More Southeast Asian startup founders to tap venture debt, according to INSEAD and Genesis Alternative Ventures survey
More than 60% of founders would consider using venture debt to raise up to US$5 million each for Series A and B funding
Venture capital firms support venture debt and would recommend portfolio companies to use venture debt
Singapore, 28 December 2022 – More than 60% of Southeast Asian startup founders would consider using venture debt to raise up to US$5 million each, according to a survey by the INSEAD Global Private Equity Initiative (GPEI) and Genesis Alternative Ventures.
Founders would tap venture debt for Series A and Series B funding and would also prefer to raise from specialised venture debt lenders in order to access their networks and future rounds of funding, as well as for their help in building a credit track record.
The latest INSEAD GPEI and Genesis survey found that almost all startup founders polled had heard of venture debt, but only 27% have used it. Most of the venture capital (VC) firms surveyed, however, have recommended venture debt to their portfolio companies in the past two years and will continue to do so. About 82% of VC firms’ portfolios have used venture debt, and going forward most of the VC firms surveyed would recommend venture debt to their portfolio companies.
On the investor side, the study found that in the current environment of rising interest rates, investors prefer the yield and risk profile of venture debt.
The respondents were mainly from enterprisetech, healthtech and fintech companies in Southeast Asia.
The survey covered a total of 94 VC firms, startup founders and investors, and was carried out between 8 July to 1 August 2022.
The findings come as more startups in Southeast Asia have turned to debt financing given declining valuations. They have closed at least 15 financing deals totalling US$819 million in the third quarter of 2022, or just over half of the debt raised since the start of 2022.
Vikas Aggarwal, Academic Director of the INSEAD Global Private Equity Initiative and Associate Professor of Entrepreneurship and Family Enterprise at INSEAD, said: “Venture debt plays a critical role in the ecosystem of entrepreneurial finance, and has become increasingly important to startups in Southeast Asia in recent years.”
Dr Jeremy Loh, Co-Founder and Managing Partner of Genesis Alternative Ventures, said: “Our latest survey with INSEAD offers hope that startup founders will continue to view venture debt as a useful and necessary source of funding, complimentary to venture equity.
Genesis was founded by Mr Ben J Benjamin, Dr Jeremy Loh and Mr Martin Tang in 2019, to support early-stage growth companies in scaling up while minimising dilution in founders’ shareholdings.
As one of the world’s leading and largest graduate business schools, INSEAD brings together people, cultures and ideas to develop responsible leaders who transform business and society. Our research, teaching and partnerships reflect this global perspective and cultural diversity.
About INSEAD Global Private Equity Initiative (GPEI)
The Global Private Equity Initiative (GPEI) is INSEADʼs private capital think tank which works hand-in-hand with private equity and venture capital firms, institutional investors and governments around the world to foster entrepreneurial ecosystems. It connects companies and entrepreneurs with the right sources of capital for their stage of development. GPEI covers research topics ranging from early-stage venture capital to growth equity to buyouts of mature businesses. For more information, visit www.insead.edu/gpei.
About Genesis Alternative Ventures
Genesis Alternative Ventures is Southeast Asia’s leading private lender to venture and growth stage companies funded by tier-one VCs. Genesis is a trusted partner in empowering corporate growth while minimising shareholders’ equity dilution. Genesis is founded by a team of venture lending pioneers who have backed some of Southeast Asia’s best-loved companies. Genesis was founded by Ben J Benjamin, Dr Jeremy Loh and Martin Tang in 2019.
The ambition of any startup was to become a unicorn. However, with the recent battering of the financial markets and the looming threat of a 2023 global recession, the pendulum of venture financing has swung from feast to famine.
Startups in Southeast Asia have not been spared from the “perfect storm”. Gone are the days when venture funding was readily available for “growth at all costs.” Instead, investors have been tightening their purse strings and prioritizing strong unit economics, sustainable growth, and conserving cash. Therefore it is not surprising that Founders are feeling anxious and looking for alternative sources of financing.
To explore the ecosystem’s perceptions of such an alternative financing instrument, venture debt, INSEAD GPEI collaborated with Genesis Alternative Ventures to survey founders, venture capital firms, and investors.
Genesis welcomes our latest Limited Partner, OurCrowd, is a global venture investing platform that empowers institutions and individuals to invest and engage in emerging companies. OurCrowd manages more than $1.9B in committed funds for its 300+ portfolio companies and venture funds.
