Episode Four

Impact VC 101:

Dondi Hananto of Patamar Capital

2 February 2021


ALAN  0:12  
Welcome listener, both old and new to Season Two, Episode Four of the Indo Tekno podcast. Selamat berjumpa kembali semuanya! Today we wanted to study a growing sleeve of venture capital in Indonesia, which is impact investing. With impact investing very simply speaking, the investor is looking to make a profit while also having a positive impact on the world's social or environmental concerns. The Global Impact Investing Network (GIIN) estimates that global impact investing rose from $52 billion in 2015 to $98 billion in 2019. Southeast Asia was the second fastest growing geography for impact investment of the 10 that are under study. It expanded at a 23% compounded annual growth rate, or CAGR, over this period, versus 17% globally. Today's guest, Dondi Hananto, is partner for Indonesia at Patamar Capital, a leading venture capital firm focused on South and Southeast Asia's mass markets, which moreover claims to have improved the lives of more than 5 million people in the region. Great to have you on the Indo Tekno podcast Dondi.

Hi Alan. Glad to be here. Thanks for inviting me.

ALAN  1:27  
You're very welcome. Now Dondi, your journey includes having yourself been an entrepreneur, can you tell us about this part of your life?

Well, I wouldn't really claim this was a big part of my career, nor a hugely successful phase. I cofounded a co-working space in Jakarta called Comma, and a crowdfunding platform for creative projects called Wujudkan. I started both in 2012 with different cofounders. Both unfortunately had to been shut down for different reasons. But I definitely learned a lot from the experience. I think my biggest learning was about focus; that it's impossible for me to do multiple roles well. I was focusing on my investing career. I think I could have done more for both businesses, but just didn't have enough bandwidth. So that's why I think it's only a select superhuman like Elon (Musk), who can run multiple businesses at the same time. And I think the second best learning for me was the very basic learning of how cashflow was always very important for businesses. Both were bootstrapped with funding purely from founders. Both generated revenue, so they weren't the type of high burn businesses. And thankfully, at the end of that, I didn't really lose money, because one of the companies actually had some cash reserves at the end. So we could distribute that among shareholders. So there's always a silver lining; that was a really great learning phase for my career.

ALAN  2:46  
I'm sure. It sounds like it was. Now Dondi, you've been with Patamar Capital for six and a half years. How was Patamar formed?

This can be a long story, but I'll try to give a short summary. One of my business partners, Geoff Woolley, previously was running a fund investing in microfinance institutions in India. Before that, few people believed that microfinance institutions can be scalable. And this was the early 2000's. This fund ended up being very successful in catalyzing the growth of that industry in India. By the end of the 2000's, it had attracted large investment banks like Credit Suisse and Warburg Pincus to invest in the sector, and actually led to the first microfinance IPO, which was his portfolio company that was called SKS Microfinance back in 2010. So after that, he was interested in a similar concept of utilizing early stage equity investment to create impact. We tried to do that elsewhere; trying to find new business models outside micro finance, and new geographies. We looked to Southeast Asia and started Patamar. I met my partners pretty early on, and fast forward to now, that remains our mission: to reimagine Southeast Asia by investing in impactful businesses at the early stage using a VC strategy.

ALAN  4:00  
Let's definitely get back to that mission shortly. I note that you're also the Founder of impact accelerator Kinara Indonesia. How does that relate to your work at Patamar?

Yeah, well, Kinara was my first foray into the early stage investing world. Before that my previous life was in commercial banking, mostly doing retail and micro business lending. And as Kinara runs accelerators and capacity building programs, we've got a team running all of those. My learning about focus was: I consciously pulled myself back and did not get involved in the day to day operations, making sure there are people who are running those. I still sit on the board and sometimes get involved as mentor in the programs. So doing that is really a good way for me personally to keep a pulse of what's happening at the very early stage because most of the companies that are in the accelerator programs are mostly pre-seed stage, or even some in the ideation stage. So although Patamar is mainly a Series A investor, we like to meet these companies early in their phase. It helps me to understand more about the company and their progress. It helps me really detect the strong founders who can tell me their learnings on what works and what doesn't work. And I always believe that VC's like me only know a little about a lot of different industries. And the founders are ultimately the experts, right? So I really enjoyed learning from their journey.

