Legal Aspects of Venture Capital Financing and Its Relation to the
Development of Micro, Small and Medium Enterprises (MSMEs) in
Indonesia
Zulfi Chairi
1
1
Faculty of Law,Universitas Sumatera Utara, Jalan Universitas Nomor 4, Kampus USU, Medan, Indonesia
Keywords: Legal Aspects, Venture Capital, Development.
Abstract: The existence of Micro, Small and Medium Enterprises (MSMEs) is one of pushing forces for economic
development. They also play a strategic role in developing potentials of people’s economy which has been
proven to be able to survive in economic crisis in Indonesia. The government has paid special attention to
MSMEs. MSME development is one of solutions to accelerate national economy growth and decrease
poverty rate. Therefore, government focuses not only on MSME policy and program but also on their
implementation in the field. There are some main obstacles for MSME development in Indonesia such as
the lack of capital, poor management and the lack of the use of technology. Venture capital financing
institution is one of sources of capital that can be accessed by MSME. It is an alternative financing
institution whose mission is to help MSMEs through capital participation and management support. This
research applies a descriptive analytical method and juridical normative approach by studying the applicable
laws in Indonesia through library research on the roles of venture capital as an alternative financing for
MSMEs. The research found that venture capital has a clear legal basis in positive laws in Indonesia and
plays a role in MSMEs development as an alternative financing in addition to bank to support national
economy development in Indonesia.
1 INTRODUCTION
The number of MSMEs in Indonesia is the highest in
the world. Citing data form the Ministry of
Cooperatives and Small and Medium Enterprises in
2014, there were around 57,8 milion local actors in
Indonesia. Its estimated that the number of Micro,
Small and Medium Enterprises (MSMEs) will
continue to increase ( Hartati, 2017).Currently, there
are 55.2 million Micro, Small and Medium
Enterprises (MSMEs) in Indonesia. The Ministry of
Cooperative and Small and Medium Enterprises of
the Republic of Indonesia says that currently, tens of
million of small and medium enterprises represent
more than 90% of enterprises in the country and
contribute 57% to Gross Domestic Product (GDP) in
the country (Rivai,2015) The existence of Micro,
Small and Medium Enterprises (MSMEs) is one of
pushing forces for economic development. They also
play a strategic role in developing potentials of
people’s economy which has been proven to be able
to survive in economic crisis in Indonesia. The
government has paid special attention to MSMEs.
Capital participation is one of efforts to grow and
develop MSMEs. It is a sad fact that MSMEs are not
yet bankable to access fund from bank. MSMEs still
face various obstacles to access capital from bank
such as the lack of information of procedure for the
submission of a loan proposal, long and complicated
procedure for the submission of a loan proposal, lack
of information about standards of a loan proposal,
uneven distribution of bank loan, bank’s obligatory
to implement prudent banking principle, the
obligation of the debtor to submit a guarantee and
bank’s lack of capital (Sunaryo,2008). Other
obstacle includes asset ownership rights so that
MSMEs are unable to meet bank’s requirements
related to loan guarantee (Sidik,2017), because
MSMEs are usually unable to provide a guarantee
1444
Chairi, Z.
Legal Aspects of Venture Capital Financing and Its Relation to the Development of Micro, Small and Medium Enterprises (MSMEs) in Indonesia.
DOI: 10.5220/0010081714441449
In Proceedings of the International Conference of Science, Technology, Engineering, Environmental and Ramification Researches (ICOSTEERR 2018) - Research in Industry 4.0, pages
1444-1449
ISBN: 978-989-758-449-7
Copyright
c
 2020 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

which is one of requirements for submitting a loan
proposal.
MSMEs is also one of alternative efforts to
alleviate poverty because they have been proven to
be able to survive economic crisis which has ever
affected Indonesia. Although MSMEs play a central
role in Indonesia’s economy, the making of
government policy and regulation is not yet effective
to develop MSMEs maximally.
Other challenge and obstacle for MSMEs
development are the lack of fund and poor
supporting facilities and infrastructure which result
from the lack of attention from the government. It is
clear that government is fully responsible for
MSMEs development because “de facto and de
jure”, they should show their political will and
political action to protect MSMEs sector. This
should have been included in the “blue print” of
government’s development policies in their own
area (Marsuki, 2005) and other economic
institutions, including venture capital.
The Government of Indonesia has issued a
regulation on the establishment of non-bank
financing institution, venture capital company, as an
effort to develop MSMEs in the country. Venture
capital is an alternative and the most suitable
financing source for MSMEs. Venture capital
investment through capital participation or other
forms of financing into a company as a partner
corporate enterprise (investee company ) for a
certain period of time is considered to be more
effective for MSMEs (start up) financing because it
can help develop the company at its early stage of
establishment before it has the standard as a public
company or has an operational history.
