Wednesday, May 19, 2021

Support PinterPolitik

Available for Everyone, funded by readers

PinterPolitik :

Indonesia Is Enjoying a Start-up Bubble; That Bubble Could Burst Anytime Soon.

With policy support from the government, startup companies have proliferated. But there is a danger lurking over this rapid growth.

By Harishmawan Heryadi


In recent times, young Indonesians have found a new aspiration apart from becoming a content creator, and that is to become a founder of or at least to work at a startup. Unfortunately, lately, the glitz of technology companies seems to have faded. One of the reasons is the possibility of a startup bubble. 

People became aware of this situation when they became widely aware of the accounts of startup operators such as @taktekbum, @ecommurz, or @ridehaluing. Indeed, these accounts revealed a lot about the dark side of the start-up’s operations. 

However, these accounts also provide new insights to the economic calculations of startup companies. One revelation is the possibility that this remarkable growth is actually a bubble that could burst any time. 

What makes it complicated is that so much hope has been pinned on the digital economy. So many parties have given their support to these companies. Supporters include the government, which often takes pride in being associated with an endeavor in which young people are involved. 

What is the probability that this startup bubble will burst? Is it appropriate for the government to provide all-out support to companies in that bubble? 

Companies that make you look

Who wouldn’t be tempted to visit startups? Over the last few years they have caught the attention of many people. 

In terms of service, these companies are known for the “disruption” they provide. Many things have become a lot easier due to the innovations they offer. 

Want to go shopping? No need to leave the house, just order online. Want to travel? Relax, just use your cellphone and book a motorcycle taxi, or online taxi that will take you to your destination. Want a vacation? No need to queue to buy tickets. Just touch the screen and everything is done. 

This “disruption” gave many conventional types of businesses a run for their money. It motivated many people, especially young people, to launch their own start-up companies. 

These start-up companies offered various innovations that made them a distinct business area. Many activities that were once considered trivial have been given a touch of the digital economy. That said, these businesses tend to prioritize innovation and ease of service. This is different from conventional businesses that primarily pursue profit. 

Thus start-up companies became pervasive like mushrooms after a thunderstorm. According to Startup Rankings, Indonesia is among the top five countries hosting world startups with an estimated total of 2,233 companies.

In terms of business valuation, several Indonesian companies are included in the ranks of unicorns. There are five Indonesian companies classified as unicorns, even one of them is categorized as a decacorn.

The activity of this typical young company has prompted the government to look into startups. In recent times there have been many policies supporting this kind of company. 

The Ministry of Communication and Information, for example, has the National Movement of 1000 Digital Startups and The Next Indonesian Unicorns (NEXTICORN). Besides, there are also Indonesian Innovation Startups (SSI) from the Ministry of Research and Technology / National Research and Innovation Agency (BRIN). 

Not only that, some high-ranking startup companies were even invited to be directly involved in the government. Of course, everyone knows that Education and Culture Minister Nadiem Makarim is the former CEO of a leading ride-hailing company. Earlier, there were also Belva Devara and Andi Taufan Garuda Putra who had served as special staff to the president.

The situation seems to indicate that the government has high hopes for startup companies. Of course, everyone still remembers that President Joko Widodo (Jokowi) had asked his opponent, Prabowo Subianto, during the presidential election debate in 2019, about what infrastructure to build for the unicorns. This reflects how much interest he has in start-up companies.

Never Profit

Of course, it’s nice to have a lot of young people who want to try their luck in this kind of business. There is a view that this would be helpful to the national economy. 

Digital services in trade, tourism and food distribution could encourage public consumption, which is important to economic growth. Online taxi and motorcycle taxi services provide new job opportunities that help reduce unemployment. 

When it comes to employment, they certainly can absorb a large part of the workforce. Moreover, many companies offer attractive salaries. As a result, of course, more young people gain high purchasing power. 

Given all these benefits, is it wise for the government to go all-out in prioritizing these companies?

