Abstract:

This study performs an analysis of the staged financing given by Venture Capital firms (VCFs) to the Indonesian start-ups they financed, whether or not the staging exists, including the requirement from VCFs to the start-ups in order to get the next stage of financing. As the awareness of the importance of technology has increased, many Indonesian start-ups have been established, most of which are technology-based companies. These companies’ funding needs are not very easy to meet. Funding for start-ups encounters high information asymmetry, which is both an adverse selection problem as well as a moral hazard problem. VCFs investing in potential start-ups need to mitigate this risk by gradually investing its funding (staged financing). Based on the literature, staged financing is widely used among VCFs, especially in the United States. This research is performed through conducting in-depth interviews. The unit of analysis is Indonesian start-ups funded by VCFs or private equity funds. The participants of the study are four representatives of four start-ups who occupy a strategic position in order to understand the financing process of each start-up. We found that Indonesian start-ups financed by VCFs or private equity funds are given their funds in stages, also known as staged financing. The same method is also used by VCFs in the United States and other countries. We also found that, to get to the next stage of financing, VCFs set some requirements for the start-ups they have financed to fulfil. These requirements even involve a strictly-followed audit process. Learning and innovation process are among the requirements set.