The blockbuster IPO of GoTo, Indonesia’s largest tech company, in April this year has underlined how robust the fast-growing tech sector is in the country. While lawyers say they are looking ahead to more such offerings, they are also mindful of regulatory developments coming up.
Southeast Asia continues to push its reputation as a hub for tech innovation, as the startup boom continues to gain momentum. Southeast Asia’s technology startups had a combined valuation of $340 billion in 2020, according to Singapore VC firm Jungle Ventures, and the firm anticipates this will triple by 2025. Lawyers working in the vibrant region are busy guiding companies through developing regulations and evolving investor moods.
The star of Southeast Asia at present is Indonesia, and in Indonesia the star tech company is the recently merged GoTo. In April, GoTo made a strong market debut, raising $1.1 billion for its IPO in a development which will likely set the mood for future market offerings. Despite listing at a time when IPOs are being stymied by the Russian invasion of Ukraine and rising interest rates, Indonesia’s tech companies continue to show their resilience — the IPO ranked as the world’s fifth largest in 2022, according to Refinitiv data.
Indonesia, Southeast Asia’s largest economy, has seen a flurry of tech startups in the market in recent years, with capital investment in Indonesian tech companies in 2020 and 2021 reaching a historic high of $3.4 billion over two years, according to Tracxn.
Such developments are closely watched by investors, innovators, regulators, and high-profile government officials. During a video message at GoTo’s listing ceremony, Indonesian President Joko Widodo (known as Jokowi) expressed his wish that the GoTo IPO would motivate younger generations and “give new energy” to the country’s economic progress, Reuters reported.
Joel Shen, a corporate lawyer based in Jakarta and Singapore, and head of Withersworldwide’s technology practice in Asia says, the Indonesian government is closely watching the success of its homegrown tech startups, and is looking for means to support and develop this further.
“The Indonesian government is making a great effort to promote foreign investment in this sector,” Shen says, adding “The Indonesian government has also been very supportive of the growth of startups, and has gone out of their way to attract foreign investment into Indonesia.”
He points to the Omnibus law, where the Indonesian government has relaxed foreign investment rules, and is expected to introduce tax and foreign investment regulation in order to encourage investment into Indonesia’s digital sector. “To some extent, it has — although the omnibus law is now being constitutionally challenged,” Shen says.
LAWYERS BUSY
While Jokowi hopes the GoTo IPO will prove a source of new entrepreneurial energy, Shen observes that lawyers are also enjoying a lively period as a result of the recent market developments.
“Lawyers have been making hay. We’re entering the golden age of Southeast Asia tech,” he says. “We’ve seen the demand for legal services grow and grow over the last few years. Now, my bread and butter, is still the venture capital series investment and fund-raising work,” he explains, noting “My funds team are extremely busy now, helping VCs restructure their current holdings into much more tax efficient structures.”
The range of work lawyers do around this area is broad, says Shen, encompassing everything from applying for venture capital fund management licences, and the reorganisation of stock portfolios, to applications to the Monotony Authority of Singapore for tax-exempt statuses. “That’s created a whole range of work for lawyers like me,” he says.
Andre Rahadian, a partner at Dentons HPRP, agrees on the variety and scope of legal work that is keeping firms busy. “There are regulatory compliance, funding transactions, as well as operational matters. When crises and disputes become inevitable, lawyers will support and assist clients with all the necessary legal services,” Rahadian says.
GoTo has also broken ground as the first company in Indonesia that implemented the newly issued OJK Regulation on Multiple Voting Shares as well as the revised IDX Listing Regulation, says Intan Paramita, a partner in Assegaf Hamzah & Partners’ capital markets practice group.
“By having this MVS structure, GoTo’s founders are still able to exercise control on GoTo using the current voting ratio of 30:1,” Paramita says.
“However, the MVS holders will have the same voting rights as other shareholders for, among others, appointment of public accountant and independent commissioner. To aim the purpose of the MVS structure, OJK implementing lock-up period of two-year for the MVS holders and eight-month for the pre-IPO shareholders, since the effective statement.”
This also generates legal work ranging from “advocating changes to the regulation, structuring the group to fully comply with the prevailing laws and undergoing the IPO process itself.”
“In the future, we expect more legal work generated from the corporate actions of MVS implementing companies,” Paramita says.
DEFYING GRAVITY
These developments keeping lawyers in demand show no sign of slowing down anytime soon, Shen notes. “The Southeast Asia digital economy, irrespective of how the regional markets and the global capital markets perform, seems to defy gravity. Indonesia’s digital economy was at 8 billion dollars in 2016, and leapt to 44 billion dollars in 2020, and this is expected to triple again by 2025,” he says.
Shen calls GoTo’s IPO a “symbolic win for Southeast Asia, because it defies the sceptics and brings us to the resolution of the first funding cycle of Southeast Asian tech.” The second funding cycle, Shen notes, is about to begin.
