The Indonesian startup scene is feeling the chill of a capital drought. In the second quarter of 2025, startups in the country secured just Rp 1.29 trillion (about US$78.5 million) in funding — a precipitous 67% year-on-year decline and the lowest quarterly total in six years.

This dramatic plunge has sent ripples through the tech ecosystem, stirring debate over the causes, implications, and how startups and VCs might adapt in the months ahead.

What the Numbers Reveal

• Sharp downturn across stages. The steep contraction underscores that funding pullbacks are not limited to late-stage deals but are affecting all phases of startup growth.

• Weakest quarter in recent history. Observers note that such low figures have not been recorded in at least six years, signifying how pronounced the correction is.

• Broader ecosystem contraction. This slowdown mirrors global trends: venture capital globally is cooling, and capital is becoming more selective.

• Selective resilience in early-stage. In some markets, pre-seed and seed deals are holding up better than later rounds — investors may see more margin of safety in backing very early, lower-cost bets. Carta

• Declines in disclosed deals. The number of equity financings reported across Indonesia also suggests fewer rounds, not just smaller ones.

Why the Freezing Capital?

Several interlocking forces are contributing to this drastic pullback in investment activity in Indonesia:

1. Global macro headwinds.
   Rising interest rates, inflationary pressures, geopolitical uncertainty, and tighter liquidity are dimming risk appetite among international and regional investors.

2. Capital flow tightening.
   Foreign institutional investors are exercising caution. Some are redirecting capital to safer assets or more stable jurisdictions, making it harder for Indonesian startups to access cross-border funding.

3. Heightened investor scrutiny.
   Gone are the days when runaway growth and user metrics alone could justify high valuations. Investors are now demanding proof of unit economics, clear cost discipline, sustainable margins, and defensible business models.

4. Exit drought.
   With fewer IPOs and major acquisitions this year, the usual exit pathways that reassure LPs (limited partners) are constrained. That puts pressure on VCs’ ability to raise new funds and commit fresh capital.

5. Shift toward “real sectors.”
   Many VCs are redirecting attention to sectors that produce tangible value — agriculture, energy, health, logistics, education — rather than pure software or consumer tech plays with speculative upside.

6. Overcapacity and soft competition in some verticals.
   In segments like e-commerce and payments, saturation and margin pressure are forcing many startups to prove they can scale profitably — not just scale fast.

What It Means for Startups and VCs

For Startups

• Sharpen your financial discipline. Cash burn is under heavy scrutiny — controlling overhead, optimizing metrics, and extending runway are critical.

• Emphasize unit economics and profitability. Demonstrate that each customer or transaction contributes value, not just growth momentum.

• Explore alternative capital — grants, strategic partnerships, revenue-based funding, or bootstrapping may play a larger role.

• Lean on efficiency & pivot. Founders may need to re-examine business models, reduce feature sets, or pivot to adjacent, stronger-market verticals.

• Strengthen governance and transparency. As investor scrutiny intensifies, startups that want to raise need solid reporting, clean cap tables, and audited books.

For VCs and Investors

• Rebalance portfolios. Prioritize companies with strong fundamentals over speculative “moonshots.”

• Support existing portfolio companies. Money is scarce; backing winners with follow-on capital and operational support may yield better returns than chasing new deals.

• Be more hands-on. Deep involvement — helping with hiring, partnerships, cost optimization — can help mitigate downside.

• Reassess fund strategies. New fundraisings may face tougher scrutiny; limited partners will demand stricter discipline and clearer paths to returns.

• Scout in underserved verticals. Real-economy sectors may harbor undervalued opportunities, especially where digital transformation remains nascent.

Why This Could Be a Turning Point

While the numbers are stark, this phase might catalyze a healthier evolution of the Indonesian startup ecosystem — forcing a reemphasis on sustainability, discipline, and value creation.

• Stronger foundations. By weeding out overly aggressive or undisciplined startups, the ecosystem could emerge more resilient.

• More meaningful scale. Startups that survive this squeeze may be better positioned to scale with stronger unit economics, better customer retention, and lower churn.

• Capital re-allocation to impact and infrastructure. Areas like agritech, health tech, climate, energy, and supply-chain digitization may see renewed investor interest.

• Opportunity for consolidation and M&A. Distressed or underperforming startups may get acquired or unify, cleaning up fragmentation.

Challenges & Risks to Watch

• Talent flight. Top engineers and founders may leave for more vibrant ecosystems if local opportunities dry up.

• Barrier to entry. New founders may struggle to raise initial capital, which could stifle early innovation.

• Geographic concentration. Jakarta-based startups may fare better; regional or rural founders could face even greater funding gaps.

• Regulatory uncertainty. Changes in tax, data privacy, or fintech regulation could add friction.

Outlook & What to Monitor

• Q3 & Q4 capital flows. Will the downward trend continue, or will we see stabilization or rebound?

• Sector leadership. Which sectors will attract renewed investor interest — AI, deep tech, health, ESG?

• Exit activity. Any IPOs or strategic M&A deals will be key signals for investor confidence.

• Government & institutional supports. Grants, matching funds, innovation incentives, or sovereign funds (e.g., proposed “sovereign AI fund”) may help inject capital.

• FDI and foreign participation. The broader foreign direct investment environment in Indonesia also matters — Q2 saw a ~6.95% YoY drop in FDI.

• Macro tailwinds. Indonesia’s economy grew by 5.12% in Q2 2025 despite headwinds, exceeding expectations.