Let’s look at start-ups as a business model. If you look closely, most of these companies rely on injection of funds from investors. Well, this is where potential problems can arise.

So far, the injection of investor funds may be the main source of funds from startups. In several reports, it is often stated that these companies have not yet reported a profit. This is different from conventional businesses, which are relatively more profitable. 

Start-up operators themselves are familiar with the “burn money” phenomenon along with intense promotions. Moreover their services are also well known for their low prices. 

On paper, this is of course again beneficial in terms of public consumption. People are certainly be tempted by various cheap products while being rewarded with promos.

However, if they keep burning money with promos, when will they be able to make a profit? Isn’t that one of the main requirements for a long-lasting business? Isn’t that more productive for the country in the long run? 

Bubbles?

Why are start-up companies so highly praised that they are even given glowing labels like unicorn and decacorn?

After some thought these bring to mind the notion of an economic bubble, or simply bubble. In particular, this has recently started to become a topic of discussion along with the emergence of the Covid-19 pandemic. Some suspect that this pandemic will trigger the bubbles to burst.

Just look at how some start-ups had to go out of business in 2020. A name as big as Airy, which is engaged in the lodging business, for example, is unable to stem the economic burden during the pandemic. 

Take a look at the interesting survey results from the Katadata Insight Center. When it surveyed 139 digital startup executives in May-June 2020, only 33 percent of startups felt that they were in good condition, and 42.5 percent admitted that they were in bad condition.

That finding brings up the question: why can they get a business valuation as decacorn while they are not in a good business situation?

One example of an overblown valuation is the case of WeWork. The company, according to Forbes, even has a fake valuation. This then led to the failure of the company’s IPO. 

Overvaluation was rampant in the tech-bubble or dot-com bubble in 2000 in the United States (US). At that time, technology companies had a valuation of 165 percent higher than the general market. 

Unfortunately, the market values of these companies were higher than their real values. The high price did not last long and then fell. As a result, many companies went out of business shortly after taking the floor on the stock exchange. 

Given that history and current conditions, the potential for a startup bubble to burst in Indonesia is quite real. This was expressed by John Colley, Professor of Practice, Associate Dean at Warwick Business School, the University of Warwick through his writing on The Conversation.

He said that it was only a matter of time before the bubble would burst. Colley described the decline in Apple and Facebook stocks as an indication that the established technology companies had failed forecasts. This is of course a threat to companies that have not yet taken to the floor of the stock exchange. 

Referring to Markus K.Brunnermeier and Martin Oehmke in their writing for the National Bureau of Economic Research (NBER), this tech bubble does not have a big impact like the housing bubble in 2008. Even so, it does not mean it can be underestimated, especially in Indonesia. 

If that bubble bursts, there will be an economic ecosystem that is not startup-friendly. On paper, maybe this will only affect the company’s employees and investors.

However, this condition can have an impact on the economy in the long run. As mentioned above, startups in Indonesia rely heavily on investors, especially foreign investors. 

When the bubble bursts, the investors may become investment-shy. Such a situation would adversely affect the economy.

Don’t underestimate the employee element. With salaries soaring, there is the potential for them to have high credit. If the bubble bursts and they become unemployed, there is the potential for bad credit when they are not earning for a long time. 

Of course, this does not include the informal sector and MSMEs related to startups. If a ride-hailing companygoes out of business, what will happen to online motorcycle taxis and taxi drivers?

Considering these possibilities, ideally, the government should not make startups the main backbone of the economy. One thing to watch out for is the startup company’s IPO plan, which should be well be regulated.

If the current valuation is not per the real value, events such as those experienced in the tech bubble era could arise. Therein lies the economic danger. This is where the government and all economic stakeholders must be careful.


Editor’s note: The views expressed in this article are the author’s and do not necessarily reflect the views of PinterPolitik.


Stay Connected

195,611FansLike
265,000FollowersFollow
12,878FollowersFollow

Recent Stories