ALAN  5:24  
I can see the benefits in "piking" really far upstream to the ideation stage. Now we talk about impact investing at Patamar. For those of our audience who are not familiar with the term, how is early stage impact investing different from plain vanilla VC investing? I guess, specifically, how strong are the financial returns that you expect to generate as an impact investor? And does that differ from what a mainstream VC would target?

That's a very fair question. The way the Global Impact Investment Network (GIIN) defines impact investment really resonates with us, because they define it to be those investments made with the intention to generate positive and measurable impact alongside a financial return. So obviously, the similarity here is the financial return. And on that front for Patamar, we always say that we target top tier market returns. So probably that's not very different from other VCs. The main difference is the intentionality of the "second bottom line", which is the impact. So to impact investors like us, it's mandatory for the businesses to have clear impact intention, not just a side effect, or a "nice-to-have". And this intention needs to be translated to measurement, using real data and evidence and real numbers, instead of just some anecdotal story. So impact measurement is very important for our work. There are impact metrics that get reported from our portfolio companies, in addition to the usual financial and operational metrics, of course. And the last point I wanted to add on the financial returns is that, yes, at Patamar, we happen to have a top tier market return target. But there's actually a spectrum of impact investors ranging from those who can accept below market return to people like us at the other end, who still expect pretty standard market returns. But I can guarantee you that the intentionality and the measurement of impact is there for everyone.

ALAN  7:15  
I've always loved the concept of multiple bottom lines, and it's clear that impact investing is driving that consideration. But if you don't mind me asking a devil's advocate question, is impact investing here to stay? Is it itself a secular growth trend? Or can we expect it to ebb-and-flow as an investment trend?

Well, I'm obviously biased, right. So I think it's here to stay. The total market size is still small, for impact investment, GIIN estimates that there are $700 billion that have been allocated, which is very small. It's a little less than 2% of the total managed assets of the financial world. So the growth rate, as you said, is quite strong. But I think as a percentage, it's probably still going to be a niche of the global financial market. I'm hoping the percentages will grow. But I think it's not going to be somehow that the majority of the total managed assets is for impact. But my prediction and my hope really is that, at least some of the practices will permeate more into mainstream investment and the business world. For example, right now, you can see a lot of different (what we call) conventional funds, they start to have ESG, which is Environmental, Social and Governance measurement. That started off at the impact investing community, and it has started to permeate into the mainstream financial markets. So I think there is more interest in the global markets supporting companies who can contribute to improve climate change, like electric vehicle producers, or those that provide access to cheap, clean electricity for the masses, or opening up financial access to the unbanked and so on. I think the intentionality may not always be there. But net-net, I hope is still a positive change. 

ALAN  9:03  
Yeah, I would say that ESG is a very clear mega trend. And it struck me that what you guys are doing in this earlier stage is creating companies that dovetail with that increasing emphasis. Now Dondi, how are your investee companies integrating technology into their businesses to drive more social impact; And at the same time, greater financial returns?

Yeah, I would say definitely, there's a lot more use of tech as an enabler to help these companies achieve their mission. So that's why we also describe our portfolio companies as "tech-enabled" companies, because I think most of them do use tech in their business. I'll give you an example of our portfolio company mClinica. They have managed to onboard one in three pharmacists in Indonesia. So one third of Indonesian pharmacists are on their network, which is something unprecedented in the past without technology. So these pharmacies now have SwipeRx app that mClinica has, and this has enabled clinics to help spread information very quickly to all these pharmacists. So in the critical situation like this COVID pandemic, I can remember this happened around mid-last year, in May or June, when it was still pretty early. With mClinica's work with the Pharmacists Association, this channel was used to educate pharmacists about how to prepare themselves, the health protocols they need to set up in their pharmacies, and even early detection of symptoms to quickly refer patients to proper health facilities. So it's interesting that you and I may take this for granted, but the fact is that in the developing markets like Indonesia, there's a lot of people who go to their local pharmacy or drugstore first to self-medicate. They just go there and say, "Hey, I'm having this cough. What do I need? Can you recommend me something?" So pharmacists are actually a very, very important part of the frontline healthcare system that is often forgotten. So that was just one example. I'm seeing a lot more examples where technology helps to amplify the impact.

