Donald Wihardja recently began a five-year jail sentence in Indonesia for what he – and numerous other industry participants – consider normal VC behaviour.

As head of MDI Ventures, a unit of Telkom Indonesia, Wihardja oversaw an investment in agri-tech business Tanihub. When the start-up was exposed as a fraud, prosecutors not only pursued the founders, but also several investors. They reasoned that those responsible for channelling state-owned corporate VC money into Tanihub should face corruption charges for incurring a sovereign loss.

In addition to Wihardja, Adrian Hartanto, formerly a vice president at MDI Ventures, has been jailed for two years. Nicko Widjaja, ex-CEO of BRI Ventures, a corporate VC unit of Bank Rakyat Indonesia, and William Gozali, previously the firm’s CIO, received sentences of three years and two years, respectively.

Monika Rudijono, Wihardja’s wife, told AVCJ that her husband is keeping a positive spirit and trying to make the best of the situation. However, she was keen to emphasise “not just the personal impact, but the industry impact” of an unprecedented case that has effectively criminalised venture capital activity.

“International investor appetite for Indonesia seems to have disappeared,” said Rudijono, who leads the Indonesia arm of Endeavour, a global non-profit organisation that supports high-impact entrepreneurs. “From what I hear from entrepreneurs, founders and VCs, money is very hard right now.”

Multiple sources describe a climate of apprehension. First, state-owned pools of capital that form a key part of Indonesia’s technology ecosystem have become pariahs. Founders don’t want their money, fearful of the legal ramifications, while other investors are wary of sitting alongside them in cap tables.

More profoundly, it’s another hit for Indonesia at the worst possible time. Global investor sentiment on local start-ups had already turned amid slow realisations and a spate of frauds. This case, and others like it, raise questions about the institutional quality of a country also grappling with macro challenges.

Sunil Mishra, a partner at Adams Street Partners, compared the current state of Indonesia VC to a poorly supported tent.  Governance issues emerged even before the industry had meaningful outcomes – or poles – to maintain investor confidence in the broader story.  Everything else is an additional weight on the canvas.

“With traditional family-owned businesses, to some extent you expect governance issues anywhere in the world, but not so much with younger founders who are starting fresh, so it can shake your confidence.  And heightened regulatory scrutiny – notwithstanding whether it is warranted – can scare investors and others alike,” he said.

“On top of that, the macro and geopolitical narrative, given what’s happening in terms of stock market performance, for example, doesn’t help. Indonesia still has strong macro fundamentals, but any which way you look right now, it seems to be in a tough spot. There are a lot of questions and reasons to pause.”

The big picture

Few industry participants with direct exposure to Indonesia were willing to speak publicly for this story. Interview requests submitted to the major local VC firms – independents and corporate VC units – were declined or unanswered. They included MDI Ventures and BRI Ventures. But among those who shared their thoughts, on and off the record, there is a collective sense of frustration.

“It’s terrible. I’m not sure how aware the country is of the signals they’re sending,” said an investor with a European development finance institution (DFI). “I hear people say there are political reasons for this. I can’t judge that. But the signals are very bad and it’s not only about those very prominent cases.”

The most visible macro signals are a stock market and a currency that are among the worst performers globally year-to-date. Moreover, MSCI has threatened to downgrade the Indonesia Stock Exchange from emerging to frontier market status, which could trigger substantial capital outflows. The country’s finance minister was dismissed last September and the central bank governor resigned this week.

However, economists point to a pattern of policymaking that has upended a decade-long period of relative stability: spending programmes that are widening the budget deficit; altering the central bank’s mandate to prioritise growth over currency stability; and moving to strengthen central government control in areas like state-owned enterprise (SOE) oversight and commodity exports.

“Each one on their own is not the end of the world, but when added together, it does create lots of concerns,” said Gareth Leather, a senior emerging markets economist at Capital Economics.

Collyer Capital, a Southeast Asia-focused fund-of-funds, expects to have a country manager for every major ASEAN jurisdiction apart from Indonesia in its latest primaries programme. One obstacle is the lack of local teams with historical track records that make them stand out. Another is the macro.

“Eighteen months ago, we thought Prabowo [Subianto] would be a continuation president, following the same path as Jokowi. But he’s pursuing a populist agenda and hasn’t displayed the most astute stewardship of the economy,” said Eric Marchand, a managing partner at the firm.

Anti-corruption is part of this populist manifesto. While few would dispute the need for such initiatives – nor, more broadly, criminal actions against start-up founders who have committed fraud – questions are being asked about institutional overreach. According to Rudijono, the police and other agencies have been sent caseload targets and are competing to see who can secure the most convictions.

“At the same time, the prosecutor’s office can pick and choose whatever interpretation of the law they like,” she added. “That’s what is happening in Indonesia right now. It’s not unique to Donald’s case.”

