Southeast Asia venture debt: Getting acquainted

When Jeremy Loh joined the venture debt division at DBS in 2015, the biggest challenge was explaining to the market what they were doing. “Companies and even investors were struggling to understand the value of venture debt,” he recalls. “We built up the knowledge and perception, and we ended up with a nice portfolio.”

DBS wasn’t alone in advocating debt financing for start-ups. The bank initially teamed up with Vertex Ventures, Monk’s Hill Ventures and Golden Gate Ventures, with a view to backing start-ups that had raised at least S$1 million ($740,000) in Series A funding from one of these investors. Targets typically needed working capital or financing for projects and acquisitions. They included Singaporean home automation developer Zimplistic, Indian tea specialist Teabox, and Thailand-based retailer aCommerce.

A few months later, Temasek Holdings and United Overseas Bank (UOB) acquired Silicon Valley Bank’s venture debt business in India, which had been in operation since 2008. Regional expansion was always on the agenda and within 12 months, the business – renamed InnoVen Capital – was active in Southeast Asia. In 2016, Enterprise Singapore launched a S$500 million venture debt program with support from DBS, OCBC and UOB.

Now Loh has established what he describes as Southeast Asia’s first independent venture debt business. He is working alongside Ben Benjamin, an angel investor who is involved in the Singapore branch of OurCrowd, and Martin Tang, a colleague from DBS. The firm, known as Genesis Alternative Ventures, is said to be raising a $70 million fund, according to sources familiar with the situation. The Sassoon family office will participate as an anchor investor, while Indonesian bank CIMB Niaga is a strategic partner.

The plan is to finance start-ups at the Series B stage, structuring the loans with a warrant component that converts into an equity stake. There should be plenty of untapped space. Loh estimates that venture debt accounts for less than 5% of total VC funding in Southeast Asia. In the US, 15% of VC investments since 2009 have been in debt form, with commitments reaching $8 billion in each of 2015 and 2016. More than half of companies took loans for the first time following their Series A or B rounds.

Venture debt should be regarded as another component of Southeast Asia’s start-up infrastructure, which has fallen into place, piece by piece, over several years. The Series B funding gap, for example, is well-documented and venture capital firms have responded with growth-stage funds. It is estimated that 180-200 start-ups will be seeking Series B and C rounds in the next two years, assuming 10% of those that raised Series A rounds in 2016-2018 make it through to the next level.

Many of these companies could be targets for Genesis and its fellow venture debt providers, whether they provide an alternative solution to an equity round or a bridge to it. 

Even though the level of knowledge and comfort is higher than four years ago, there is still a long way to go, with the adoption rate in Southeast Asia still trailing India, for example. And regardless of the market, products must to some extent be tailored to local realities. To the borrower, venture debt is a means of raising capital without diluting equity. To the lender, the nature of the proposition can vary based on the business type of the borrower. On a basic level, the risk profile of an enterprise-facing start-up might be very different to that of a consumer-facing start-up.

Venture debt has seen encouraging growth in Southeast Asia and there is the potential for much more, but in many respects, parties on both sides of the transaction are still getting used to the asset class.

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• Topics
• Southeast Asia
• Venture
• GPs
• Financing
• Structured finance