We sat down with Jon Medved (JM), Founder & CEO of OurCrowd. John is a serial entrepreneur and investor, who has been named by the Washington Post as “one of Israel’s leading high tech venture capitalists” and by the New York Times among the “top 10 most influential Americans who have impacted Israel.
Q1: You’ve been in the startup industry for a very long time. What is it that excites you about the industry?
JM: Startups are the lifeblood of technological innovation and progress. Decades ago, Lockheed Martin invented Skunk Works, and Xerox created Xerox Park, where the brightest minds could dream up big ideas unhindered by stultifying corporate red tape.
Today, the smartest companies in the world – including all the tech giants – realize that the only way to bring innovation into their products is to scout for startups developing relevant tech, invest in them, and snap them up. Today’s entrepreneurs have become Rockstars who are often celebrated and admired. They are responsible for building the world’s largest companies who have completely transformed our lives. Startups are developing the tech we need for computing, communication, and commerce, not just for the tech industry alone, but to address the critical issues of our time: food production, healthcare, clean water, sustainable energy and much, much more.
As a venture capitalist, I have the privilege of enabling visionary founders and innovators by connecting them with the investors who can fuel their startups and transform their dreams into commercial reality. Our companies literally save lives, heal the sick, and provide fresh food, water and clean energy where it’s most needed. They protect critical infrastructure from cyber-attacks. They provide the digital tools that help businesses grow. They entertain and they create employment. And when they succeed, they repay their investors many times over. It’s the best job in the world.
Q2: OurCrowd is a well-known equity investor and you’ve now launched a venture debt strategy. Can you tell us your rationale? What has been the reaction from your investors and startups?
JM: OurCrowd’s mission was always to democratize access to private markets, so in that sense it’s just a natural continuation of our journey. This initiative also came at a perfect time. Demand for venture debt is at an all-time high as entrepreneurs and investors alike realize its critical importance in the market.
This new debt product serves us in two ways. It allows us to further support our portfolio companies by offering them non-dilutive financing, which is highly relevant given the decline in valuations and the desire to avoid serious dilution from a down round. It also expands our value proposition to our investors with a cash-generating facility that provides steady income and much shorter duration than the equity investments. We are getting great feedback from both portfolio companies and investors for adding this new asset class, as evidenced by the oversubscribed Genesis first close.
Q3: Why did you choose to partner with Genesis?
JM: We decided to partner with Genesis because of the Genesis team’s strong domain expertise, with 40 years of VD/VC/PE experience and $100m+ venture debt deals executed. They are probably the most experienced venture debt team in Southeast Asia. The team’s performance speaks for itself in the early results from Fund I.
Genesis also gives us access to a unique market opportunity. Venture debt is growing strongly across Southeast Asia and high-growth companies that raise venture debt typically do so concurrently with an equity fund raise. In 2021, a record $621B was invested into global startups with $25B injected into companies in Southeast Asia. This represents a 3x increase over equity raised in 2020.
OurCrowd also likes to invest alongside strong LPs, like the Fund I investors who also decided to invest in Fund II and include some of the strongest institutional investors in the region. Moreover, we know many of the key members of the funds management for many years, and not only like them and appreciate them as fine human beings, but we continually are amazed by their talent and high ethical standards. When a great team addresses a huge and fast-growing market opportunity at the right timing, this is a good time to invest.
Q4: Where do you see the venture capital industry, especially venture debt, going in the next 5 years in SEA and Israel?
JM: A typical benchmark used by research analysts is to estimate the total size of the venture debt market as a percentage of total venture capital invested during a given year. Estimates are that the venture debt market in SEA represents ~2-5% and in Israel ~5-10% compared to 15-20% in the US. These two markets achieved fundraising records in 2021. Israeli startups raised $25.4b, a 136% increase on the previous year, while SEA startups raised $25.7b, a 167% YOY increase. We believe that the record VC money raised in 2021, maturing of the market and strong demand for venture debt amid the current global slowdown will continue to be the main drivers pushing the growth of this market.
Q5: How and where can startups in SEA and Israel collaborate together?