Tom Lembong, co-founder of Indonesian private equity firm Quvat Management and subsequently minister for trade, recently weighed in on the issue. Speaking on the What Is Up, Indonesia? podcast, he described “a wave of criminalisation” that has grown in scale and scope over the past few years, with the target universe extending from the administration’s political opponents to businesspeople.

“The business community is rife with reports of extortion, of threats to pay up – officially or unofficially – or the criminalisation will occur or intensify,” he said, adding that in most cases the formal indictments are “constructed very absurdly.”

Lembong included his own case in this analysis, having been targeted in a sugar import corruption probe last year only to be pardoned by Subianto while preparing to appeal his sentence. Cases involving the VC investors and Nadiem Makarim, the GoTo founder turned education minister who received a 10-year jail sentence over a government laptop procurement programme, were also referenced.

VCs on trial

Makarim challenged the accusations made against him in a series of LinkedIn posts ahead of and in response to the guilty verdict. Similarly, Widjaja’s lawyer offered a rebuttal of the case against his client, and by extension, the three other VC investors, repeating arguments that proved insufficient in court.

The panel of judges found that due diligence work on Tanihub fell short of what was expected and the investment oversight function wasn’t strong enough; that the defendants didn’t personally benefit from the investment, but under the Corruption Law, they were guilty of enriching a third party, namely Tanihub; that they caused a financial loss to the state; and that they did all this collectively.

Ditho Sitompoel, a managing partner at Hotma Sitompoel & Associates, who defended Widjaja, told AVCJ that the judges didn’t convey a basic understanding of venture capital. “For example, they asked during the trial why investments were being made in loss-making companies,” he explained.

This, in his view, contributed to an unfair assessment of the work undertaken for the Series A round in 2020. A paper trail was presented that captured the BRI Ventures process – initial screening, using external consultants to validate information, following standard procedures for internal approvals – and even blocking participation in a Series B in 2021 because by then red flags had been raised.

“We showed that all data we received was in the share subscription agreement and confirmed by Tanihub. But the judges weren’t satisfied. They said the diligence was based on unaudited reports, not audited reports. But at the time, even the 2019 audit report wasn’t ready yet,” Sitompoel added. “They moved from intentionality to negligence, but corruption cases must be based on intent.”

The defence made several arguments for dismissing the case out of hand. Perhaps the most pertinent in a venture capital context is that the corporate VC units are limited liability companies, not direct extensions of the state treasury, and the Tanihub investment constituted behaviour in line with the prevailing principles governing their industry.

The start-up raised USD 95m based on the potential of a business model that cut through fragmented supply chains by connecting farmers with end customers. It collapsed amid financial stress and investigators then found evidence of embezzlement and falsified financial statements. From a VC perspective, this was a business judgement call that didn’t work out rather than a crime, it is claimed.

“They invested like we do, taking risk to a certain point,” said an investor with an independent VC firm active in Indonesia. “Did they do everything we do? Maybe not. Is that a criminal act? No. Is it a founder-led fraud committed on multiple investors? Yes. Do they deserve to go to jail for it? Absolutely not.”

Sovereign risk

The Tanihub ruling also sets a worrying precedent. BRI Ventures put USD 5m into the company but realised gains from its seven-year-old investment programme amount to USD 48m, according to Sitompoel. Cynthia Wihardja, Donald Wihardja’s sister, noted that MDI Ventures had generated returns of more than USD 120m since 2015, eclipsing the USD 20m lost on Tanihub.

Yet AVCJ Research has records of around 30 deals involving BRI Ventures, and MDI Ventures has completed more than twice that number. Based on the risk profile of a typical VC portfolio, many of these – like Tanihub – are unrealised losses, valued below the investors’ entry valuation.

Several sources asked whether these other deals might become the focal point of investigations and the investment professionals behind them face legal action. Moreover, what about the portfolios of other state-linked corporate VCs like Mandiri Capital, Sinarmas Technology, and Telkomsel Ventures?

Though hypothetical, this is already bleeding into the actual. “People are thinking twice about taking capital from state-linked investors,” said Yuan Lee Chung, a partner at Southeast Asia-focused Cento Ventures, adding that some start-ups are exploring other ways to work with these groups such as issuing debt rather than equity or strategic collaboration in areas like lead generation.

Several investors have portfolio companies already backed by state-linked investors that want to remove these groups from the cap table as soon as possible. Founders are worried about the complications of doing a down round when certain shareholders can’t post a loss or, even worse, the business fails and they are investigated for causing a loss to the state.

“One of our companies has BRI on the cap table and the founder said, ‘We need to figure out a way to raise some money and redeem them.’ The company is worth less than the valuation at which BRI invested, but the founder doesn’t want to operate in an environment where there’s a threat of jail,” said a second investor with another independent VC firm active in Indonesia.

