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Indonesia’s smaller cities attract start-up investors

New Indonesian companies focused on so-called tier 2 and 3 cities and engaged in sectors ranging from fintech and social commerce to digitising family-run shops have raised tens of millions of dollars in the past few years. Investors are attracted to such start-ups as they are essentially diving into a potential blue-ocean market -smaller Indonesian cities that are digital laggards and far from the ultra-competitive tech scene in places like the capital, Jakarta.

A local venture capital investor says the archipelago will see about three unicorns – private companies valued at over USD 1 billion – emerge in the next five years from start-ups focused on the smaller population centres. Tier 2 and tier 3 cities are three to five years behind tier 1 cities when it comes to digital adoption, the venture capitalist said in a recent report. But it expects that a large prize awaits investors, as the digital economy in those locales is expected to expand about fivefold by 2025.

Digitising small businesses in smaller cities have gained traction. In the past year alone, start-ups that provide digital bookkeeping apps for small roadside shops and stalls, and start-ups that aim to help small retailers streamline their supply chains, have each received over USD 10 million in funding from global and local investors.

Other sectors have also attracted attention. In fintech, a start-up that operates a branchless banking agent network that provides services to unbanked people in rural areas, received USD 53 million in July last year. Meanwhile, a peer-to-peer lending start-up serving female entrepreneurs in villages secured a USD 50 million lending facility from a US-based lending platform. Social commerce start-ups, which both allow individuals to become resellers of consumer products have also obtained funding in recent years.

Jakarta trumps all cities in digital competitiveness, according to a report by an Indonesian venture capital investor. The capital had an index score in that category of 71.9 in the 2021 research, which considers things such as infrastructure and human resources, ahead of second-place Bandung, capital of West Java Province and home to the Bandung Institute of Technology, Indonesia’s version of the Massachusetts Institute of Technology. Other Indonesian tier-one cities include the likes of Surabaya and Bandung, both on Java.

However, reports say that nonmetropolitan areas are growing faster and increasing in economic importance. The country grows and the government intensifies the economic diversification efforts. Tier 2 and 3 cities will be more prominent economically, increasing their share of GDP by 3% to 5%.

Another factor affecting start-ups is the COVID-19 pandemic, which has forced people even in remote places to digitise their lives to some extent as movement restrictions were put in place to slow the spread of infection.

Accordingly, studies say that Indonesia is on its way to becoming the 4th biggest economy in the world by 2040. But being ‘big’ is not enough, a country should serve its people and make their lives better in every way. Hence, the country’s president set out his national priority programmes, including economic transformation and economic equity.

In this modern world, the country needs to increase its competitiveness in various industries and human equality. Leaders should also believe that welfare should be distributed evenly throughout Indonesia. Prosperity will not be achieved if wealth and progress are concentrated in some areas while others are struggling to survive. For the past six years, they have worked to achieve those goals.

Technology is one sector that can answer these challenges. Indonesia raised six unicorns and thousands of rising technology start-ups in less than a decade. Also, digital solutions changed Indonesians’ ways of life, from the use of e-commerce for easier daily trades to the rising number of SMEs due to better access to lending brought by fintech companies. The report shows that industry players have focused only on the metropolitan areas, but now, the other parts of Indonesia are ready to join the digital revolution as well.


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