Indonesia: The next Silicon Valley?

JAKARTA, Indonesia — Shortly after Yahoo reportedly lost a $100-million bid to buy the mobile platform Foursquare last year, the company paid just a fraction of that price for an almost identical product — made in Indonesia.

Yahoo is just one of many foreign companies pouring venture capital into web and digital development start-ups in Indonesia, where consumers have taken quickly to smartphones and tablet computers, and where digital design is far cheaper than in Silicon Valley and increasingly more affordable than in China and India.

Like Foursquare, Koprol allows users to "check-in" to locations using a smartphone, sharing real-time photos and information about where they are and what they think of the venue, whether it is a restaurant, a mall or a concert.

While Yahoo has not disclosed how much it paid for Koprol, it is rumored to have shelled out $2.5 million. Since the purchase, Koprol’s user base has jumped 20-fold, from 75,000 users to 1.5 million, and Yahoo stands to make big bucks from businesses that have access to Koprol users’ personal information and their whereabouts.

Rama Mamuaya, an industry analyst in Indonesia who runs the DailySocial.net blog that features the latest news in IT and web start-ups, said an increasing number of investors, recognizing the market potential here, are spending money on Indonesian tech start-ups.

He said there have been upward of 500 to 600 start-ups like Koprol since 2008.

“I’ve seen investors from Hong Kong and China, Singapore, the United States and Japan fund ventures with between $200,000 and $1 million each,” he said.

Like Yahoo, a number of companies have acquired start-ups in full, including e-commerce platform disdus.com, bought by Chicago-based Groupon, and Tokopedia, a Craigslist-style platform bought by East Ventures, a Singaporean and Japanese company.

Batara Eto, co-founder of East Ventures, said that his company saw enormous potential in Indonesia, where the middle class is growing and per capita income has risen to $3,000 a year.

"Indonesia has the second-highest number of Facebook users after the United States and the fourth-highest number of Twitter users. And yet, we haven't seen any IPO from the consumer web and mobile services. We think the market is there, the players are starting to make the move, and we don't want to be left out," he said.

The market certainly is there. In this developing Southeast Asian nation of 240 million, more than 100 million have a mobile phone. Smartphone data subscriptions are expected to reach 16.3 million by 2014, according to Indonesia’s International Data Corporation.

The reason for this boom in telematics — the term given to the convergence of telecommunications and IT — is that Indonesia was so slow in developing landline and broadband internet services that consumers simply leapfrogged straight to inexpensive smartphones that give them internet and email access, among other data services, and a telephone in one device.

As tablets like the iPad enter the market, the demand for digital content is rising fast. Telecommunications companies are investing in data services, while local cigarette companies, like Djarum and Sampoerna, have also bankrolled start-ups.

The tech industry here is well aware of the growing interest from investors and start-ups are emerging all over the country, particularly in the capital, Jakarta. SuitMedia is one such fledgling company. It started in 2009 and now has 17 staff members working for companies like Samsung. SuitMedia is now designing a new app for the iPad that they are hoping will be the next Angry Birds.

"We can't tell you the idea, but let's just say it's targeted at kids and is educational," said Fajrin Rasyid, a co-founder of SuitMedia.

"You can make a lot of money with a good app. Apple gives you 30 percent of what the app makes, and with millions of iPad and iPhone users, that can add up to a lot," he said.

But for Indonesia to become the next Silicon Valley and compete with China and India, it will need to foster the same ecosystem the southern San Francisco Bay area developed in the ’50s: quality universities, an abundance of venture capital and an appetite for risk and innovation.

There are other hurdles as well.

Many start-ups have been hindered by a lack of options locally for online payment. Very few Indonesians have credit cards, particularly younger Indonesians who are more likely to purchase goods online, and PayPal services are only offered in U.S. dollars. A much-anticipated service similar to PayPal, created by doku.com, launched in mid-May. 

The biggest risk is that the influx of venture capital could create a bubble like in 1999-2000, when speculative investment in anything ending with a dot-com caused a crash.

"Venture capitalists and angel investors are trying to keep valuations down. But from the start-ups' side, it is quite the opposite,” Mamuaya said. “Crazy valuation is everywhere, with start-ups valuing themselves for millions of U.S. dollars without any proper business plan available."

But Eto from East Ventures is not worried. There is enough of a market in Indonesia to justify the investment, he said, which remains far smaller than in other parts of the world.

"If you take Japan as an example, the GDP is 10 times that of Indonesia's. The largest e-commerce site in Japan, Rakuten, is a public company with a market valuation of $12 billion. Based on that, the largest e-commerce site in Indonesia has the potential to become a $1 billion company."

Mamuaya from DailySocial.net said Indonesia's advantage is its spirit for innovation.

"The very definition of Silicon Valley is innovation. Indonesia has all the ingredients to be the next Silicon Valley, although it will take time," Mamuaya said.