However, despite GoTo’s strong IPO debut, Rahadian says market interest in tech companies is affected by the way they perform after listing. “It’s a mixed signal because, from the IPO value, tech companies dominate. But, from the price of shares, they tend to weaken after the IPO, and this means IPO investors have lost money in, for example, GoTo and Bukalapak,” he says.
But while market watchers may carefully weigh market developments, for young entrepreneurial Indonesian tech minds, the ongoing success story of the Indonesian tech startup paints an enticing image.
“Indonesia is young and vibrant — 60 percent of Indonesians are Millennials and Gen Z. Company founders have inspired a whole generation of Indonesians, as the poster boys and girls of Indonesian startups,” Shen says, noting that the startup stories playing out the headlines have inspired others to pursue a similar pathway.
“It’s a very technology-savvy and connected population, and they’re inspired to walk in the footsteps of their very successful predecessors,” he adds.
While there are ample models of success, it is a range of driving factors that have contributed to the creation and growth of the trend of tech startups in Indonesia.
One key contributor is the rise of the consumer middle class. The development and emergence of these startups has come at a time when Indonesia’s rapidly emerging middle class is shifting the country’s composition — 163 million solvent households are expected to emerge by 2030 in Southeast Asian countries, according to McKinsey.
While in part, the startup boom in Indonesia is driven by entrepreneurs addressing the various services and needs of this new population segment.
“The rise of the consumer middle class is driving the growth of technology in companies. Indonesia here is expected to become the third largest contributor to the middle class by 2030,” says Shen, noting the recent advances in technology “provide to the market what the growing consumer class aspires to — education, health-care, basic financial services, and products that traditional sectors have struggled to provide in the past.”
Rahadian has observed the way growing use of technology has fostered demand for services, noting that mobile phone penetration “has surged in the last 15 years.”
“In 2021, it was reported that smartphone users in Indonesia reached 170.4 million or more than 61 percent of the population. That’s almost double the number of users in 2019,” he says, noting that the mass of users demand “flexible and fast services for almost everything.”
“It’s logical that with the increase in the number of mobile devices, tech startups, for example, ride-hailing, peer-to-peer financing, and marketplace, have also trended upwards. Now we can even see tech companies in the healthcare and education sectors.”
— Andre Rahadian, Dentons HPRP
Such services are provided by tech companies, “so it’s logical that with the increase in the number of mobile devices, tech startups, for example ride-hailing, peer-to-peer financing, and marketplace, have also trended upwards. Now we can even see tech companies in the healthcare and education sectors,” Rahadian says.
Startups have also begun to address the challenges faced by the residents as a result of geographical distance. Indonesia’s 273 million population lives across 6,000 islands, and the spread has created disconnected pricing and services, but savvy tech startups have stepped in to offer more cohesive services and products, using social media to reach their consumers.
REGULATORY DEVELOPMENTS
While consumers may be winning, where there is innovation, there also comes regulation. Looking ahead to potential regulatory developments and the gaps or areas that officials may look to address, Rahadian says “definitely compliance, that is why the government will continue using a sandbox approach to support the growth while adding responsibility from the tech players.”
“To induce IPOs in Indonesia, the Financial Services Authority (Otoritas Jasa Keuangan or OJK) has introduced shares with multiple votes, so founders of tech start-ups can have control while fundraising and hold fewer shares,” Rahadian adds.
“The newly issued Regulation on Multiple Voting Shares can only be implemented by innovative companies that fulfil the somewhat difficult criteria listed. If OJK intends to encourage more companies, the relevant regulation may need to be adjusted.”
— Intan Paramita, Assegaf Hamzah & Partners
Paramita notes that the newly issued OJK Regulation on Multiple Voting Shares “can only be implemented by innovative companies that fulfil the somewhat difficult criteria listed.”
“Therefore, if OJK intends to encourage more innovative companies to undergo an IPO, the relevant regulation may need to be adjusted,” Paramita says.
Shen meanwhile says regulators are putting in place “more stringent regulations around these rapidly evolving technologies. Regulators too are keeping a close eye on Web3 technologies, cryptocurrencies, payment technologies and cross-border remittances.”
Regardless, the trend of tech startups in Indonesia remains robust.
“The trend of tech startups will continue to rise,” Rahadian says, noting these operations fill the gap between “what is provided by the brick-and-mortar industry and the needs of customers.”
Rahadian says improvements in data and internet services and infrastructure that support tech penetration throughout the country will play an important role in supporting further development of tech startups in the future.
But, with this developing situation, “I believe the government will also have to prepare relevant regulations,” Rahadian says.
While there may be regulatory developments on the horizon, tech startups are here to stay. Nevertheless, Shen says the market is evolving, with recent developments including a much more diverse bench of venture capital investors, and investors more carefully weighing how they invest.
“There’s certainly more caution now in how investors deploy capital. There’s a lot less patience for companies that are persistently loss making, quite a bit of due diligence done before investors write cheques.”
— Joel Shen, Withers
“There’s certainly more caution now in how investors deploy capital. There’s a lot less patience for companies that are persistently loss-making, quite a bit of due diligence done before investors write cheques,” he says.
