Venture debt is no panacea for virus-hit startups in India and SE Asia

Clockwise from top left: DealStreetAsia senior writer Kristie Neo, InnoVen Capital Southeast Asia CEO Chin Chao. Alteria Capital managing partner Vinod Murali and Simmonds Stewart partner Chris Wilson speak during an online webinar on venture debt on April 16. Photo: DealStreetAsia

Venture debt may not necessarily be the magic bullet for Southeast Asia and India’s cash-starved startups, especially those that have already tapped the route and are struggling to make debt repayments, industry players have cautioned.

InnoVen Capital Singapore and Southeast Asia CEO Chin Chao said that 80 per cent of the firm’s portfolio companies in the region have been impacted by the pandemic and that it has been in talks with founders to find a “path forward” collectively to address maturing loans.

“We try to help where we can. We try to be supportive but there are limits to what we can do,” he said during DealStreetAsia’s first webinar, Is venture debt a lifeline in a pandemic-afflicted world? 

Chao added: “If that means we need to restructure our loan a bit, we will take that into consideration and in most cases, we’ve been able to help most of the companies that have been pretty badly affected through the COVID-19 situation.”

He also said that founders who are looking at taking on venture debt now need also to get other external capital, or raise money from existing investors, rather than rely on investors who have no risk exposure to the company yet. “When we work with companies, we work with their investor base as well to figure out what’s the best path forward.”

Unlike venture funding, venture debt provides companies with additional capital without diluting the shares of founders and investors.

In Southeast Asia, venture debt loans can start as small as $500,000, and go up to $10 million, depending on the needs and the risk profile of the startup. Interest rates are typically pegged around 10-12 per cent, with loan tenures of 24-30 months.

With the pandemic making traditional capital slightly more difficult to access, some companies are now becoming more open to other ways of funding to give themselves some buffer for the next few months, according to Chris Wilson, a partner at technology law firm Simmonds Stewart.

“As more providers have teamed up and awareness has grown, people understand the concept and where it fits in the ecosystem. So, not surprisingly, on the demand side people still want to raise money,” Wilson added.

Venture debt requests in Southeast Asia surged in March, but loans may not be disbursed if businesses do not meet the requirements that venture debt firms expect. The process would involve evaluating existing portfolio companies in terms of where they are in their fundraising cycle, and how the business is faring in this time of crisis.

Chao said InnoVen closed 24 venture debt transactions in 2019, up from 14 deals in 2019. The Temasek-backed venture debt provider expects this year to be more like 2018 than 2019 due to the COVID-19 pandemic.

Still, he said there are some opportunities to put money to work, especially into category leaders in industries and sectors. “There are companies out there that we have not had a chance to work with that are looking to shore up their balance sheets in this environment. They are looking toward us for the first time.”

Also speaking at the webinar, Vinod Murali, managing partner at Indian venture debt firm Alteria Capital Advisors, said that there was a significant uptick in venture debt demand in the country in the last 18 months. But once COVID-19 hit, it changed the baseline.

In March, the Reserve Bank of India allowed banking institutions in the country to offer a three-month moratorium on all loans. This, Murali believes, has raised founders’ expectations regarding loan payments. Like InnoVen, Alteria has also spoken to about 80 per cent of its portfolio companies about the impact of the pandemic.

Murali said the firm looks at signing new venture debt agreements on a ‘case-by-case basis.’ “While I’d love to help everybody, if I do that, I will have to shut shop because as a fund, we don’t get any relief [from the central bank] for that.”

“It’s going to take some time for the real recognition of loss, maybe even a year. The idea is to ensure companies don’t just fall off a cliff. You work with them and try to help everybody around the table recover as much value as possible,” Murali added.

Nevertheless, the crisis also makes it easier for firms to pick up quality, better, and more sizeable deals. “The strong companies, the founders, they will raise more capital and they will become easier candidates for venture debt,” he said.

The deployment strategy for both Alteria and InnoVen, however, has changed given the uncertainty brought about by the virus. And that also impacts the chances for companies looking to take on venture debt now as a lifeline during the crisis.

The firms’ focus is now on their existing portfolio and closing out deals that have been signed after the pandemic. “We need to wait and watch and see that the scenario looks like, say in June, when some of the new variables become more clear,” Murali said.

“Venture debt now has a great role to play but it is all about existing relationships,” Chao added.

Southeast Asia to see valuations dip

The restrictions to curb the virus spread and the subsequent impact on business activity in various countries will also see valuations dipping quite a bit. However, this has not taken effect in Southeast Asia yet, according to Chao. But the lower valuations are likely to trigger more VC deals.

“We have not seen the impact in Southeast Asia yet but through our China office, we can see that it has started to happen right now. We are seeing valuations 50 per cent lower than last rounds in certain cases. You will start to see that here going forward,” he said.

Wilson confirmed seeing a number of seed and Series A valuations already sliding. He also noted more companies raising rounds now with flat or minimal upticks in value or even down rounds, including those based in Singapore.

In India, while it is still a bit early to determine whether valuations have slipped, Murali was clear that there is going to be pressure, and there will be flat rounds and down rounds.

“The focus is how much cash is needed and what is the real runway,” Murali said. “We are at this point where we are still figuring out what the path of recovery is going to be.”

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.