JM: Startups are shrinking the world. Cross-cultural collaboration is essential for innovation, because it breaks boundaries of thinking and attitude. Just look at how many of the top tech executives in the US are immigrants. One of Israel’s great strengths that has helped make our tiny country a global tech powerhouse is the fact that our population comes from more than 100 different countries, creating a rich cultural diversity that expands knowledge and thinking. Every time an Israeli startup begins a collaboration with a partner or customer from another country, it adds to its experience and effectiveness.
We are now seeing the same phenomenon in our new relationship with the Gulf states following the signing of the Abraham Accords, where Emiratis and Israelis are bringing different and complementary skills and experience to bear on a wide variety of issues and creating something brand new and even more exciting. In the same way, collaboration between startups in SEA and Israel can only enrich everyone involved and expand their horizons. Israeli companies can benefit from SEA skills in scale up and manufacturing, SEA companies can benefit from Israeli R&D prowess and deep tech innovation.
Q6: What do you look for in a founder or founding team?
JM: OurCrowd vets hundreds of startups every month and chooses perhaps one or two percent to add to our platform. Our founders must display technological excellence, relevant experience, original proprietary technology, good management skills and commercial sensibility. It is very rare for one person to have all those skills, so we tend to invest in teams of founders whose skills and experience combine to create the right group to establish, lead and build a company with a potentially commercial product. Moreover, we want to work closely with our teams, so it helps to like them!
Q7: What are the challenges and opportunities that you are seeing in the tech industry?
JM: The world is in crisis. We need answers to the critical issues facing our planet and its people. Startups can create the technology we need to fix the world. Just look at BioNTech, a startup founded by Turkish immigrants in Germany that created the vaccine marketed by Pfizer. Startups that tinker with problems that no-one needs to solve will not survive. But founders who identify a real problem, develop a practical, commercial solution and find a way to market will continue to succeed.
Q8: Any advice to founders on weathering the current downturn?
JM: This market correction was almost mandatory if you look at the soaring valuations of the past few years. Founders can no longer expect to enjoy the soaring double-digit price/revenue ratios that we have seen. There is still a lot of venture capital waiting to be deployed, but investors will want to see realistic business models and more modest spending. Founders should trim costs, extend their runway, and turn to alternative financing like venture debt instead of dreaming of huge cash injections from selling off tiny parcels of equity at high valuations.
Q9: What is your favourite movie and why?
JM: It’s A Wonderful Life. No explanation necessary.
Q10: What’s next for you?
JM: I have the greatest job and the cutest grandchildren in the world. I’m staying right here with them in Jerusalem, the most beautiful city on Earth.
TOUGH market conditions are creating a spike in demand for venture debt among startups. A tighter funding environment along with unfavorable exit conditions in public markets have led to more venture debt requests, even more so than at the onset of the pandemic in 2020.
Venture debt provider Genesis Alternative Ventures has been tracking quarter-on-quarter growth in venture debt requests and is seeing an average of between US$80 million and US$100 million of requests per quarter currently.
Traction among investors for venture debt appears to be growing, as Genesis Alternative Ventures is now raising its second fund, with a target of US$150 million. Half of the funding target has been committed, with 80 per cent of the investors following on from the first fund.
Venture debt provider, Genesis Alternative Ventures, has launched its second venture debt fund, with a target of US$150 million. About half of fund II’s target has been raised at the first close earlier in August. The first close had 80 per cent of fund commitments come from existing limited partners, Sassoon Investment, Aozora Bank, Korea Development Bank, Mizuho Leasing and Silverhorn among others. New investors also include OurCrowd, an Israel-based global venture investing platform.
Genesis Alternative Ventures, a private lender to ventures and growth-stage companies, is looking to raise $150 million for a second fund to finance startups across Southeast Asia. The Singapore-based firm has raised almost half of the fund at first close this month, with commitments from existing investors including Sassoon Investment Corp., Aozora Bank, Korea Development Bank, Mizuho Leasing and Silverhorn, Genesis said in a statement Thursday. Israeli investment firm OurCrowd Ltd. has joined as a new backer.
Genesis Alternative Ventures, a private lender to ventures and growth-stage companies, is looking to raise US$150 million ($209.1 million) for a second fund to finance startups across Southeast Asia.
Following the success of its debut $90million fund in 2019, Singapore-based venture capital firm Genesis Alternative Ventures has launched its second venture debt fund to raise $150m million to finance start-ups across Southeast Asia.
Strong investor support with almost half the Fund committed at first close.