Venture capital financing is conducted by a
venture capital company (investor) in the form of
capital participation into a company which receives
the financing assistance (partner corporate
enterprise) for a certain period of time before the
investors will divers the shares (Fuady,2005).
Venture capital is also an active investment which
provides capital to a company with an involvement
in financial management, marketing and operational
supervision. It can also be temporarily provided to a
business so that the invested capital can be with
drawn after the business runs smoothly and
develops.
As a business institution, venture capital
business, of course, aims to get a high profit because
it is a high risk capital. However, it also has a
humanistic mission (humanistic institution) to help a
weak company develop its business. (Sunaryo,2008)
The establishment of venture capital is effective
because its system is completely different from that
of other financing institutions. In principle, venture
capital financing is an equity financing cooperation
which provides financing in the form of capital
participation for a certain period of time. If MSMEs
are supported by a venture capital, it must have
enough money and a long-term scheme because the
maturity of MSMEs is usually reached after five
years. Therefore, it is hoped venture capital
financing will be able to develop MSMEs and
contribute to economy development in Indonesia.
Although MSMEs play a vital role in economic
development in Indonesia, they still face internal and
external obstacles. Therefore, an alternative
financing through a venture capital will be needed.
The following questions will be answered through
this research, what is the legal basis of the existence
of venture capital in Indonesia, What are the roles of
venture capital in MSMEs development in
Indonesia.
2 RESEARCH METHODOLOGY
A normative legal research method and a normative
juridical approach were used in this research by
focusing on the use of secondary data which was
supported by literature data. The research also used a
statute approach. Based on its specifications, it is
categorized as an analytical descriptive research i.e.
research that analyzes the relation between venture
capital financing and MSMEs development in
Indonesia. In this research, data on the roles of
venture capital as one of financing sources for
MSMEs development was collected through library
research.
3 RESULT AND DISCUSSION
3.1 Legal Basis of the Presence of
Venture Capital in Indonesia
The term ventura capital is the translation of an
English term venture capital. Venture means risky
business. Therefore, many define legal venture as a
risky capital investment in a business or a company
( Rahman,2003) or it also can be defined as a
business. Venture capital also can be defined as a
capital which is invested in a risky business to get
income in the form of interest or
dividends.(Martono,2004) Article 1 point 2 of the
Legal Aspects of Venture Capital Financing and Its Relation to the Development of Micro, Small and Medium Enterprises (MSMEs) in
Indonesia
1445

Regulation of the Minister of Finance of the
Republic of Indonesia Number 18/PMK/010/2012
on Venture Capital Company stipulates that venture
capital company, here in after abbreviated as VCC,
shall be a business entity to do business financing
/equity into a company that receives financial
assistance (investee company) for a period of time in
shares of stock, equity through the purchase of
convertible bonds, and/or financing based on the
results of the business division.
Venture capital is a new financing institution in
Indonesia. Institutionally and formally, venture
capital business is established through Presidential
Decree Number 61 Year 1988 on Financing
Institution and Decision of the Minister of Finance
of the Republic of Indonesia Number
1251/KMK.013/1988 on Provisions and
Implementation Procedures on Financing Institution.
The two regulations become a milestone for the
development of law on venture capital.
(Sunaryo,2008)
Venture capital company is also regulated in
Regulation of Financial Services Authority Number
34/POJK.05/2015 on Business License and
Organization of Venture Capital Business,
Regulation of Financial Services Authority Number
35/POJK.05/2015 on Good Corporate Governance
of Venture Capital Company and Regulation of
Financial Services Authority Number
37/POJK.05/2015 on Direct Inspection of Venture
Capital Company.
