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Investing In Indonesian Startups - Myths, Rules, Regulations And Solutions

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bkpmI could probably compile 20 pages with just links to “horror stories” about foreign investments in Indonesia going awfully wrong and resulting in a total-loss of money. For instance the German entrepreneur who twice opened a restaurant in Bali and twice got squeezed out of his restaurant by landlords who all of a sudden decide to increase the rent with 500%. Or a little bit bigger, the case in which Churchill Mining lost their license on what’s probably the worlds 7th largest coal mine.

Also we’ve seen sudden changes in Indonesian laws introducing a cap of 40 percent on the single ownership of domestic banks. This followed a mining law put in place in March limiting foreign ownership in the industry to 49 percent from 80 percent previously. And in the digital world the government is also imposing new regulations which are less than motivating for foreign companies to enter Indonesia. And then there’s also still the everlasting corruption, which despite all the efforts and successes of the KPK (Corruption Eradication Commitee) doesn’t seem to be beaten at all. According to Daily Social, an Indonesian tech-blog, also startup entrepreneurs seem to suffer under the strict rules for foreign investments.

So, how bad is it anyway? Is Indonesia indeed a mine field for foreign investors?

First there are some basics you need to know when it comes to doing business/investments in Indonesia.

PT vs PMA

A PT stands for Perseroan Terbatas, is a company with limited liability and can only exist when it’s 100% owned by Indonesian persons or entities. If any foreign investment is involved the company should be(come) a PMA, Penanaman Modal Asing (foreign investments). So just to make it clear, any company that receives foreign funding should be a PMA, even when the investment is done through an existing PMA. 

Requirements for setting up a PMA

The government body in charge of handling foreign investments is the BKPM (Badan Koordinasi Penanaman Modal or Investment Coordinating Board). The minimum capital requirement for a PMA is IDR 10 billion, which is about the equivalent of $ 1 mln, however in some cases the minimal capital requirement might be higher. This doesn’t mean your paid up capital has to be IDR 10 billion, however the minimum requirement is that 25% of the capital is paid up, meaning IDR 2.5 billion (eq $250.000).

DNI - Daftar Negatif Investasi (Negative Investment List)

As Indonesia protects local SMB as well as some strategic industries such as the exploitations of natural resources. This results in a list with industries either fully excluded from foreign investments or just allowing limited foreign ownership/investments. The DNI regularly changes but the “grandfathering principle” applies:

When it comes to Negative Investment List, a “grandfathering” principle applies. Foreign companies that were approved under the previous DNI will not have to comply with the future DNIs and therefore won’t have to divest or sell their shares. This is an important principle to understand as it gives you the certainty as a foreign investor.

Source: Indosight

So how difficult is it to invest in startups in Indonesia?

Back to the post on Dailysocial, where was argued that the paid-up capital requirement for a PMA of $ 250.000 makes it really hard for local companies to receive foreign angel investments. This is true if an angel investment would involve equity (eg the direct issue of new shares), since shares in foreign ownership would force the company to become a PMA and thus force founders to put up capital themselves as well if the investment is less than $250.000.

However, when any investment being done is equal to $250.000 then the money for meeting the paid up capital requirement is available. In case we talk about a very early phase startup and an angel investment of let’s say $25.000 then there are other ways to do this. One of those ways is using convertible instruments, a topic on which I to explain more in a future post.

How dangerous is investing in Indonesia?

In general there’s absolutely no “discrimination” between foreign owned companies and locally owned companies. Besides the requirements for establishing the entity and possible ownership limitations, basically 99.9% of all the corporate rules apply to both a PT as well as a PMA. Strictly by the law I would say there are no risks in investing in Indonesia. So if you make sure you structure your investment or company in the right way and comply to all the rules and build in the usual investor protection you should be save.

Unless….

Unless you start to fly high above the radar and upset powerful local people. The world 7th largest coal mine owned by foreigners will upset rich, hungry forces in Indonesia and you should expect trouble. Or unless the Indonesian Telecommunication Regulatory Authority (BRTI) decides to shutdown the complete premium SMS services industry because of alleged fraud of a few companies. Or unless you’ve engaged in a nominee construction for setting up a company or buying a villa in Bali and your nominee decides to take over, your own bad I’d say.

Yes, Indonesia has glitches and it’s probably not the worlds most save market to invest in. For sure things are bureaucratic, you need to have a lot of patience and might freak out some times over the  hurdles put in your way. Also, you do need a great reliable lawyer since Indonesian law will be different than the legislation in your home country.

But, based on my personal experience, it’s definitely not a Wild West in Indonesia. I’m basically putting the majority of my “marbles” in the basket called Indonesia and so did and still do a lot of other global VC’s. Things might be a tad difficult, but considering the huge potential in many industries in Indonesia I would say that’s a low price to pay for the upside in the end.  Don’t forget that there are also success stories of foreign VC cashing out successfully, they just don’t always get as much exposure and attention as the cases in which things go wrong.