80% of first close commitments from existing investors such as Sassoon Investment Corp, Aozora Bank, Korea Development Bank, Mizuho Leasing, Silverhorn; notable new investment from Israel’s OurCrowd.
Genesis’ US$90m Fund I launched in 2019 financed 25 companies across Southeast Asia including unicorns Matterport & Akulaku.
Singapore, 25 August 2022 – Following the success of its debut US$90 million fund in 2019, Genesis Alternative Ventures has launched its second venture debt fund to raise US$150 million to finance start-ups across Southeast Asia. Almost half the fund was raised at first close earlier this month.
In a strong show of support, 80% of Fund II’s first close commitments came from existing Genesis’ Limited Partners (LPs) such as Sassoon Investment Corp, Aozora Bank, Korea Development Bank, Mizuho Leasing, Silverhorn, family offices, charitable trusts, fund of funds and corporate investors. Among new investors is OurCrowd, the Israel-based online global venture investing platform.
Dr Jeremy Loh, Genesis’ Co-Founder and Managing Partner, said: “We are grateful to our investors for their continued support.
Genesis Fund II further strengthens our ability to provide financing for promising start-ups that are catalysts for economic growth in the region.”
Genesis extends debt to revenue-generating, high-growth companies that are backed by venture capital funds. These start-ups typically do not qualify for regular bank loans because they lack collateral, or have not yet reached profitability, and/or their founders are wary of taking on too much venture capital for fear of diluting their ownership.
The venture debt firm founded by Ben J Benjamin, Dr Jeremy Loh and Martin Tang in 2019, will continue to focus on Southeast Asia’s early and mid-stage high growth technology start-ups (Series B to pre-IPO). Dr Loh said Fund II already has a US$60 million deal pipeline in place.
He added: “Southeast Asia remains a magnet for investors attracted by the region’s growth potential, talent availability, high population and reasonable labour costs. In particular, Singapore has strengthened its position as a hub for innovative start-ups in the region.
“While the pace of investing may have slowed due to economic headwinds, interest in Southeast Asia technology companies remains strong. Given the record amount raised by venture capital funds in the last year, there’s a lot of dry powder for start-ups with strong fundamentals.
“Genesis will continue to finance first-class entrepreneurs who are building high-growth companies built on sustainable business models.”
Impact & ESG forms backbone of Fund I portfolio
Genesis Fund I raised an oversubscribed US$90 million and has financed 25 companies from Series A to pre-IPO in sectors such as logistics-tech, fintech, agritech, cybersecurity, and food-tech operating in Southeast Asia. It counts two unicorns among its portfolio companies namely Matterport, a leading global spatial data platform company, and Akulaku, a banking and digital finance platform in Southeast Asia.
Genesis selectively finances companies with meaningful impact objectives and works closely with entrepreneurs to identify and introduce important ESG principles within portfolio companies. Genesis has channelled nearly half of its capital from its debut fund into start-ups with meaningful impact objectives that are aligned with the United Nation’s Sustainable Development Goals. Close to 80% of its portfolio companies have in place formal ESG policies and procedures.
In a joint report last year, Genesis and PwC Singapore noted that venture debt is fast emerging in Southeast Asia as an alternative and complementary source of financing for high-growth tech companies that traditionally only raised equity as a source of capital. The report was presented at last year’s Genesis Forum featuring Tan Sri Mohamed Nazir bin Abdul Razak, past Chairman, CIMB Group, who delivered the keynote address “Profit with purpose, my personal journey to here.”
Victor Sassoon, Chairman, Sassoon Investment Corporation: “We are delighted to continue backing the Genesis team in their mission to provide less-dilutive funding to entrepreneurs across Southeast Asia. We are firm believers that venture debt will play an important role for start-up founders who are confident of their business growth and recognise the long-term value in complementary financing for working capital and other needs.”
Shin Kato, Head of Asia Investment Group, Aozora Bank: “The Southeast Asian and the Japanese venture ecosystems have long been underserved by credit providers. Genesis and Aozora Bank are both tackling this issue in their respective markets, and we are happy to continue our strategic partnership with Genesis to provide non-dilutive capital to innovative and impactful companies through their second fund while exchanging know-how and market insights on Japan and Southeast Asia.”
