Rethinking Venture Capital Funds Optimization as an Alternative Financing Models to Emerge Markets for Indonesian Start-up

A B S T R A C T

Start-ups play a pivotal role in improving economic efficacies and a significant source of many groundbreaking innovations. Start-ups are different from small medium enterprises (SME) as they are also bounded by the liability of newness. The scarcity of resources compels start-ups to look for external partners in various stages of development and commercialization of their ideas or technologies. The existence of start-up itself, whether it will grow succeed or not, tend to rely on the availbility of financial and technical support despite their potential ideas, therefore known an alternate financing support model as venture capital investment (VC). Which is an investment that occurs by an equity participation including technical support to an emerging business partners, leading their business to emerge in a market. Venture Capital Investment held by a VC company or venture capitalists. However, comparing to the world leading industrial nations, venture capital investments in Indonesia are more likely stray apart from the true purpose of a venture capital investment. The purpose of this study is to explain and break down the deviations made by Indonesia Governing regulation regarding venture capital investments and or Venture Capital company.

Keywords :

Venture Capital, Venture Capital Company, Start-up, Investment

Introduction

The theory that i will use will be "law as tool of social engineering", It was developed by Roscoe Pound which is now re-introduced by Mochtar Kusumaatmadja, as an attempt to assimilate the theory to Indonesian law. Rather than the original statement which is considered to be more suitable in common law system country, it was used to study the purpose of a law implementation that ought to be appropriate based on the law that live within a society[1]  . The theory indicates that the purpose of the law is not always to be formed based on society interests, however it must also be upheld in such a way by the jurists as social control efforts. As applied to my study the theory holds that i would expect my Independent variable (s) The "law as a tool of social engineering" theory to influence or explain my dependant variable (s) the "current Indonesia's Venture Capital implementation of regulation" because those regulation should provide a good environment that are appropriate and well suited for Start-up company as Inventor and large company as their Investor's in Indonesia.

Those current Indonesia's implementation of regulation as i mentioned earlier consisting ; Regulation of the Minister of Finance Number 18 / PMK.010 / 2012 and Regulation of Financial Services Authority Number 35 / POJK.05 / 2015. Referring to those regulation, this study will specify the implementation of current regulation to Start-up company and not small and medium enterprise (SME). Thus, the main concern from the author in this study is why there are rarely potential Start-up company and / or Inventor , succeed in cultivating their invention and establishing their business in Indonesia .Furthermore, How does a regulation should provide an environment that support Indonesia's potential Start-up company and /or Inventor.

Start-ups play a pivotal role in improving economic efficacies and are a significant source of many groundbreaking innovations. [2]  The start-up is referred to as a new venture with limited technical and financial resources, Blank, defines a start-up as "an organization formed to search for a repeatableand scalable business model". They are bound by their liability of newness and smallness [3]  and therefore lack access to adequate resources. The scarcity of resources compels start-ups to look for external partners in various stages of development and commercialization of their ideas or technologies [4]. The start-ups are different from SME's as they are also bounded by the liability of newness. However, they are similiar to SME's since they both face scarcity of resources usually labelled as liability of smallness. Start-ups also share many commonalities with SME's in terms of strength and challenges but their complexities are exacerbated due to their liability of newness.[5]

Black Law's Dictionary defines that Venture Capital is a funding for new companies or others, embarking on new or turnaround ventures that entails some investment risk but offers the potential for above average future profits. Other definition identifies Venture Capital (VC) is a financing model by a Venture Capital Company in the form of equity participation in a company which receives financing assistance for a specified period, whereby after that period, the investor will divest the shares. Venture capital financing system is quite unique because this financing system has multidimensional function such as; as a financial institution and as a corporate institution since there are equity participation.There are many large companies, that grew larger because the existence of venture capital financing assistance, such as Apple Computer, MTV, Microsoft, Kentucky Fried Chicken,etc[7].  Furthermore, Regulation of Financial Services Authority Number 35 / POJK.05 / 2015 identify 2 form of VC company which are Venture Capital Company and Islamic based VC company / Sharia. First, VC company defined as a business entity which effectuate on Venture Capital Business, venture capital funds management, fee based services, and other business activity that has been approved by Financial Services Authority. Then, for the Islamic based VC company, it is defined quite similiar as a common VC company, in addition, it implemented islamic principle or so called Sharia.

