Indonesia is an emerging economic superpower in Southeast Asia and globally. The startup ecosystem is still fairly young – the real startup “boom” only began 4-5 years ago.

Progress is set to increase as the country shifts towards a new age of technology, innovation and entrepreneurship. This, along with its huge VC market, makes Indonesia a growth story that closely follows the footsteps of China.

Population - the engine of growth

It is fair to assume that large populations mean large markets and, with a population of over 263 million, the Indonesian market is one of great potential. As the 4th most populated country in the world, and with over half of the population under 30 years old, Indonesia is set to become a major economic powerhouse in Southeast Asia. According to the latest statistics and predictions, it is already on its way to doing so. Currently, Indonesia is the 15th largest economy in the world and by 2030, it is expected to be the 5th largest.

What is driving this growth? The economy is primarily fuelled by consumption and spending from an increasingly affluent middle class. As living standards improve, more of the population is moving towards the “middle-class and affluent customer” (MAC) status. In 2013, only 74 million people were classified as MAC and this is expected to double by 2020.

This increasing wealth is complemented by the decrease in the cost of living. Inflation rates have almost halved in the last 5 years – falling from 6.4% in 2013 to 3.49% in 2016.

Economic growth

Historically, Indonesia has had a fairly strong and stable economy. With a GDP of US$900 billion, it is the highest in Southeast Asia. Indonesia’s GDP growth has remained steady over the past 15 years, even maintaining 5% throughout the Global Financial Crisis. By some standards, Indonesia is outperforming several Western countries, Australia included.

Digital connectivity in Indonesia

By simply looking at the statistics on digital connectivity at face value, the numbers are comparable to most other countries in the region. However, if we factor in Indonesia’s enormous population, the true prevalence of technology in the country becomes much more compelling.

Social media is, in fact, an area where Indonesia stands out in the region. On a global scale, the country records the highest mobile Facebook usage with approximately 63 million users in 2015. Jakarta, Indonesia’s capital city, is also branded as “the world’s number one Twitter city”.

The state of the startup ecosystem

The most popular industries for Indonesian startups are no different to other Southeast Asian countries. E-commerce verticals and marketplaces attracted the most funding – over US$700 million, followed by FinTech, media and big data startups. The estimated value of the e-commerce sector is expected to reach US$130-150 billion by 2025. With hugely popular e-commerce startups including Tokopedia, Lazada and Matahari Mall, it is no surprise that this sector has received the most attention.

Funding for startups has been gaining traction in recent years, amplified by the success of unicorn startups GoJek, Traveloka and Tokopedia. The number of seed funding and later stage deals have seen a 3x and 8x increase respectively. Although deal quantity has considerably improved for both early and later stage startups, there has not been a commensurate improvement in deal size. Funding has primarily been sourced from foreign investors – 72% in 2016 and now, the government is looking to further attract foreign interest through international collaboration.

Government Support for the Startup Ecosystem

The Indonesian government is focusing on 2 key areas that are hindering the advancement of the startup ecosystem.

The first involves the promotion of economic stimulation and phasing-out of outdated regulation, bureaucracy and corruption. 12 policy packages aimed at doing so were released over the course of 2015 and 2016.

Currently, the government is looking to recruit foreign help to build its human capital. The growing presence of incubators, accelerators and VC firms will enable and facilitate the transfer of knowledge and thus, increase the quality of Indonesian startups. In addition, the government is in talks with Malaysia and the USA in regards to mentorship development.