Jon Medved, CEO, OurCrowd: “We are delighted to be investors in Genesis Fund II. This fund has a tremendous management team whom we have known for years, leading co-investors, superb performance to date, and a brilliant future in bringing the important asset class of venture debt to the fast-growing Southeast Asia market. When we add the power of our global OurCrowd community to Genesis’ already great story, we are confident that this is about to get only better.”
About Genesis Alternative Ventures
Genesis Alternative Ventures is Southeast Asia’s leading private lender to venture and growth stage companies funded by tier-one VCs. Genesis is founded by a team of venture lending pioneers who have backed some of Southeast Asia’s best loved companies. Armed with a strong reputation among entrepreneurs and investors, Genesis is a trusted partner in empowering corporate growth while minimising shareholders’ equity dilution. Genesis was founded by Ben J Benjamin, Dr Jeremy Loh and Martin Tang in 2019.
We get it. Running a startup is a crazy roller coaster ride. That is why it is important to find and bring the right VC partners on board with you. You will probably meet many before deciding on a core team. And it all starts with a convincing pitch that is engaging, clear and concise.
When I googled “how to pitch my startup”, I got more than 42 million hits. I am sure most of the advice offered is sound, if a little generic.
Having worked in the startup ecosystem in both Silicon Valley and Southeast Asia, I have noticed that there is a difference in the way founders here approach their pitch. I have noticed that Southeast Asian entrepreneurs tend to be more conservative in their pitch approach and more reluctant to talk about their achievements (and I include myself in this category). There are many cultural reasons for this but such reticence does not serve startup founders well, especially when making their pitches.
Over the years, my team at Genesis and I have attended multiple startup pitch sessions and have given my share of feedback and useful tips to help founders in Southeast Asia sharpen their pitch. Here’s a quick summary of those feedback:
Be clear about your ask
It is perfectly fine to be upfront about what you are looking for – be it mentorship advice or an investment. Many founders feel shy about talking about money so early in a discussion but trust me, it is helpful for the VC to know your objective from the start.
For instance, if you are looking for funding, you can start by saying, “Thank you for your time today. I am looking for $6m funding for a 10% share of my agri-tech company.”
Or, if you are looking for strategic partnerships, “Thank you for your time today. I am looking for partners in the agri-tech and/or logistics space who can add value to my business.” It is also reasonable to seek introductions to business contacts or possible advisors.
Be proud of your mission and credentials
Once I sat in on a pitch from an edutech company and it was only after 5 or 6 slides that she revealed that she is a geneticist. Immediately that became interesting to me. What is the connection between genetics and education?
Most founders tend to have business, finance or engineering backgrounds. So when someone with academic achievements and industry experience turns up to share why they are on this mission, it certainly catches the attention of an investor.
Likewise, for your mission. Whether you are solving a payment problem or moving 1 ton of ugly food per day, if you are not excited about your mission, no one else will be.
So do speak with positive energy and conviction. I know this is not natural for many of us in Southeast Asia but it is important to “infect” the VC with your enthusiasm.
Be humble when receiving feedback
This sounds contradictory to #2 but it makes sense. The VC industry is a small one, particularly in our region. One of the first questions that VCs ask themselves is “can I work with this entrepreneur over the next 3-4 years and help build this business?”
“VCs invest in people, not ideas or technology.” Most investors are placing a bet on the founder’s ability to successfully handle the multiple challenges of growing a startup. And founders who are unable to handle a couple of tough questions in a pitch are less likely to raise money from investors.
So treat the feedback as a gift. An hour that a VC set aside to listen to your pitch may not end up in an investment. But the feedback could bring fresh perspectives, new ideas and insights for your business or even how to improve your pitch.
Be concise with your elevator speech
It is always good to be prepared to talk about your startup concisely. You’ll never know when you’ll meet a potential investor.
We suggest an elevator speech along these lines:
Think BIG: What is the end goal (e.g. save 10 tons of ugly food per day)?
Start SMALL: What are the low hanging fruits that you are plucking today?
Move FAST: How are you going to scale?
Starting with your Big Idea allows you to plant a seed into the investor’s mind. And if you get interrupted and don’t get to the other two parts of your elevator speech, at least you’ve communicated your mission. This leads me to the final point.
Be jargon free
Most VCs are finance- or economics-trained. A few of us are engineers by training. Even fewer of us were medical professionals.
While we may have picked up terms like “NFT”, “Metaverse” or “DAO”, it helps if you use layman terms in your pitch. Try pitching to your family or friends first; if they can understand what your business is about, the likelihood of an investor understanding it would be higher.