Venture capital investments and technology-based Industry in Taiwan

As a comparison in the 1980's, Taiwan imported the know-how of VC investing from the US and developed a strategic investment strategy to promote growth of Taiwan technology-based industry. This strategy includes the ground rules for the development of VC industry and investments in technology firms, for almost three decades, the Taiwanese venture capital program and the technology-based industry have been remarkably active and successful. As a result, their VC investments have been highly focused on the development of technology-based firms. Until 1989, the scope of these investments was regulated by the "Regulations Governing Venture Capital Investment Enterprises"and only allowed for developing technology-based firms. Even though the government relaxed the restriction of VC investments in 1989, the majority of their VC investments now still go to the technology-based industry. Up to date,the "big five" industries in Taiwan are semiconductors, electronics, telecommunications, information, and optoelectronics. The number and the amount of VC investments in these industries account for 71 percent and 72,84 percent respectively of the current total Taiwanese VC investments[8]

Currently, venture capital investments in Taiwan are notably active as compared to those in other emerging markets. Moreover, Taiwan has the most active VC investments in Asia in terms of the number According to the 2005 Yearbook of Taiwan Venture Capital Association, Taiwan's VC market has raised over NT$ 180 billion in two decades. Over 400 VC-backed firms have gone public on the Taiwan Stock Exchange (TSE) or Over the Counter (OTC) markets, while nearly 50 percent of the firms listed on the TSE and OTC were VC-backed and 80 percent of these firms belong to the technology industry. Although VC funds have invested only NT$ 170 billion in the technology industry,the investments have created a NT$ 1.9 trillion industry. These led Taiwan's VC industry to become one of the most active VC markets in the world. In fact, due to the government's strategic investment policies, Taiwan technology-based firms have been well-known for their smooth operations and high level of adaptablility to changes in usiness and economic climates. To date, many Taiwanese firms are world-renowned for their excellence in manufacturing technology, making them the world's second largest produucers of information and communication hardware. Consequently, the share of global market held by Taiwanese manufactureres exceeds 70 percents for several key technology products, such as notebook PC's, wireless local area network (WLAN) equipement, liquid crystal display (LCD) products, and optical disk drive (ODD) products. According to the report on "Global Competitiveness in 2006 -2007" issued by the World Economic Forum (WEF), Taiwan ranks sixth in the world in terms of Growth Competitiveness Index. In Addition, Taiwan ranks second in the world after the US in terms of international patents per capita. In fact, Taiwan is the only country in East Asia that has closed the innovation gap with leading Western industrial nations and Japan.[9]

The History of Indonesia's Venture Capital Regulation Development

Initially, Indonesia began to recognize this alternative financing model through equity participation since 1988 which was introduced in the form of Indonesian presidential decree number 61 / 1988. Furthermore in 2009, the previous regulation was updated by a presidential decree number 9 / 2009, whereby in this new regulation financing to a business partner can be done, other than equity participation, financing may be made in the form of investments through the purchase of convertible bonds and / or financing based on the share of the results of operations. Therefore , with the intention to develop corporate venture capital industries and a contribute to national economy, OJK issues the regulation of financial services authority number 35 / POJK.05 / 2015 ,thus, although it was quite late, the major issues which already been revised is the re-definition for the business partner that receive venture capital financing assistant because the previous regulation only allows legal entitity as the recipient, in article number 1 point 12, this regulation redefines the definition of business partner, which now allows individual or corporate including micro, small, medium enterprises.

The notion of venture capital financing in Indonesia is quite different from the actual intent and purpose on it. In addition to what has been mentioned previously, such as Indonesia's regulation only allows legal entities to receive venture capital financing assistance, which has been revised in 2015. The next difference is about the collateral, venture capital is known because it includes high risk investments, financing is provided in the form of capital investment, purchase of convertible bonds and profit sharing principles, are said to be at high risk because venture capital are distinguished from other forms of financing model such as bank. Regarding a bank loan procedure, it is generally limited to only provide capital and the bank also demands loans on credit, loans and payment interests. As with venture capital that provides equity to a business partner, which provides financing in the form of capital instead of credit loan, venture capital financing is not subject to interest and does not require any collateral but profit sharing in proportion of each, particularly this business capital is not supported by collateral [10] . This financing model aimed to potential start-ups / firms that require financing sources, venture capitalists invest in ideas from start-ups / firms, where profit-sharing occurs only when there is profit after a certain time, the same principle as sharia / islamic financial law. However, according to prior research which found the deviations of true meaning and purpose of venture capital financing, as found in the preliminary study of one of the venture capital firms in the city of Denpasar that has been done,the study found that there is a equity participation based with a collateral ,by venture capital firms in their business partner , whether movable or immovable. In addition, in its development, venture capital funding assistance in the form of equity participation tends to have shifted into a capital loan as well as a loan capital in the form of credit to a bank financial institution [11]. However, current regulations allows the existence of collateral in a business activity agreement as set forth in article 27 of the Financial Services Authority Regulation No. 35 / POJK.05 / 2015, enabling the existence of collateral objects and collateral bonding costs in a venture capital agreement.