Taking these investors out at cost, which would insulate founders from claims of causing a loss to the state, must be carefully negotiated. According to David He, a partner at Cooley, global investment documents – most Indonesian start-ups are incorporated in Singapore – usually specify that preferred investors split the proceeds on a pro rata or pari passu basis in the event of a liquidation.

“Going forward, say a fund has a mandate to not lose money and presents a take-it-or-leave-it deal where they have some kind of senior right. The moment they do that no one else would put any money in unless they were investing in secured debt,” he added.

It is unclear to what extent the state-owned corporate VC units are still pursuing new investments. Mergermarket reported last week that Telkom Indonesia was looking to sell MDI Ventures.

Hard times

Private funding for Indonesia’s technology sector is already at an eight-year low. Pandemic-era tailwinds took investment to USD 10.3bn across 2021 and 2022, more than the prior 10 years combined, AVCJ Research’s records show. Since then, approximately USD 1.2bn has been put to work. Recent events have made state-linked money unpalatable and foreign capital less readily available.

The consensus view is that deal flow is incredibly weak at all levels, even as activity picks up elsewhere in Southeast Asia on the back of an artificial intelligence (AI) narrative – a story lacking in Indonesia.

Growth-stage funding, a space traditionally dominated by overseas investors, is available on a selective basis, but with new actors. A handful of rounds of USD 50m or more have closed in the past three years, most of them led by strategic rather than financial investors. Mizuho Bank, Astra International and Amazon played this role in rounds for Kredivo, HaloDoc, and Astro Technologies, respectively.

“Certain types of investors, those that are corporate VC or strategic in nature, have longer time horizons. They also have a lot of experience; they are used to this stuff,” said Scott Jalowayski, a partner at Morrison & Foerster, flagging it as a Southeast Asia-wide theme.

Over the same three-year period, only four Indonesia-focused VC funds have achieved final closes. Rama Mamuaya, founder and CEO of DS/X Ventures, is one of few managers preparing to return to market. While he doesn’t expect a disrupted timeline, a smaller fund size and a recalibrated – and more Asia-centric – LP base are likely.

“With 70% of the LPs we’re talking to, you don’t even bother trying to convince them to invest in Indonesia. We’re now focusing on a fund with the other 30%,” Mamuaya explained, adding that the recent court cases are a confidence killer for investors from outside the region that traditionally draw comfort from the presence of state-owned capital in deals.

A lack of liquidity is another widely cited reason for weakening LP sentiment regarding Indonesia. The DFI investor, who has passed on everything Indonesia-related for three years, routinely questions not only the tenacity with which GPs are pursuing exits, but also what assets might fetch at sale. His only recourse is to ensure there is no fund-level incentive to drag out processes.

Asked whether a handful of IPOs would be enough to turn the Indonesia story around, Adams Street’s Mishra is equivocal. “These concerns only get sorted with what I like to call eureka moments,” he said. “You need a large multi-billion-dollar outcome – people making 100x or more and being very happy about it.  Only then will investor confidence come back.  Otherwise, most people think why bother? There’s a lot happening elsewhere in the world.”

The long game

On some levels, though, there is still reason for optimism. Khailee Ng, a managing partner at 500 Global, suggests Indonesia could become a force in the next phase of AI, which he sees as the localisation of AI native services. Cento’s Chung added that investors able to find a way in will be encouraged by an entrepreneur cohort that is more disciplined and transparent in its approach.

Meanwhile, the four corporate VCs are working on appeals. The original cases were heard at Jakarta Corruption Court, but Sitompoel hopes for a different outcome elsewhere, noting that the Supreme Court is less likely to “lean towards the attorney general instead of arguments made by lawyers.”

His reference point is ex-Pertamina CEO Karen Agustiawan who was sentenced to eight years in 2019 for a failed Australian oil investment that led to a loss for the state. This was overturned on appeal by the Supreme Court, in part because it accepted the business judgement rule as a legal protection. Agustiawan has since been caught up in another corruption case and was convicted in May.

It remains to be seen whether Indonesia can regain investor confidence, through the emergence of new opportunities or demonstrating greater institutional strength. Cynthia Wihardja recognises that Indonesia’s technology ecosystem is a work in progress – in terms of ideas, innovation and legal infrastructure – and expresses pride in her brother’s stance that investors shouldn’t just cut and run.

“It’s about figuring out how to fix the system, and hopefully, Indonesia in the future will be fairer,” she said. “There are a lot of good businesspeople, there is so much entrepreneurship.”

However, investors are not the only constituency that must be won over. Part of the fallout from this episode and Indonesia’s broader travails is dwindling founder enthusiasm. Investors claim local entrepreneurs are popping up in other jurisdictions pitching Indonesia-related business models. At the same time, Rudijono observed that the next layer of talent is staying away.

“A lot of educated Indonesians don’t want to come back. I have friends who are telling their kids studying overseas to stay where they are,” she said. “If the best and brightest do not want to come back to Indonesia and they don’t want to work for SOEs or the government, what kind of people will?”