The Indonesian startup ecosystem has been one of Southeast Asia’s fastest-growing, attracting talent, capital, and innovation across industries such as financial technology, e-commerce, healthcare, and education. However, a recent warning from the Center of Economic and Law Studies (Celios) has brought attention to the risks of relying on bank loans for startup financing. Instead, Celios argues that startup funding Indonesia should primarily come from investors, including venture capital and private equity, to ensure sustainable growth and financial resilience.

This discussion comes at a crucial time when Indonesia’s startup sector is transitioning from a rapid growth model focused on customer acquisition to one emphasizing profitability and long-term sustainability. With global economic uncertainties and shifting investor sentiment, funding strategies are under increased scrutiny.

Why Startup Funding Indonesia Should Avoid Bank Loans

Unlike traditional businesses with stable cash flows and tangible collateral, startups are inherently high-risk ventures. They often operate at a loss during their early years as they focus on product development, scaling operations, and acquiring users. Bank loans, which require regular interest payments and collateral, are often unsuitable for such businesses.

Celios emphasizes that bank financing exposes startups to financial strain, especially when they have yet to achieve stable revenue streams. High-interest obligations can divert resources from innovation and growth, potentially accelerating failure. Moreover, most startups lack the physical assets typically required by banks as loan security, making it difficult to secure favorable terms.

Instead, startup funding Indonesia is better suited for equity-based financing, where investors provide capital in exchange for ownership stakes. Venture capitalists, angel investors, and private equity firms understand the high-risk, high-reward nature of startups and are more willing to accept potential losses in exchange for future growth opportunities. This form of funding aligns better with the operational realities of startups, allowing them to focus on product development and market expansion rather than debt repayment.

The Role of Investors in Startup Funding Indonesia

Investors play a crucial role in nurturing Indonesia’s innovation ecosystem. Unlike bank lenders, investors bring more than just capital. They often provide mentorship, industry expertise, and strategic connections, all of which are essential for startups navigating competitive markets. Many investors also take a long-term perspective, expecting returns only after several years when the startup achieves significant growth or exits via acquisition or public offering.

In addition, investors are more tolerant of risk and failure, an important factor in early-stage innovation. This risk tolerance enables startups to experiment with disruptive ideas and technologies that might not be immediately profitable but hold significant potential in the long run.

The startup funding Indonesia landscape has seen increased participation from local and international investors. Major venture capital firms and corporate investors have shown interest in sectors like digital payments, logistics, and green technology. Such capital inflows not only support individual businesses but also contribute to broader economic growth by creating jobs, fostering competition, and advancing digital transformation.

Challenges in Attracting Investor Funding

Despite the clear advantages of investor-led financing, Indonesian startups face challenges in securing sufficient investment. One issue is the limited number of domestic investors familiar with high-risk startup models. While foreign investors have filled some gaps, there is still a need for a more robust local investor base capable of supporting early-stage ventures.

Another challenge lies in investor confidence. The recent global downturn in technology valuations has made investors more cautious, focusing on startups with proven business models and clearer paths to profitability. As a result, many early-stage startups are finding it harder to raise funds compared to previous years when growth-at-all-costs strategies were widely accepted.

Regulatory frameworks also influence funding dynamics. While Indonesia has made progress in improving its investment climate, bureaucratic hurdles and legal uncertainties can deter potential investors. Simplifying regulatory processes and ensuring greater legal protection for investors could help attract more capital to the startup ecosystem.

Building a Sustainable Funding Ecosystem

To strengthen startup funding Indonesia, several measures can be taken:

1. Encouraging Domestic Venture Capital: Policies that support the development of local venture capital firms can help reduce reliance on foreign investors and increase funding availability for early-stage startups.
2. Government Incentives: Tax incentives for investors and startups can promote equity financing and innovation. Government-backed funds or matching schemes can also stimulate private investment.
3. Improving Investor Confidence: Strengthening corporate governance, transparency, and legal protections can enhance trust in Indonesia’s startup ecosystem, attracting more domestic and international investors.
4. Startup Education: Training founders on fundraising strategies and investor relations can improve their ability to secure and manage equity financing effectively.

Additionally, collaborations between universities, research institutions, and venture capitalists can foster innovation and provide startups with access to both talent and funding networks.

The Long-Term Impact of Investor-Led Startup Funding

Adopting an investor-focused funding model can significantly enhance the resilience of Indonesia’s startup ecosystem. Without the burden of loan repayments, startups can allocate more resources toward innovation, product development, and customer acquisition. This approach also aligns with global best practices, where venture capital and private equity have historically played critical roles in scaling successful technology companies.

Furthermore, investor-backed startups are better positioned to weather economic downturns. Instead of being constrained by fixed debt obligations, they have the flexibility to adjust strategies and pivot when market conditions change. This flexibility is crucial for startups operating in rapidly evolving industries such as technology, where agility often determines success or failure.

The growth of the investor community itself also benefits Indonesia’s broader economy. As successful startups generate returns for investors, more capital is recycled into funding new ventures, creating a virtuous cycle of innovation and entrepreneurship.

Conclusion

The warning from Celios serves as an important reminder that startup funding Indonesia should primarily rely on investors rather than bank loans. Equity-based financing aligns better with the high-risk nature of startups and provides not only capital but also valuable expertise and networks. While challenges remain, particularly in building a strong domestic investor base and improving regulatory frameworks, the long-term benefits of an investor-led funding ecosystem are clear.

By prioritizing equity investment and supporting policies that attract and nurture investors, Indonesia can strengthen its startup ecosystem, drive innovation, and enhance its competitiveness in the global digital economy.