Both civil laws and public laws are the legal
sources of venture capital as a business institution in
financing sector. Venture capital is not only used for
economic purposes but also supported by a legal
approach so that it is acceptable and applicable in a
business relation. Venture capital, as one of
economic activities in financing business, has some
legal basis such as contract and laws. Contract is the
main legal basis of venture capital from civil aspect
while law is the main legal basis of venture capital
from public aspect. Ventura capital is also juridical
manner backed up by p by three basic legal groups
namely: the principle of freedom of contract which
is contained in the contract of venture capital, legal
basis of company such as Law on Limited Liability
Company and legal basis such as laws on finance
and financing sector. ( Fuady,2004)
According to Abdul kadir Muhammad and Rilda
Muniarti in Sunaryo’s book, legal sources of venture
capital can be grouped into two classifications,
namely (Muhammad & Muniarti,2004):
a. Civil law aspect
Civil law is law which regulates civil interests of
parties bound in a legal relation. In the context of
business activities of venture capital, the parties
include venture capital company and partner
corporate enterprise (investee company). From civil
law aspect, there are two legal sources of venture
capital business, namely: 1. Principle of freedom of
contract : a) Like other financial institutions such as
leasing, factoring, customer finance or credit card,
venture capital also has legal basis i.e. principle of
freedom of contract which is regulated in Article
1338 of the Indonesian Civil Code; b) Legal relation
in venture capital is always made in a written
contract as a legal document which is the basis of
legal certainty. The venture capital contract is made
based on the principle of freedom of contract which
includes the rights and obligations of venture capital
company and partner corporate enterprise; c)
Venture capital contract is the main legal document
which is made legally for venture capital company
and partner corporate enterprise by meeting
requirements as set forth in Article 1320 of the
Indonesian Civil Code. Since the contract is made
legally, it serves as law for venture capital company
and partner corporate enterprise (Paragraph 1 of
Article 1338 of the Indonesian Civil Code). Contract
between venture capital company and partner
corporate enterprise serves as a legal evidence
document. (Muhammad,& Murniati, 2004), 2. Laws
related to civil law; Legal sources of venture capital
include the Indonesian Civil Code, Law Number 40
Year 2007 on Limited Company, Law Number 25
Year 1992 on Cooperatives and Law Number 8 Year
1995 on Capital Market.
b. Public law aspect
As a business providing financing service,
venture capital is closely related to public interests,
especially administrative interests. Therefore,
relevant public laws also apply to venture capital
business. The legislations include laws, government
regulations, presidential decrees and minister
decisions. 1)Laws in the area of public law;There are
a number of laws related to State administration
which become the main legal sources of venture
capital such as Law Number 5 Year 1960
Concerning Basic Regulation on Agrarian Principles
and its implementation regulation, Law Number 3
Year 1983 Concerning the Obligatory Registration
of Company and its implementation regulation, Law
Number 12 Year 1994 as well as Law Number 35
Year 2008 on Taxation and its implementation
regulation. 2) Regulations on financing institution;
There are some regulations related to venture capital
business such as Government Regulation Number 18
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1446

Year 1973 on the Establishment of PT. Bahana
Pembinaan Usaha Indonesia (as the first venture
capital company in Indonesia), Presidential Decree
Number 61 Year 1988 on Financing Institution (has
been revised through Presidential Regulation
Number 9 Year 2009 on Financial Institution) and
Decision of the Minister of Finance of the Republic
of Indonesia Number 1251/KMK.013/1988 on
Provisions and Implementation Procedures on
Financing Institution which has been revised
through Decision of the Minister of Finance Number
468 Year 1995.
3.2 The Roles of Venture Capital in
MSME Development
MSMEs play a strategic role in the national
economic development, economic growth, labor
force absorption and distribution of development
results. Although micro, small and medium
enterprises are part of the national enterprises, they
are very often overlooked because of their small-
scale production and inability to compete with
bigger companies. In addition, it is difficult for
micro, small and medium enterprises to get access to
financing from a bank. Therefore, an alternative
financing institution will be needed by MSMEs as a
solution to overcome the obstacles.
Government awareness of the importance of
MSMEs development in Indonesia has led
government to relate any policy on economic sector
to MSMEs development programs as an effort to
speed up economic development in the country.
(Jafar,2013)
Law Number 20 Year 2008 on Micro, Small and
Medium Enterprises is made to grow and develop
micro, small and medium enterprises to support the
national economy. Therefore, it is important to
broaden and simplify access to financing for micro,
small and medium enterprises.
To a businessman, fund is like a vein in men’s
body which never stops and is vital in running and
developing his or her business. There are some main
obstacles of MSMEs development in Indonesia such
as the lack of capital, poor management and the lack
of the use of technology. Unfortunately, MSMEs
often face various obstacles to access loan from
bank because they are unable to meet bank’s
requirements. (Widiyanti,2017)
Currently, it is hard for businessmen to access
loan from financial institutions, especially from
bank, that can be used to develop their business
because of high bank’s interests. So far, increase in
production and product market is not enough to
cover the cost. In addition, bank requires them to
provide guarantee to enable them to access bank
loan.
Capital can be accessed from bank financial
institutions and non-bank financial institutions.
Venture capital is one of non-bank financial
institutions which can be used as an alternative
financing for the MSMEs because it is more flexible
than bank. The establishment of venture capital is
one of government’s efforts to develop MSMEs in
Indonesia. This is in line with Article 22 of Law
Number 20 Year 2008 on Micro, Small and Medium
Enterprise stating that in order to increase financing
sources of MSMEs, government takes an effort by
establishing venture capital institutions.
