Clear Definition: a Sine Qua Non in Startup Development Policymaking
Many of us have been amazed, inspired by the success of four Indonesian unicorns, which have proven that idea generation and business creation can lead into economic growth and positive impact on society. But very few have realized, let alone understood, the complexities and intricacies of building and running a startup. Various stakeholders – government, private sector and academia – have been trying to help nurturing startups and their ecosystem, yet their efforts seem to be fragmented and hence led to limited success.
If one were to speculate about the reason for such suboptimal result, one fundamental issue surfaces: the lack of clear definition of startup. What actually is a startup? Is it the same with Micro Small Entreprises (MSE)? Unless we can all agree on a clear definition of what a startup is, it will be difficult to achieve President Jokowi’s vision of creating more unicorns in Indonesia.
The most common definition of Startup in Indonesian is Usaha Rintisan, or if we translate it to English becomes “Business that has just started”. Others also define startup as MSE, considering that they are relatively new and small, although facts have shown that not all MSEs are newly established. The lack of clear definition has misled stakeholders into rolling out perplexing programs or initiatives that are not right on the target.
Another common definition of startup is MSE-IT or in Indonesian UKM-IT, which is not appropriate because MSE typically do not share the same characteristics as startups. As stipulated in Law Number 20 Year 2008 regarding the Micro- and Small Enterprises, MSEs are classified by their total assets, whereas startups do not necessarily follow this asset-based valuation method as many of them have unconventional business model which cannot be valued using this valuation method.
To be able to properly define what a startup is, one needs to consider several characteristics, and subsequently compare and contrast them with those of a conventional business. The first is that their biggest assets are not tangible ones, but rather, intangible ones such ideas and coding lines. Imagine the famous picture of Jeff Bezos building Amazon.com in his garage. If we were to use his tangible assets to value Amazon.com at that time, we would probably end up with a few thousand dollars only! Since value of a startup typically lies upon its founders, it is virtually impossible to calculate the return on assets as per accounting standards. Even though some of startup assets can be quantified; e.g., coding lines converted into intellectual property right, they change very dynamically and very fast, which in turn adds complexities in valuing the startup.
The second characteristic is that its valuation is not the mere sum of its asset value; in many cases, a startup valuation even far exceeds its total asset value. For example, when Facebook acquired WhatsApp for US$22 billion of February 2014, WhatsApp had 55 employees, operating revenues of US$15 million, and a net loss of US$232.5 million. Nonetheless, Facebook acquired the company with a valuation of US$22 billion. This valuation could not be explained with any accounting method.
The third characteristic is that a startup is an early-stage technology-based company, whose ideas are mostly technology related; e.g., IoT products, online service, software. Furthermore, most cases startups depend on Internet connectivity. The early-stage criterion, makes the term “startup” self-explanatory, therefore, as many of the products or services that are being built are still at an early stage and not ready for the market yet.
Considering the three characteristics above, now we can discuss whether the existing initiatives or programs are appropriate for startup development. To illustrate, we can take a look at two topics that are mostly discussed; i.e., education and funding.
From the education topic, both startups and MSEs should not be taught using the academic approach as in campuses. While academic success is usually measured by test results, startup, and MSEs cannot be measured in the same manner. Prior to launching its product or service, a startup typically needs to do iterations in order to achieve product-market fit. Naturally, such iterations will be riddled with failures, and failures in academic context usually do not translate into good grades.
Another reason academic approach will not be relevant, is that in an academic setting, students must complete a subject within a certain period of time and with a specific sequence. On the other hand, each startup founder has their own characteristics and needs, such that it is virtually impossible to put them into a prescribed, time-bound curriculum. The most appropriate program for startups is that of incubator or accelerator. However, given their limited success and patchy track records, one can easily conclude that many of these incubators and accelerators still use academic approach.
Even startups and MSEs differ in their education needs: startups focus more on developing technology-based ideas. To illustrate, imagine what kind of classes Nadiem Makarim needed to build Gojek, vis-à-vis what Gibran Rakabuming to build Markobar. In Nadiem’s case, data security is an example, while for Gibran, supply chain management is more appropriate.
Funding is another topic that has also been discussed and tried in different schemes. However, many of these schemes are still using the conservative approach that calculates the value of a company based asset value. Banks, for example, usually could disburse loans up to 70% of the debitor’s assets. Since startups typically have very little assets, they cannot use bank loans as their funding source.
The most effective way to fund startups is through equity funding. However, this type of investment needs to be channeled through a sophisticated investor or venture capital. Looking at the current startup funding landscape in Indonesia, there are only a few local investors compared to foreign ones. We need more investors, so hopefully, the new cabinet could help increase the number of local investors or invite more foreign investors by creating a favorable startup funding ecosystem.
Besides incentives and policies, the Government can also help startups financially by becoming their first customers. We can learn from a couple of examples in the United States, where the government gave contracts to startups. The first one is the US$18 (which then increased to 25 million) contract awarded to Kaiser and Hughes to build the first Hercules airplanes. Factoring the inflation rate, that contract is worth US$ 265 million today.
The other example is SpaceX, the company built by Elon Musk. In 2006, SpaceX made its first launch with Falcon 1, albeit with catastrophic fuel leakage and fire. In March 2007 and August 2008, SpaceX tried again but still failed to reach the orbit. Eventually, in September 2008, SpaceX successfully launched the rocket to orbit. Then within 3 months, NASA awarded them with a US$1 billion contract. Despite all the failures that SpaceX had, the Government of United States understood the value of progress and was willing to take the risk by becoming the first customer of SpaceX with the value of the contract that could help the company complete its rocket development.
In conclusion, the government and private sector must understand first the nature of startups before formulating any program or create a policy to nurture them. Especially at the very early stage, programs should be tailored to the startups’ needs and avoid using academic approach. Funding helps, of course, but existing funding schemes such as KUR or traditional loans are not suitable.
#startup #ideastage #government #investment #Indonesia
Coauthor: Melinda