The tech and venture market will have its up and down cycles. Whatever the climate, there will always be venture investors looking for the next unicorn or decacorn. When you get an hour of time with a VC or a partner, it is more important to be ready with your pitch. And be prepared to evolve that pitch deck. You will be fascinated when you see the 40th version compared to your first deck.
We wish you much success and hope that these tips are useful in helping you elevate your pitch and raising the next round of funds.
(A version of this article first appeared on LinkedIn on 21 July 2022.)
Tech has been through a rocky patch so far this year, what with the gyrations of the stock market, delayed IPOs, depressed valuations, renegotiated term sheets, and layoffs. How does this align with what we’re seeing on the ground in the tech and venture ecosystem in Southeast Asia?
Our observations in the first half of the year are that investors continued to bankroll their fundraising activities and pressed on with new and follow-on investments into Southeast Asian startups despite current market conditions. Surprisingly, as at the date of this report, the pace of investments coupled with ever-growing deal sizes suggest an inverse correlation to the market correction.
For example, three Genesis portfolio companies announced strong follow-on Series C rounds in the first half of 2022, registering between a 1.78x to 2.92x increase in their enterprise value. In April, Sequoia-backed Trusting Social, an impact-driven Fintech focused on creating unique, personalised financial credit scores for the unbanked and underbanked individuals, announced its initial close of $65 million led by Vietnam’s consumer-focused conglomerate Masan Group.
A month later, Believe, a direct-to-consumer (D2C) startup specialising in consumer beauty products and backed by Accel India, raised a $55 million Series C financing led by Venturi Partners. In June, Deliveree closed its $70 million Series C led by Gobi Partners and SPIL Ventures (the CVC arm of Salam Pacific Indonesia Lines). Deliveree has been focused on creating a dynamic marketplace for the trucking industry across Indonesia, Vietnam and Philippines, matching independent truck drivers and customers with cargo.
And this was on the back of various other deals announced publicly. Indonesia’s Fintech Flip raised $100 million Series B (Tencent, Block, Insight); eFishery $100 million Series C (Temasek, Softbank, Sequoia);, Bibit $80 million (GIC); Astro $60 million Series B (Accel, Tiger Global); Singapore’s ShopBack $80 million Series C (Asia Partners); BioFourmis $300 million Series D achieving unicorn status (General Atlantic); Neobank Stashfin $270 million equity/debt Series C (Uncorrelated Ventures); Neuron Mobility $43 million Series B (GSR Ventures, Square Peg); Multiplier $60 million Series B (Tiger Global, Sequoia); Thailand’s Fresket Series B $23 million (PTT Oil, Openspace) and many more.
We also observed a continuation of Seed and Series A funding closes for startups across Southeast Asia. For example, Eratani, an Indonesia-based agritech startup raised a $1.6 million Seed round while Li Ka-Shing’s Horizons Ventures co-invested $7.5 million into Ilectra Motor Group, a 2-wheeler EV targeting the Indonesian market.
A Return to Profitability With Leaner Companies
Growth, especially growth at all costs, requires significant capital to take market share now and worry about profitability later. More often than not, customers and revenue acquired in such fashion are far from ideal, leading to higher churn rates, lower retention rates, and driving up costs even further. Raising too much capital at early stages can result in undisciplined spending leading to layoffs and other painful reactions when the burn rate skyrockets and future funding becomes scarce.
It is sobering to see news on startup layoffs across US and Asia including Southeast Asia (here are some dedicated websites tracking these statistics) and casualties such as Kaodim, an 8-year-old startup in Malaysia, which means “take care of it”, that shuttered its services as Covid halted the home-services industry. Softbank Asia’s Propzy, which bagged a $25 million Series A in 2020, dissolved a major part ofits business and reportedly laid off 50% of its employees.
On the flipside, good founders understand the value of a long-term mindset and the importance of building startups with the right values and structure so they can grow into lasting companies. The “exuberant climate” for start-ups has turned and investors are demanding to see financial metrics that are in line with the company’s stage of development. Therefore, it is prudent for start-up leaders to make adjustments in order to enhance operational efficiency and to focus funding resources to achieve important key performance indicators so as to reach the next funding round.
