. The duration that the intended shareholder (founder) is required to stay depends upon the company – although, as per ESOPs, the most common requirement is a period of four years.

There are also performance-based stock ownership programmes and tenure-based stock ownership programmes that are designed to encourage management and employees to stay longer in the company and continuously perform.

Please refer to a tax advisor on this matter.

As both investment rounds and employee incentive programmes can lead to dilution for existing shareholders, the terms are usually heavily negotiated as a package in a deal rather than negotiated separately. The establishment of an employee incentive programme such as ESOP is commonly done during early-stage funding or subsequent investment rounds. The participating investor in the intended round usually negotiates the pool allocation with management – ie, some percentage in the company’s shareholding is allocated to be distributed for the employee incentive programme. Based on such allocation, both the company and its investors would be able to expect the potential dilution on their ownership resulting therefrom.

Some exit-related provisions include the investors’ rights to direct an IPO or drag other shareholders to sell their shares to a qualified buyer. Commonly, the investors will stipulate a specific timeframe for the company to consider the possibility of conducting an IPO or other exit events in the shareholders’ agreement. Once this timeframe has elapsed, the company will be required to appoint a professional advisor to report on exit opportunities and strategy, taking into account the viability and market conditions.

As a precautionary measure in case an IPO is not feasible, usually the investors would wish to have a drag-along right provision in the shareholders’ agreement. The right would enable a group of shareholders to force the remaining shareholders in the company to join in the sale of the company. The establishment and implementation of such right can be based on:

• a decision by a group of investors according to the agreed-upon ownership percentage under the shareholders’ agreement; or
• whether the sale of company shares meets the agreed-upon valuation criteria under the shareholders’ agreement.

The main characteristic of this drag-along right is that all shareholders will sell their shares under the same terms and conditions without any discrimination, including the applicable transfer price.

Transfer restrictions typically include the right of first refusal (ROFR), tag-along right and a certain lock-up period for the founders. These transfer restrictions are also related to the investors’ position as minority shareholders in the company, which is very common in the tech start-up world in order to give founders more room to innovate in advancing the company within certain limitations set out by the investors.

With ROFR, the non-transferring shareholders in a company have the right – but not the obligation ‒ to purchase the transferred shares before they are offered to any potential buyers (who are non-existing shareholders). This right gives the non-transferring shareholders the opportunity to maintain their stake and prevent unwanted or undesirable parties from gaining a foothold in the company. Under the prevailing Indonesian company law, a ROFR provision is not mandatory in companies’ articles of association.

A tag-along right provides a right for the non-transferring shareholders to join the sale of shares by a transferring shareholder. Commonly, a tag-along right is granted to minority shareholders to ensure fair treatment in the event of a sale of the company. To avoid confusion, in a ROFR, the right-holder would be able to purchase the transferred shares offered by the transferring shareholder– whereas, in a tag-along right, the right-holder would be able to sell its shares alongside the transferring shareholder.

A founder lock-up is often included in shareholders’ agreements to provide stability and continuity to the start-up during critical periods of growth or transition. It is also used to align the interests of founders with other stakeholders and investors, as well as to mitigate the risk of founders exiting the company prematurely.

The Indonesian market has experienced two landmark IPOs in the tech start-up industry. Bukalapak, an e-commerce platform, is the first technology unicorn company listed in the Indonesian Stock Exchange (“the IDX”). Bukalapak raised fresh funds of IDR21.9 trillion (approximately USD1.5 billion, according to the applicable currency rate at the IPO), the highest IPO proceeds in the history of the IDX. GoTo raised IDR15.8 trillion (approximately USD1.1 billion, according to the applicable currency rate at the IPO) and was participated in by 300,000 investors, the highest number ever to take part in an IPO on the IDX. These two successful IPOs demonstrate the market’s enthusiasm for tech start-up companies’ shares, despite the less-than-joyful current stock price developments.

The IDX requires a company to meet one of the following financial criteria in order to list its shares on the Main Board of the IDX:

• profits before tax and net tangible assets for the previous financial year of at least IDR250 billion (approximately USD16.50 million);
• accumulation of profits before tax for the previous two financial years of at least IDR100 billion (approximately USD6.66 million) and share capitalisation value of at least IDR1 trillion (approximately USD66.66 million) before the listing date;
• revenue for the previous financial year of at least IDR800 billion (approximately USD53.33 million) and share capitalisation value of at least IDR8 trillion (approximately USD533.33 million) before the listing date;
• total assets for the previous financial year of at least IDR2 trillion (approximately USD133.33 million) and share capitalisation value of at least IDR4 trillion (approximately USD266.66 million) before the listing date; or
• cumulative cash flow from operating activities for the previous two financial years of at least IDR200 billion (approximately USD13.33 million) and share capitalisation value of at least IDR4 trillion (approximately USD266.66 million) before the listing date.

To assist less-developed companies in going public, the IDX provides avenues in the form of the Development Board and the Acceleration Board, which have easier-to-meet requirements (particularly regarding the company’s financial capabilities).

Given that this industry is still new to the Indonesian market, regulators have introduced several specific provisions for tech start-up IPOs. One of them is the introduction of multiple voting shares (MVS), whereby a single share can carry more than one voting right based on certain tiering thresholds. This new voting share class system evolved from the traditional voting share system, where each share typically holds one voting right or none, and has been adopted by various developed stock exchanges (eg, NYSE, the Stock Exchange of Hong Kong, and Nasdaq).

The primary motive behind implementing MVS is to strike a balance between the development of tech start-ups, which still heavily rely on the vision of their founders, and the interests of shareholders (including public shareholders). With the presence of MVS, founders can maintain their control over the company. 

There is definitely demand for secondary market trading prior to an IP) but it is unclear whether there is a tangible market need. The main concerns would be existing lock-up and how secondary sales close to an IPO may impact pricing for other non-selling shareholders.

Anti-dilution provisions would discourage founders from issuing too much equity to employees. Parties will need to structure the ESOP or any securities offering carefully to avoid triggering any public offering requirement. This is usually done by way of grant in Indonesia where no investment decision is available on the part of the employee. Companies also need to bear in mind the number of recipients, so as to avoid being considered a public company.

A few years ago, the government regulated foreign direct investment (FDI) by implementing something called the “Negative Investment List” ‒ a list consisting of businesses that are either closed or partially open for foreign investment. Since 2021, the government has reformed FDI policies by implementing something called the “Positive Investment List”. In the latest list, more businesses are 100% open for foreign investment, except investment in those classified as closed or partially closed can only be conducted by the government or can only be conducted by micro, small or medium-sized enterprises. The foreign shareholding restrictions may differ depending on the industry ‒ for instance, a local venture capital company is subject to a maximum foreign shareholding of 85%. Companies will also need to adhere to foreign investment and foreign exchange reporting requirements, which may differ depending on investment size and transaction structure.

With this FDI policy, foreign venture capitalists have more opportunity to invest in Indonesian-based tech start-up companies. However, beyond the foreign ownership provisions, a common obstacle is the requirement of IDR10 billion (approximately USD700,000) minimum capital for companies with foreign shareholders (see 3.3 Investment Structure).