For years, state-owned enterprises (SOEs) around the world have undeservedly been branded as inefficient, with a variety of loss-making business units hampering core revenue drivers. But as the SOE landscape in China has shown, this has not been the case in recent years – not only have profits and revenues increased across the board, but China’s largest SOEs have become key dealmakers in the global acquisitions space.
In Southeast Asia, the outsized influence of SOEs has had varying effects on the aggregate productivity of the region’s 10 economies.
A 2019 paper found that while Singapore and Thailand’s SOEs are largely profitable and contribute to state revenues, SOEs in Indonesia, Myanmar and Malaysia serve more nationalistic, non-commercial agendas and play prominent roles in key industries like finance, energy and telecommunications.
With the influx of both private local wealth and foreign VC into ASEAN’s startup communities, the region’s SOEs have taken notice of this growth sector. In Singapore and Thailand, corporate venture capital (CVC) arms of SOEs like Singtel, Siam Cement Group and Singapore Press Holdings have become major, active players in early and growth-stage funding rounds of
local startups.
Bolstered by their market-leading positions and easy access to capital, state-owned CVCs like Singapore’s Singtel Innov8 (founded in 2011 with
82 investees) and SPH Ventures (founded in 2014 with 40 investees) have served as alternative exit routes
in the startup landscape.
The success of both Innov8 and SPH Ventures when not only establishing early relationships with potential acquisition targets, but also leveraging portfolio companies to improve internal efficiencies for their parent companies (Singapore Telecommunications and Singapore Press Holdings) has encouraged SOE peers in other countries like Thailand, the Philippines, Malaysia and Indonesia to follow suit.
In 2019, Indonesia’s Ministry of State-Owned Enterprises directed the country’s three SOE CVCs – MDI Ventures (Telkom Indonesia), BRI Ventures (Bank Rakyat Indonesia) and Mandiri Capital (Bank Mandiri) – to invest in and leverage the capabilities of startups that can help Indonesian SOEs undergo digital transformation.
An alternative exit route
MDI Ventures, which has invested in almost 50 companies since 2015, sees this push as a key part of normalising acquisitions by SOEs as an exit route for Indonesia’s startups. Currently, Indonesia’s exit landscape is being dominated by acquisitions by unicorns like Grab and Go-Jek, both of which are still operating at negative cashflow. This is reducing liquidity options for both investors and startups in the digital ecosystem.
Building a more sustainable local exit environment is now even more vital in the current covid-19 reality, where valuations have dropped and investors are keeping powder dry to support existing portfolio companies.
In addition to local stock market regulators making initial public offerings (IPOs) a more attractive exit option for Indonesian startups, SOE acquisitions can be another option for founders looking to exit.
Such an acquisition can be like a warm blanket. SOE’s core business should ideally provide the startup with customers and partnerships. If the startup has already reached an inflection point of growth, it will be able to unlock the true value of said core business.
For that route to crystalise, state-owned CVC firms like MDI Ventures will play a key role in identifying startups that can truly bolster state-owned parent companies. This will be done both by improving internal efficiencies and by building a presence in new business segments.
In the context of funding, as well as considering exit options, much of the attention is spent on startups that serve the B2C arena. We don’t see as much happening in the B2B space, especially with under-the-radar sectors like regulatory tech, agriculture tech, edtech and healthtech.
Investing in startups in such sectors aligns with the social policy roles that Indonesia’s SOEs play, such as helping spur economic growth in underserved, rural regions. Moreover, while private VCs may have less appetite for risk or slower-growing startups, SOEs have the patience and supply chain capabilities to help startups expand at a sustainable pace instead of chasing sky-high valuations on unrealistic market shares.
If startups are eventually acquired by SOEs, the links and prior relationships established will not only make the acquisition process seamless but also assure founders as to the continuity of their businesses post-exit. Because a large number of Indonesian SOEs are already listed on the local stock exchange, founders will also be able to see the impact of their exits on capital markets (via share prices) without taking the IPO route.
Creating value for SOEs
As state-owned CVCs funds are relatively new to the regional VC sector, not many portfolio startups have yet been acquired by the parent SOEs.However, the value for SOEs has been undeniable in terms of new business segments, higher productivity and increased digitisation, as shown by a few state-owned CVC moves in recent years.
In 2019, MDI Ventures contributed to Telkom’s inorganic revenue of $9.9m in capital gains as well as total synergy value (new revenue generation and cost-saving) north of Rp1 trillion ($70.75m).
Spotlight on sustainable B2B startups
One of MDI’s portfolio companies is PrivyID, a secure digital ID startup, which has proven to have multiple use cases both inside and outside of Telkom Indonesia. In 2017, MDI Ventures participated in a seed funding round for PrivyID.
Within two years, PrivyID was used to verify a swathe of governments issued IDs, phone numbers, e-mails and signatures, unlocking massive opportunities in a covid-19 business environment where almost all transactions are now conducted online.
Within Telkom Indonesia, PrivyID acts as the verification mechanism for the group’s Indihome internet service through its app. This validated the need for an ID verification system for know-your-customer processes – especially in the context of financial services.
Outside Telkom Group, PrivyID has been successfully implemented in other enterprises, such as Bussan Auto Finance, ZTE and Adira Finance. In less than 16 months, PrivyID has reached 430,000 users, and we expect its use cases to expand further into major Indonesian banks.
Riding on the success of investments into companies like Kata.ai, Codapay, and now PrivyID, MDI Ventures is building an in-house mergers and acquisitions arm with and for Telkom Group.
First published at e27