And there are certainly opportunities for resilient founders and companies in a market correction. As with prior downturns, we believe there is a correlation between economic cycles and the formation of category-defining companies. Companies such as Uber, Airbnb, Square, WhatsApp, MailChimp, and Adobe were all founded during recessionary periods. Moreover, today’s founders have an arsenal of tools ready for them to launch their disruptive companies in a cloud-based world with less capital required for growth and the ability to operate with no hard assets. And venture capitalists are still hunting for startups that could well become tomorrow’s category-defining companies.
A great example is Deliveree. Genesis visited Deliveree at its South Jakarta office in June to catch-up with Tom Kim, Deliveree’s Chief Executive. Tom was wrapping up Deliveree’s Series C fund raise and shared how Deliveree had been keeping a tight rein on hiring and marketing expenses which is why the company was able to garner an industry-leading gross margin in the mid-teens, compared to better-funded competitors, some of whom have low, single-digit to negative gross margins.
Brisk Pace of M&A Transactions
A “buyer’s market” has emerged as deep-pocketed acquirers pick up targets of good value. Acquiring targets in order to bulk up seems to be more attractive as the IPO window remains closed, keeping exit valuations depressed.
For example, India’s Pine Labs acquired Southeast Asian startup Fave for up to $45 million. Singapore’s Funding Societies announced it is acquiring digital payment provider Cardup to expand its payments offering.
In fact, Genesis has been receiving requests from founders who want to strengthen their balance sheet with venture debt for the sole purpose of acquisitions – a smart way to raise lower dilutive capital and add breadth and depth to their business.
We expect the pace of M&As to gather further in coming quarters given the conversations we have been having with founders who want to leverage on venture debt to buy up smaller competitors.
Abundant Dry Powder Globally For Venture Capital Investments
Preqin estimates there is more than $497 billion of global venture capital dry powder as at May 2022 (dry powder being the amount of capital that has been committed to funds minus the amount that has been called by general partners for investments).
Quarterly funding levels in 2022 remain above quarterly funding levels in 2020 and prior, according to CB Insights (July 2022) with $108.5 billion raised across 7,651 deals. This is despite the fact that quarterly funding has slowed in 2022 amidst tightening liquidity and a global meltdown in technology stocks.
US VC fundraising tops $120 billion for the second consecutive year, according to Pitchbook. A strong showing from established managers in the first half of the year has pushed capital raised to a record pace. These managers have closed 203 funds worth $94.7 billion through the first six months of the year. Already, 30 funds have closed on at least $1 billion in commitments, eight more than the previous full-year high of 22 recorded last year. While this activity is most likely a continuation of momentum from 2021, it’s still an encouraging sign around the level of capital availability through the uncertainty that the next few years may bring.
In Southeast Asia, fund investors have increased allocations to the Southeast Asia venture corridor. Southeast Asia and India-focused VC funds have raised $3.1 billion in the first 5 months of 2022, eclipsing the $3.5 billion these funds raised in all of 2021, according to a Nikkei Asia report in May 2022.
Established Southeast Asia players like Sequoia, Accel, Jungle and Mass Mutual have raised larger, multi-stage funds. Sequoia raised $2.85 billion, which includes its first dedicated fund for Southeast Asia with a pool of $850 million. And despite the shaky short-term outlook in tech, Sequoia remains optimistic about Southeast Asia’s start-ups, as do new entrants White Star, Antler, and Altara. From our conversations within our network of General Partners (GPs), it is evident that companies that can demonstrate financial discipline and prioritise healthy topline growth with manageable bottom-line expenses will be rewarded in this investment climate.
While GPs believe that the pace of investment may slow compared to 2021, this does not also mean that investing into new deals will come to a halt; rather the deal selection and diligence process will take longer as GPs will now insist on observing certain metrics and may choose to sit on the sidelines while monitoring progress.
On the topic of valuation, we also notice that GPs have already lowered their WTP (willingness to pay) and this is a common theme across funds globally. Seed and pre-A startups are likely most impacted and may see as much as 50 – 75% reduction in valuation as investors prefer not to take very early-stage risk. Series B, C and D startups remain attractive for GPs to continue investing in given their life-cycle and more reasonable enterprise values, and as highlighted above, there remains a barrage of early growth startups that have raised $50-200 million in a single round of financing with little to no discount to valuations. It also appears that funding has shifted away from late-stage pre-IPO mega deals which has resulted in the declining minting of new unicorns into the tech sector (which mirrors the global phenomenon).