ALAN  11:07  
Great example. We actually had Farouk Meralli on several weeks ago joining the podcast. Now Dondi, shifting gears a bit; impact investing has become a hot sector globally. I noticed that large players such as TPG and KKR now have multibillion dollar impact funds. A simple question: currently are there enough high quality impact investment opportunities for all the money that's targeting them now?

That's true when you look at the global aggregate; there is $700 billion available. But I always believe that not all investment money is the same. Those mega-funds obviously look for larger PE-type deals. Some of them may have specific sector focus, and some may have specific geographical focus. For example, Sub Saharan Africa is one that gets a lot of allocation. So from the $700 billion that's available, what we really need to see is how much is available for specific types of deals. So for example, let's take an early stage company in Southeast Asia. If you're an early stage renewable energy company trying to raise a 3 million Series A, and you're located in Indonesia; that $700 billion doesn't really matter. What matters is how many investors actually fit your specific company. So for that example, the stage, Series A; round size, $3 million and the geography, Indonesia; is a good fit for us. But we still won't invest in that company, because we don't do renewable energy. Well, it's mainly because we just don't understand the industry. So looking at the big guys, TPG Rise has $5 billion allocated specifically for renewable energy investments, but they won't look at deals lower than $100 million. So it's important to look at specific allocations and not just a total aggregate. So, looking to our work, I personally find there are still a lot of deals in Southeast Asia, specifically in Indonesia, that we can't or won't do, that need others to invest in. Another example, like I said, we like to meet companies early on, but when they only need to raise a couple of $100,000 Seed round, there's no specific impact Seed Fund for me to refer them to. So the most we can do is refer them to conventional tech Seed VC's, which may or may not be a perfect fit. So I think that there are still a lot of opportunities available, especially for specific industries that require specific knowledge.

ALAN  13:29  
That's fascinating. So there are some discontinuities in this area of investment, which I think with time can only be addressed and must represent an interesting growth opportunity for those who take up that challenge. Now Dondi, we also talk about "gender lens" investing. What does that mean? And can you share with us a successful example?

Gender lens investing is actually very broad. We only started really practicing this back in 2017. One aspect is really investing with the intention to address gender issues or promote gender equity. And this could mean investing in women-owned businesses, or investing in businesses that offer products that improve the lives of women and girls. Another aspect besides the general intention is ensuring that the investment process considers gender issues. This is really an internal process; from our sourcing, due diligence, deal negotiation to post-deal monitoring. That's what we focus on in our fund to ensure that it's "gender-balanced". So for example, if we only mainly attend community events where the attendees are your typical "tech bros", then we might be missing out on great women-led companies whose founders may not feel that they belong in that community. So that's why we have to really look deeply into how we source our deals, which communities we're in, and making sure that our process is not "gendered". So we also look at how gender plays a role in the business; for example, whether the target market is predominantly women, like the case of our portfolio company SayurBox; or whether critical stakeholders are majority women, like our previous portfolio company Mapan, which has 300,000 agents and almost 100% of them are women. So this plays a role in how we evaluate the business. For example, the questions are: if the majority of the customers are women, then the founders need to ensure that the marketing message, the product design and user experience and so on fit into the target market. To me, it's not just a politically correct thing to do, but critical to business success too. So besides that, we also have just launched a sister fund focusing on female entrepreneurs called the Beacon Fund. That fund is managed by a separate team in Patamar, led by my business partner Shuyin. I'll tell you one anecdotal interesting story that I think, after we as a firm decide to seriously adopt a gender lens, I tend to see and apply this lens in my daily life. For example, as an outsider watching the C2C e-commerce war, I assume all the marketplaces want both male and female customers because they want everyone to transact more in their platform. So it's interesting to see how Tokopedia tried to appeal to more female customers by using BTS as a brand ambassador, while on the other hand, Shopee uses Cristiano Ronaldo and Bambang Pamungkas and have special male-oriented promo days. So my guess is that's trying to balance out the image that more guys shop at Tokopedia and "ibu ibu" (women) shop at Shopee. So I think the gender lens is not just about investing in female entrepreneurs, even though that is one important part as well. But I think for general business performance, it actually helps a lot.