Further Advancement of Indonesia VC Investment

In addition to venture capital firms (VCs) that fund various technology-based startups, actually in Indonesia there are also VCs that provide funding to conventional Small and Medium Enterprises (SMEs) . They even once formed a association for this group, called Indonesian Venture Capital Association (AMVI). However, on May 13, 2016, along with technology-based VC company and startups, several conventional VCs took part in the establishment of a new association called the Venture Capital Association and Startup Indonesia (AMVESINDO). With this establishment, they expect that , government should be able to hear their desire even more.

Some conventional VCs which already associated with AMVESINDO are ; Astra Mitra Ventura, Ventura Giant Asia, Celebes Artha Ventura, Mandiri Capital Indonesia, and Pertamina Dana Ventura. While technology-based VC company that have ensured their support and membership in AMVESINDO are Alpha JWC Ventures, Convergence Ventures, CyberAgent Ventures, East Ventures, Fenox Venture Capital, Ideosource, Kejora Ventures, MDI Ventures, Skystar Capital, SMDV, Sovereign's Capital, and Venturra, thus with this deveopment, in addition to act as a bridge to communicate associated VC, it is also expected to help the government and the Financial Services Authority (OJK) in the development of a fair venture capital industry in Indonesia [12].

Conclusion

Finally the answers for the main concerns of this study, which is, why there rarely a potential inventor / start-up succeed in cultivating, marketing and establishing their business in Indonesia. Related to the previous discussion, whereby from 1988 to 2015, the Regulations in Indonesia did not provide a solution and necessary support that could help a start-up / firms to find sources of financing for their potential ideas. When compared with the Taiwanese Government in 1980, that made a serious regulation related to venture capital financing aims to assist firms and companies in the development of technology-based industry, so that at the time both investors and the government itself vigorously doing venture capital financing on business development related to technology. In fact, the requirements, procedures and costs to establish a Limited Liability Company (LLC) such as ; minimum 2 shareholders, 1 director and 1 Commisioner, issued capital, submission of shares after 6 month(s) and public notary's fee, is not well suited to a embryonic phase start-up business. Establishing a limited liability company in Indonesia are complex and burdensome for start-ups, companies and SMEs. Therefore, the policy of Indonesian regulation from 1988 to 2015 has prevented the start-ups,firms and potential companies to develop as a result of the venture capital financing, thus can only be given to the business partner in the form of LLC.

Author : Radityo Dewandaru Basoeki

Citations 

[1] Mochtar Kusumaatmadja, "Hukum, masyarakat dan pembinaan hukum nasional", 1976, Binacipta, p. 9;

[2] Hunt, R.A., "Entrepreneurial tweaking : an empirical study of technology diffusion through secondary inventions and design modifications by start-ups", European Journal of Innovation Management, Vol. 16 No. 2, pp. 148 -- 170 In Audretsch, D.B, "Innovation growth and survival", International Journal of Industrial Organization, Vol. 13 No. 4, pp 441 - 457;

[3] Freeman, et. al, 1983; Hannan and Freeman, 1989;

[4] Teece, 2010; Esteve-Perez and Rodriguez, 2013;

[5] Muhammad Usman, Wim Vanhaverbeke, "How start-ups successfully organize and mange open innovation with large companies", 2017, European Journal of Innovation Management, Vol, 20 Issue: 1, p. 172;

[6] Henry Campbell Black, "Black's Law Dictionary", 1990, West Publishing Co, St. Paul, USA, p. 1556;

[7] Munir Fuady, Pengantar Hukum Bisnis, 2005, Citra Aditya Bakti, p. 125 -126;

[8] Woody M. Liao, Chia-Chi Lu, Hsuan Wang, "Venture capital, corporate governance, and financial stability of IPO firms", 2014, Elsevier B.V., p. 21;

[9] Ibid,p.22;

[10] Khutibul Usman, "Modal Ventura (alternatif pembiayaan usaha Mikro, Kecil, Menengah dan Koperasi", 2010, BPFE Yogyakarta, p.32;

[11] Putu Sisilia Prabandari, "Persyaratan Jaminan Terhadap Perusahaan Pasangan Usaha di dalam Perjanjian Modal Ventura", 2015, Masters Thesis, Universitas Udayana;

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