In running its business activities in Indonesia,
venture capital company provides not only
financing/capital participation but also assistance in
marketing, production and resource management to
the partner corporate enterprise. Venture capital
business gives a lot of benefits to business
development, especially the development of small
enterprises in Indonesia. Venture capital is an
alternative financing in addition to bank to support
the growth and development of a new company by
providing financing which takes the form of capital
participation and management support. In addition,
it takes the financing risks.
Unlike a bank, a venture capital company not
only provides capital and management support but
also takes risks in their business activities. The
involvement of venture capital company in helping
its partner corporate enterprise can be categorized
into two, namely: single tier approach and two tier
approach. Single tier approach is an approach of the
venture capital to perform two functions, namely: as
a fund provider and a fund manager. Meanwhile,
two tier approach is an approach which involves two
business entities separately. The two parties are the
fund provider and the fund manager. In its practice,
venture capital in Indonesia applies one tier
approach. Capital market, as a fund provider, is not
involved in venture capital in Indonesia.
(Utaminingsih, 2014)
Neil Cross, the former leader of the European
Venture Capital Association, defines venture capital
as a risky financing which usually takes the form of
equity participation into companies having high
potentials to develop. He adds that venture capital
company gives some added values in the form of
management assistance and contribution to the entire
strategy of the companies. The high risks will be
compensated by the possibility of high return
Legal Aspects of Venture Capital Financing and Its Relation to the Development of Micro, Small and Medium Enterprises (MSMEs) in
Indonesia
1447

investment, which is usually obtained through
medium-term capital gain. (Fuady, 2002)
Venture capital is a type of financing which is
provided as risk capital targeting companies with
unique ideas without an obligation to provide a
guarantee. The main basis of this type of financing
lies on the beliefs in the strength of the ideas and
belief that partner corporate enterprise will develop
and get benefit in the previously set term. To
anticipate the potential risks, venture capital
investment needs people with different expertises so
that they are useful for the active roles of venture
capitalist in building, developing and realizing the
business prospect of the partner corporate enterprise
which has high risk and limited sources. (Safrina
2013)
Venture capital financing is one of forms of
financing which can be used by MSMEs because it
does not require any guarantee like a bank but it is
based on the prospect of the business. It is different
from bank. A bank provides loan or credit while a
venture capital provides financing to companies it
finances through capital participation. Theoretically,
venture capital has potential to contribute to MSME
development. Small companies with good prospect
but lack capital and access to credit from bank can
develop rapidly after receiving capital from venture
capital. The roles of venture capital financing in
Indonesia cannot be separated from the orientation
of venture capital as a development financing
institution which provides financing by prioritizing a
healthy business. Other role of venture capital is to
help un bankable MSME to be bankable MSME
(which deserves to get credit).
(Taufiqrachman,2008)
Nevertheless, behind the easiness of financing
provided by venture capital to MSMEs, venture
capital faces a high risk.(Nur asiah,2018) In
addition, it is a fact that not all MSMEs can get
venture capital financing. It only provides financing
to companies with a good business prospect and real
potential to get profits. Besides that, there are still
many venture capital companies which require
guarantee (collateral) or borough in the provision of
its financing. This, of course, is not in line with the
characteristics of venture capital financing.
4 CONCLUSIONS
Venture capital financing has clear legal basis in
positive laws in Indonesia such as Regulation of the
Minister of Finance of the Republic of Indonesia
Number 18/PMK/010/2012 on Venture Capital
Company. It is also regulated in Regulation of
Financial Services Authority Number
34/POJK.05/2015 on Business License and
Organization of Venture Capital Business,
Regulation of Financial Services Authority Number
35/POJK.05/2015 on Good Corporate Governance
of Venture Capital Company and Regulation of
Financial Services Authority Number
37/POJK.05/2015 on Direct Inspection of Venture
Capital Company Civil laws and public laws are the
legal sources of venture capital as a business
institution in financing sector.
The roles of venture capital financing in
Indonesia cannot be separated from the orientation
of venture capital as a development financing
institution which provides financing by prioritizing a
healthy business. The mission of venture capital
company established by government is to help
MSMEs through capital participation. In addition to
capital participation, it also helps MSMEs with
management support It also helps un bankable
MSMEs be bankable MSMEs(which deserves to get
credit).
ACKNOWLEDGEMENTS
The research was funded by the Directorate of
Research and Community Service of the Directorate
General for Research and Development of the
Ministry of Research, Technology and Higher
Education in accordance with the Funding Research
and Community Service Agreement for the Fiscal
Year 2018.
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