ALAN  16:42  
Now Dondi, we talk about targeting with our investments in "mass market consumers", namely those 1.6 billion low and middle-income consumers in Developing Asia. Now, by virtue of being low income, do we not immediately encounter a challenge in areas such as monetization and revenue growth with a low income user base?

I think it's a very nuanced view. And that's why we like the term "mass market" rather than "low income". And the unfortunate part here is that after almost seven years, I still cannot find the proper translation of "mass market" into Bahasa Indonesia. So if listeners, you can help, please help me with that, because it's just difficult to translate that to Bahasa Indonesia. So in World Bank economic jargon, we see a lot of opportunity with those categorized as the "aspiring middle class", where in Indonesia, this is defined as those spending $3.5 to $8 per day, or between IDR500,000 to IDR1.2 million monthly. That market alone is 100 million people in Indonesia. This comprises some entry level blue and white collar workers, your warung owners, ojek drivers, domestic workers, farmers, etc. There's a lot of them. And even some of those professions I mentioned may already have been classified as the middle class. But the big opportunity here is one: how to help most of these aspiring middle class people get to the middle class level; to upgrade them. One fascinating story about Indonesia is again, quoting World Bank data, that of Indonesians who were considered low income back in 1993, 80% of them (eight zero!) actually managed to climb up by 2014. So they are not considered low income 20 years later. That was huge progress. And that created momentum and more opportunities for business and impact. And that created a lot of these people that are now at the aspiring middle class level. So that's the first impact opportunity. The second opportunity is to prevent them from slipping down the pyramid, since it's found that they are vulnerable to economic shocks. So sickness in the family or a natural disaster, or one flood in Banjir in Central Java can wipe out a couple of villages, and they might slip down again to the bottom of the pyramid. Yes, monetization can be an issue. You're right. And that's why we believe it's very important to find the right business model to ensure that either they're willing to pay themselves or finding other models where revenues may come from other sources. The way we see it, in summary is that it's a matter of how to get $1 revenue, each from 100 million customers instead of $1,000 each from 100,000 customers. That's how we look at it. 

ALAN  19:32  
I think many of your peers, if not most of them, encounter the same question and are deliberating it. It's great to have a population of 270 million, and to be able to get a few percentage points of that population is great, but actually monetizing them can be a totally different set of challenges. So I appreciate those insights. Now Dondi, maybe an example of successful impact VC investing: could you walk us through the story of how Patamar, for instance, came to invest in student lending platform Danacita?

Danacita was an investment we made from our investing-in-women fund, which was when we started learning about gender lens investment. It was a seed fund we set up. I knew the founder Susli from way back even before she started the company. And I remember her telling me early on that she was working on something around education, financing and student loans before she even launched. And then the next news I got from her was the Danacita was accepted in Y Combinator, the winter cohort of 2018, if I'm not mistaken. So we had some intense conversations after that, and decided to invest in the Seed round late in 2018. Business-wise, it was a very good fit for us as we like financial services. We believe education financing can be very impactful. But we also knew that it wasn't an easy thing to do. But we believe in the founding team of Susli and Naga, that they're strong enough to figure things out. It's not an easy thing to do, but I believe they've started to crack the market. And they keep tweaking their product and operations to improve. So it's been a great journey for them. And progress is very good.

ALAN  21:11  
That's great to hear. Now Dondi, a basic question: what are the main forms of value add that Patamar brings to its portfolio companies in Indonesia?

We pride ourselves on having local teams who understand the local market and the local nuances. And we've been a distributed team from Day One. You have me and the team here speaking Bahasa Indonesia, business partners speaking Vietnamese. And I believe that helps us connect to the entrepreneurs and understand the target market, especially as we target the mass market. We also like to think that we have a deep understanding of that mass market in this region as we have started investing since 2012. So hopefully, those are good values to bring to the table. Now the question is whether our entrepreneurs feel the same way or not. You'd need to ask them, because maybe it's just our imagination. As VCs we always like to think highly of ourselves.

ALAN  22:02  
Well, it was exactly through some of those entrepreneurs that I found you, and their rave reviews of their interactions with Patamar as an investor and partner. Now, what common themes or characteristics have you identified across this mission-driven set of entrepreneurs that you back? 

