More founders looking to add venture debt to fundraising toolkit: Chin Chao, InnoVen Capital

Chin Chao at the Asia PE-VC Summit 2016 in Singapore. Photo: DEALSTREETASIA

Fresh from drawing a hefty $200-million commitment from its shareholders Temasek Holdings and United Overseas Bank, Singapore-based venture debt provider Innoven Capital is looking to accelerate its expansion across its three markets and also make larger follow-on investments in portfolio companies.

InnoVen Capital – which was formed in 2015 with the acquisition of Silicon Valley Bank’s business in India by Temasek Holdings and UOB  – has supported over 200 startups with over $500 million in financing. Some of its notable investments include Swiggy, Oyo, Byju’s, UCommune, Momenta, Akulaku, Carsome and RedDoorz.

In an interview with DEALSTREETASIA, Innoven Capital Singapore and Southeast Asia CEO Chin Chao said, “I believe all three geographies [India, China & SE Asia] will grow substantially in the next 3-5 years, but I think China will have the highest growth potential for us, given the size and depth of the venture capital market.”

The venture lending firm entered China a little over a year ago and has already built a portfolio of nearly 30 startups.

Sharing his observations on the relatively new venture debt space in Asia, he said, “We have seen an increasing number of founders wanting to add venture debt as part of their fundraising toolkit.”

Another interesting trend that InnoVen Capital is leveraging on is the increased demand for cross-border venture debt. “As companies expand geographically from India to Southeast Asia or from Southeast Asia to China, they are looking for venture debt in each geography,” he added.

Edited excerpts from the interaction:-

InnoVen has raised $200 million to expand its business in Asia. What areas are you looking to expand into this year? Would you be rolling out more products or adding more markets?  

We will continue to focus on our existing markets of India, China and Southeast Asia. There is simply a lot more room to grow in these geographies. The additional capital also allows us to increase our engagement with even more companies and to support existing portfolio companies with larger, follow-on venture debt investments as they continue to grow and scale.

Finally, the additional capital allows us to continue to build out a truly, unique platform that leverages our cross-border network and our connectivity to the Temasek and UOB investment and banking ecosystems to create even more world-class companies across Asia.

InnoVen is in India, China and Southeast Asia. What is the percentage revenue contribution for these geographies? Which markets do you think present the highest growth potential and why?

We only began operations in Southeast Asia in 2016 and China in 2017 so these geographies are still relatively new for us given that we have operated in India for over 10 years. Our India business still generates the bulk of the group’s revenue with the remainder is roughly split equally between China and Southeast Asia. I believe all three geographies will grow substantially in the next 3-5 years, but I think China will have the highest growth potential for us given the size and depth of the venture capital market.

How do Southeast Asian founders view venture debt as an asset class today? In what areas are they open and educated about venture debt, which areas are they not? Why?

In the United States, where venture debt has existed for decades, founders find venture debt a powerful source of capital to grow their business while minimising equity dilution. The data shows that over 80% of the largest unicorns in the US have used debt early on in their lifecycle to minimise equity dilution.

The take up of venture debt in Southeast Asia, however, is still well below this figure, primarily because the concept is still relatively new. Educating the startup ecosystem on venture debt has been a key focus for us over the past few years and will continue to be so moving forward. The positive sign is that we have seen an increasing number of founders wanting to add venture debt as part of their fundraising toolkit and also a growing number of investors recommending venture debt to their portfolio companies as a complementary source of financing alongside equity capital.

How does this influence the way you sell venture debt in these markets?

With the increasing familiarity of venture debt in Southeast Asia, we now spend more time speaking with founders and investors on specific use cases and benefits of venture debt for a particular company rather than answering the general question of what is venture debt. It also gives us a chance to explore with a company how InnoVen can add value to their business. Given our pan-Asia footprint, investor and corporate connects throughout Asia and the network of our shareholders Temasek and UOB, we can often contribute in more ways than just providing a venture debt facility.

Does this mean that InnoVen requires a certain level of patient capital to fully capture the market potential of these geographies?

Venture debt has always been reliant on a robust and vibrant venture capital funding environment. Venture debt in Southeast Asia, China and India is no different. The more venture capital funding that is present in an ecosystem, the more opportunities for venture debt.

What venture debt trends have you noticed across Southeast Asia, India and China in the last few years in terms of average cheque size, frequency of transactions, debt type preferences?

Given the low penetration rate of venture debt in China, India and Southeast Asia, the greatest trend we have seen is that more companies are taking on venture debt as a way to complement the venture capital funding that they are raising. In more mature ecosystems such as the United States, the size of the venture debt market in a particular year is roughly equal to 10%-15% of the total amount of venture capital invested in companies in that same year. We are still below 5% in each In China, India and Southeast Asia.

Another trend we have seen in each region is that average venture debt cheque sizes have grown larger, almost close to 50% from when we first started. This is due primarily to the fact that companies are raising larger equity rounds and companies are staying private much longer than before. Finally, we are seeing an increased demand for cross-border venture debt. As companies expand geographically from India to Southeast Asia or from Southeast Asia to China, they are looking for venture debt in each geography, and InnoVen is well-placed to service that demand.

Which are the sectors that are more receptive to venture debt?

We believe the use of venture debt is not sector specific and that startups from virtually all sectors will be able to benefit from it.

InnoVen considered making equity investments at one point early in its journey. What is the outlook on that part of the business?

To date, we have only made equity investments in companies where we have previously provided venture debt. That will continue to be the case going forward. Selective equity investments continue to be part of our strategy but I do not think it will constitute a major part of our business.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.