No country for ecommerce unicorns: why the word ‘bubble’ may not apply to Indonesia

Let’s wind the clock back 19 years. Alan Greenspan, chairman of the US Federal Reserve Board at the time, used the term “irrational exuberance” as a way to describe investor zeal during the onset of America’s infamous dot-com bubble – one of the world’s most notorious valuation boom and bust cycles that played out at the turn of the millennium.

Essentially, this meant both public and private investors were so bullish on internet companies during that period of time that an otherwise justified story about the value of tech firms was taken to an extreme. This caused market players to form unrealistic expectations about future capital gains, and worse even, to act on those expectations.

The result was that several companies were flat out gang raped. Pets.com sold supplies for household critters online and raised US$82 million in an IPO in 1999. The firm then went from IPO to liquidation in 268 days later, burning more than US$80 million in ad spending. US$300 million in capital also flew out of the window along with Pets.com’s cute little sock puppets.

Webvan.com sold groceries online. It devoured US$375 million in three years, and was once valued at US$1.2 billion. In the 12-month period that followed, the company laid off nearly 2,000 people before perishing into oblivion. Today it’s looked at as one of the go-to cautionary tales for bubble disasters. Firms with more robust business models and better metrics for success like Amazon and eBay were able to endure, but still at great cost. They suffered tremendous losses and plowed through a devastating stock market dip, but were ultimately able to hang on and today are valued higher than they were during the peak of the bubble.

In Southeast Asia, we’re seeing some starkly reminiscent symptoms of irrational investor exuberance, particularly toward ecommerce companies. The case can be made for several Asian nations, but for the sake of focus and depth, I want to zero in on Indonesia, the largest and most sought-after market for firms looking to become regional ecommerce legends. As we witness all the excitement surrounding Indonesian ecommerce, could it be that Jakarta is recreating the Silicon Valley dot-com bubble of the late 90s without knowing it?

Do you have FOMO for Indonesia?

I recently picked up the word FOMO, which stands for Fear Of Missing Out. (Example: you’ve already got rock concert tickets, but one of your popular friends is having a secret anything-but-clothes party on the other side of town. Which one do you choose?). Foreign ecommerce players who are licking their chops at Indonesia – a 250 million population with a recent annual GDP increase between 5 and 6 percent, primarily driven by folks buying stuff – understand the feeling of FOMO.

Lyall Taylor, associate director at global financial services firm Macquarie Group in Jakarta, explains the fundamentals of a boom and bust cycle.

“Usually what happens is that rapid growth in an industry […] results in profits to early investors. These profits get increased media attention and eventually attract more and more people to enter the fray, driving prices higher still,” says Taylor. “Price rises move into the bubble phase when prices begin to rise at a faster and faster pace. The price action then becomes increasingly speculative and divorced from the initial factors which drove the boom in the first place, as speculators come to form emotional convictions about future price increases primarily based on past price increases.”

See: Despite relatively small funding amounts, experts agree that Japan is on the cusp of a startup bubbleAccording to Taylor, in situations like this, the best possible outcome is if the bubble can deflate in an orderly fashion – what experts might call a “soft burst.” Essentially, it means that prices in a particular industry stay flat for several years while the fundamentals of a sector have the chance to catch up. On the other hand, the worst case scenario is a disorderly and rapid bust, where people go bananas. In such a case, Taylor says the only people who can benefit are those who correctly identify the fact that there is a bubble occurring and can position themselves to profit in the event of a market decline.

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