I'm always drawn to those who are very focused in gaining deep understanding of their target markets. Because when you build a business, the most important thing is to understand who your customers are, and how they make their economic purchases. That's all very key to the progress of the business. I learn a lot for example, about the female consumer's psyche and how to market to them from Amanda and Metha, the super women behind Sayurbox, and how rural women are such powerful and important figures in the community from Aldi Haryopratomo of Mapan, who then left GoPay after the acquisition. I think that's really the commonality between them. Their strength is really the obsessive understanding of their customers.

ALAN  23:05  
Understood. Now Dondi, as we speak today, what segments or sectors are the most exciting for you in Indonesia?

We've been very interested in the supply chain of different commodities or verticals. This is mainly because more than 60% of Indonesian consumption is purchased through micro small retailers, or are produced by micro small businesses. So a lot of these startups are B2B. My partners sometimes call it "capital B to lowercase b", because they're targeting SME's. We have an overarching thesis that any improvement to the supply chain is going to be impactful to the micro SME stakeholders, either the retailers or the producers. So we've invested in companies working in the food and agricultural, produce, pharmaceutical supply chains, and household items like furniture and kitchenware. But I believe there are still a lot more to cover. For example, we've been watching the FMCG distribution space. It's a huge 100 billion dollar market. Quite a lot of players are now already raising large rounds, but we know that this is a notoriously low margin business. So we want to make sure that if we invest, the founders understand how to create a path to profitability. I think there are still some large supply chain verticals out there. For example, vehicle spare parts, stationery like your paper and books and pens, or specific agricultural produce. I think there are still a lot of huge markets waiting for tech improvements.

ALAN  24:34  
Fascinating. I would agree that that is a massive, largely tradition-bound and still quite inefficient set of verticals that smart capital can help disintermediate. Now we don't need the smartphone must be one of the most profoundly catalytic developments across that "mass market" of 1.6 billion consumers that we cited earlier. What is the coolest way in which it has impacted the community In which you invest?

I definitely agree with that. We saw that 10 years ago, we didn't even imagine the smartphone penetration to become this high thanks to all the affordable phones available out there. I'll take the example of the story of Mapan, who grew together along with the developments. When Aldi first started offering rural women, the "ibu ibu", to join Mapan as agents, the first product was phone credit. We call it "pulsa". Back then it was mainly still for "dumb phones". So people were buying these phone credits. And as the business evolved, they realized that the margins on pulsa were razor thin, and that the market was controlled by large distributors. So it's difficult to gain more margin. So they pivoted to other household products. And by that time, smartphones were already out there but still a novelty. The agents were starting to use them with the Mapan app to manage their sales, but the customers were still not using smartphones. Fast forward to now: I just caught up with the team at the end of the year. The customers themselves are now starting to use smartphones, obviously they can place orders from their phones. And now that Mapan are a part of the Gojek group, it's amazing how a big chunk of their transactions are cashless, paid electronically using GoPay; whereas 12 years ago when Aldi started, they were all cash. Looking back, I think that was just an amazing progression that mirrors Indonesia's digital development.

ALAN  26:26  
Clearly a massive and pretty fascinating transformation. Now Dondi, if you were to find six extra hours of free time in your day, how would you spend it?

This is a very interesting question, Alan. So I'd found that working from home for the past 11 months since March last year, it actually already freed up at least two hours of my daily commuting time. And it allows me to do more for leisure. Back in my college days, I used to play video games a lot and found that over the last 10 years I seldom play. I still have the consoles. My son plays it more, just because I had no time. Since the pandemic, I've actually managed to sneak in some more gaming time. But if there were six extra hours, I don't think as a responsible adult, I should put them all into gaming. Maybe I'll split them among games, some family time, more books and movies, but definitely more sleep.

ALAN  27:22  
Amen on that last one! Well Dondi, a really expansive vision that you've outlined today. And it clearly seems as though impact VC in Indonesia is still in its very early days. Definitely looking forward to seeing you and the rest of the Patamar team extend this impact across South Asia and Southeast Asia. Thanks again for joining today.

Thanks a lot. See you again.

ALAN  27:46  
Terima kasih telah mendengarkan.  Sampai jumpa lagi!