Venture debt in the times of COVID-19: Your questions answered

The coronavirus outbreak and resulting restrictions have brought business activity to a grinding halt globally. Against that backdrop, traditional financial institutions, peer-to-peer lenders, and venture debt firms are getting requests from cash-strapped firms in need of a lifeline to keep operations up and running.

For startups, venture debt, in particular, sounds like a quick fix.

The financing is extended to startups that may not have tangible assets and operating profits that are requirements for traditional financial institutions, but possess technology with high growth trajectories, explained Vinod Murali, managing partner of India-focused venture debt firm Alteria Capital. “The underwriting of credit is built on a deep understanding of the VC ecosystem,” he said.

Venture debt also does not dilute a shareholder base the way an equity fundraising does, and it can also be disbursed quickly.

But its interest rates are also higher than that of traditional lenders. And, venture debt firms such as Alteria Capital and InnoVen Capital collect warrants each time they do a financing round in a startup.

“Venture debt firms take a different approach to lending to startups. We understand the higher perceived risks involved and evaluate a separate set of factors to get comfortable,” said Chin Chao, Southeast Asia CEO at InnoVen Capital. “We look at the quality of the team, the business model and the company’s competitive advantage. We then look at the existing cash runway, the quality of the equity base and the financial projections.”

This would mean that not all startups would meet venture debt providers’ requirements. Nevertheless, demand is picking up, Murali said, particularly from more mature Indian companies in the market for growth capital.

“There is going to be a strong need for growth capital post-June, especially for companies beyond Series B, which are recovering fast or are in sectors having some tailwinds. This could be an opportunity for founders to augment their equity raises with slugs of venture debt and preserve dilution,” said Murali.

Murali and Chao were speakers at DealStreetAsia’s webinar “Is venture debt a lifeline in a pandemic-afflicted world?” on 16 April. Also on the panel was Chris Wilson, a partner at law firm Simmonds Stewart. Below are the panellists’ responses to questions submitted by attendees during the webinar.

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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.