Southeast Asia’s venture debt firms are seeing a rise in requests from startups seeking debt financing in today’s cash-strapped market. However, the rise in demand may not necessarily lead to more issued loans since many startups are unlikely to enjoy the cash position venture debt providers are hoping for.
InnoVen Capital, a Temasek and United Overseas Bank (UOB) backed venture debt firm, said it has seen a 30-50 per cent increase in venture debt requests from Southeast Asia in the month of March alone.
Another venture debt firm, Genesis Alternative Ventures, says it has a healthy pipeline this year, with a noticeable uptick in queries from Southeast Asia, India and even as far away as the US. Genesis is backed by the likes of Malaysia’s CIMB Bank and the Sassoon family office.
Venture debt is appealing during a season like this one.
The COVID-19 crisis continues to roil public markets, causing a trickle-down of caution and fear as global investors freeze their capital positions and commitments. For the “weaker” startups, venture equity – while lovely – simply may not be a viable option as investors’ capacity and will to deploy capital continue to evaporate.
“Venture debt is becoming an increasingly popular debt option as it is complementary to the VC equity raised, and helps to balance the overall cost of capital,” said Jeremy Loh, co-founder and partner at Genesis Alternative Ventures.
He continued: “The likes of tech giants like Facebook have cleverly raised venture debt to fund capex such as the growth of their computing and server infrastructure as their active user base increases exponentially. Others have used venture debt to increase runway in order to fulfil certain milestones which allowed them to raise their next equity round at better terms.”
In Southeast Asia, venture debt loans can start as small as $500,000 going all the way to $10 million, depending on the needs and risk profile of the startup. Interest rates are typically pegged around 10-12 per cent, with loan tenures going between 24-30 months.
However, the growing appeal of venture debt may not be matched with a commensurate increase in the number of issued venture loans in the market this year. InnoVen Capital told DealStreetAsia that the firm may issue less venture debt as opposed to more this year, despite the flood of requests it’s seen recently.
“Given the current environment, we would likely only deploy capital if the company is able to raise an equity round. But I think equity rounds are going to slow down because the pace of investment from the VCs is also slowing. That means we won’t be able to provide venture debt just on its own without some sort of VC investing alongside us,” said Chin Chao, Southeast Asia CEO at InnoVen Capital.
The uncertainty of COVID-19 has also raised the level of caution among venture debt firms. No one simply knows how long the coronavirus is going to stick around for.
“We have raised the bar a bit in terms of what we’re looking for just simply because of the uncertainty in the environment. If a company has decent runway, we’ll definitely take a look, but I think we’re just going to have to analyse it even harder than we have been in the past,” added Chao.
Venture debt firms such as InnoVen and Genesis typically like startups with an ample cash runway of at least 9-12 months. Founders should be able to display an ability to manage cash flow efficiently. Business models should be commercially compelling, whether in terms of the ability to scale or show dominance in a specific market category.
According to InnoVen Capital, the firm executed about 24 deals in 2019. Between 2016 and 2019, it deployed $100 million in Southeast Asian firms such as Akulaku, Carsome and RedDoorz. Genesis Alternative Ventures declined to share details on its loan book but clients include Horangi, GoWork and Grain.