10 reasons behind the collapse of Indonesia’s startup scene.
The number of startup companies in Indonesia has been increasing in the last decade, particularly in big cities like Jakarta, Tangerang, and Surabaya. Top-notch startups, such as Gojek, Tokopedia, and Ruangguru, have been doing well throughout the years even though they are known for using burn rate strategy (how quickly a startup company spends the cash or investment funds it has). By applying this strategy, they can upgrade the company’s value to the unicorn (US$1 billion) and decacorn (US$10 billion) levels.
However, startups such as Gojek, Tokopedia, and Ruangguru turned out to be a rare exception instead of the norm. Implementing the burn rate strategy does not guarantee that startups will conveniently achieve profits. As a result, many Indonesian startups only reached their peak in one or two years before entering bankruptcy. For example, Pegipegi, a digital travel agency company, went bankrupt in December 2023. CoHive, a co-working space service company, collapsed in January 2023. Fabelio, a furniture and interior company, closed its services in October 2022.
Here are the 10 reasons why most startups in Indonesia have failed, described briefly below:
Over-hiring
At the first time of its establishment, a startup company would normally open for various job vacancies, hiring many talents to work. As a new company with pressure to meet the growth target, it seems normal to hire a large number of workers. However, since there are too many of them, it will typically lead to over-hiring which, afterwards, leads to high expenses on salaries and facilities, reduced productivity due to the shortage of responsibilities and tasks, and even mis-hiring of incompatible employees.
Overspending on User Acquisition
As the digital era is updating, startups normally focus more on technology; these startups usually exist to solve social problems with tech-based solutions. This approach usually attracts investors to fund the company to run their businesses. However, most startups implement a burn rate strategy which leads them to overspend the funds more than they actually need. The main point of overspending is to acquire as many users as possible without prioritising profit gain. Eventually, when a company overspends on unnecessary expenses, it may not have enough money left to invest in essential areas like new equipment, marketing efforts, or employees’ salaries.
Insufficient Funds
Most startups go bankrupt due to unwise spending. Since they are not profitable yet, what they can do is rely on their investors’ money and when the money is spent, they struggle to maintain the company, which makes them have to raise another round of fundraising. If the company is low on funds, it cannot innovate a new product or service and pay the employees’ salaries. When this happens, a company has a high chance of collapsing. Thus, to maintain good sustainability, startups should have developed a financial plan to calculate the required funding, allocate amounts for each need, and monitor the remaining funds. Unfortunately, most startups in Indonesia that once existed in the past failed to do so.
Difficulties in Securing Investors
The main challenge faced by startups is always related to funding. They need money to sustain, generate new products or services, expand their business, and conduct market research. The only way they can get the money is by attracting investors. However, appealing to the prospective investors’ attention is easier said than done. A startup has to propose its business model, present the benefits and impacts, and attempt to provide solutions with its products or services. Once all the steps are done, however, the business proposal will not be automatically accepted. Most of the time, the company has to find another investor and start the process all over again. This cycle costs not only money but also time.
Leadership Crisis
If you follow the latest news of startup companies, you can see that most of the CEOs and owners are fairly young people. Considering their age, leading a full-blown company might not necessarily be the best idea; instead, they should be at the level of exploring their interests, improving their skills, and learning how to build their careers from the lowest level before being considered to take on a leadership role in a company. Lack of competent leadership often results in stifled innovation, low company governance, and misdirection towards the company’s development.
Changes of Business Model in a Short Period of Time
Determining the correct business model is crucial, especially for startups. In the first year of establishment, startups tend to change their business model in a short period of time. For example, a furniture company applies business model A to focus on interior services; then, after six months, it changes the strategy to business model B which focuses on kitchen appliances. This quick turnover will typically lead to existing customers’ confusion, and the biggest negative impact is the customers most likely decide to find another company that suits their needs with better clarity.
Inadequate Understanding of Market Needs
One of the reasons for most startups’ failure in Indonesia is their inability to meet market demands. Some startups believe that they are able to solve problems with their products based on fresh and interesting ideas. However, the actual benefits for the market (customers) might not necessarily be as significant as the startup in question initially expected.
Lack of Continuous Innovation
Once a startup company succeeds in accomplishing its goals, it typically heads towards a period of stagnancy. One of the main reasons for this stagnancy is overconfidence in its product and/or service. The startup would swiftly assume that its products/services are the number one solution for customers; hence, they quit innovating their products/services altogether. This complacency can lead to missed opportunities for growth and an eventual decline in competitiveness.
Defeat in the Hands of the Competitors
Startups often enter markets with innovative ideas, but struggle to maintain a competitive edge. Many startups neglect to observe and understand their competitors’ actions. Without a unique value proposition, strong marketing strategies, and continuous innovations, startups risk being overshadowed and losing market share, ultimately leading to their downfall.
Deluded by Valuation Based on GMV and the Number of Customers
Startups often fall into the trap of overvaluing themselves based on Gross Merchandise Value (GMV) and the number of customers. This misguided focus can inflate their perceived success, masking underlying issues such as unsustainable business models or lack of profitability. For long-term success, startups need to prioritise genuine revenue growth and customer satisfaction over superficial metrics. Unfortunately, most startups in Indonesia did not put such things on the top of their priority list.