Summary
While we recognise this will be a tough period for investors and companies alike, we equally believe that this will be a rewarding time for investors and GPs who have stuck to their investment thesis of backing mission-driven founders who are building sustainable businesses and aiming for market leadership positions.
The medium to long-term outlook of venture capital investing will improve as valuations and investment pacing return to more sustainable levels. And not forgetting the abundant VC dry powder waiting to pounce on attractive deals in the shorter term.
All of this should also lead to more robust dealflow for venture lenders like Genesis. Investors are now more focused on more sustainable companies with a path to profitability, healthy gross margins, lower burn, more reasonable valuation ascents etc. These are the very companies that Genesis has always invested in. In fact, in the last 2 quarters, Genesis reviewed more than $100 million of deals, and since inception, our total dealflow has crossed the $1 billion mark, which is a significant milestone.
It has been an incredibly busy two months for us at Genesis Alternative Ventures, the current market volatility notwithstanding.
In April and May, we took advantage of the reopening of global borders to visit our investors, partners, and portfolio companies in Tokyo, Seoul, and Indonesia. In May, we hosted our General Partners Advisory Board and Limited Partners to share the progress of the Fund and to discuss the macro-economic investment outlook. It was refreshing to catch up with everyone face-to-face and to reaffirm the trust that we built via two years of virtual meetings.
All the discussions I had were enlightening, insightful and relevant in the current market uncertainties and I thank everyone for sharing your thoughts and time so generously. As one good deed deserves another, I thought it would be useful to sum up and share my takeaways that might help guide us through these turbulent times:
Growth of venture debt : Amid rising interest rates and increased market volatility, private debt tends to shine and venture debt providers across Southeast Asia, India and the US are reporting a surge in deals and a growing pipeline.
Cash is King: With tighter funding market environment and falling valuations, startups should look for opportunities to consolidate and acquire good assets to strengthen their position while cutting back on cash burn to focus on profitability and preserve cash runway
Keep Calm and Carry On: Venture investors have indicated continued support for existing companies and will allocate more capital to their portfolio, instead of hunting for new ones. However, with freshly minted Southeast Asia venture equity funds like Jungle Ventures Fund IV ($600m), East Ventures multistage $550m venture and growth fund, Mass Mutual Ventures Fund II ($300m), there is still ample liquidity for early-stage companies seeking entry ticket funding. However, founders are advised to sharpen their pencils as the days of funding back-of-envelope ideas are gone.
There ARE Alternatives to TINA (There Is No Alternative): Navigating a challenging environment, sophisticated investors are pivoting from traditional portfolios that were based on a mix of public equities and fixed income. Increasingly they are looking for an alternative bucket of private equity, venture debt, and real estate where opportunities for better yields than liquid assets, with lower volatility and less correlation to headline risk.
Next month, we hope to share some insights on Founders’ sentiments from a survey of the entrepreneur community. I thank you in advance to all those who have kindly agreed to be surveyed and share your thoughts with us.
Disclaimer: The content in this article is meant to be informative and for general purposes only. It is not and shall not be construed as investment advice.
(A version of this article first appeared on LinkedIn on 3 June 2022.)
Words cannot express how delighted we were to meet our investors, partners, and portfolio companies at Genesis’ first-ever, physical event.
Held on 12 May 2022 in the charming Grace Hall of the Jacob Ballas Centre, we welcomed our guests, some of whom have travelled from Korea, Japan, and USA to join us. We are also grateful to those who joined us via Zoom from Indonesia, Israel, Malaysia, UK and USA.
In addition to sharing the progress of our Fund, our guests were treated to a packed agenda full of insights:
AI driven consumer research and analytics by Stephen Tracey, COO, Milieu Insight (portfolio company)
Advanced 3D technology for the fashion e-commerce industry by Harindar Keer, Flixstock (portfolio company)
South-east Asia investment landscape by Jeff Benjamin, CEO, Bank J Safra Sarasin
Panel: Due South – Why SEA Continues To Be A Magnet For Investments
Tony Huang, Managing Partner, KISO Capital (moderator)
We would not have made it this far in our venture debt journey without the support, encouragement, and belief of our stakeholders. Thank you and see you in 2023!
Special thanks also to Teabox for their exclusive selection of Darjeeling teas for all our guests to enjoy.
Relive the afternoon’s highlights with the recap video
