Article by Jeremy Loh, Co-founder Genesis Alternative Ventures

Posted on 20 July 2019

Looking back at my venture investing career, its been 12 years since I hung up my lab coat at A*STAR and Imperial College and switched sides to become a venture capitalist. Started with venture equity which took me across the Pacific to Silicon Valley and then back to Southeast Asia where I took on a new challenge as a venture lender.

I recalled trying to raise some venture debt in 2008 for one of my portfolio companies but got nowhere with the banks. Reason? Lack of financial and operating track record. When I was the Head of EDBI’s US office and sat on the board of our portfolio companies, it was intriguing to learn how pre-profit venture-backed companies create a judicious balance of their equity and debt capital raise, either concurrently but at times, just venture debt solely.

Venture debt really started blossoming in Southeast Asia only from 2015. I joined DBS to build a venture lending business that year. Assembled a venture-experienced team that went on to build a well-balanced loan book but more importantly, my team helped many founders to understand the value of venture debt.

I decided to leave corporate banking to start Southeast Asia 1st private venture debt fund with 2 other co-founders. Genesis Alternative Ventures was born in August 2018 having seen the dramatic rise in demand for venture debt. Founders were beginning to look at debt seriously.

The common misnomer inaccurately protray venture debt as convertible debt. Let me try and explain in simple terms what venture debt is, and how venture debt can be a useful financing tool for start-ups.

The Genesis of Venture Debt

Let’s start with the term venture capital. It’s commonly associated with equity but in finance 101, capital refer to both equity and debt. Equity is where shares of the company is exchanged for capital. In 2018, Southeast Asia start-ups raised a total of $11 billion equity and this amount is expected to growth exponential over the next few years.

Early growth start-ups (not Seed, but Series A and beyond start-ups) can opt to raise venture debt alongside the equity they raise to augment their cash position. And founders choose to raise venture debt for several reasons: lower equity dilution, using debt to finance working capital needs (e.g. supply chain, inventory, accounts receivables etc).

So what is venture debt? Venture debt is a form of “risk capital” and primarily a form of debt financing from specialist lenders to pre-profit venture-backed companies with an established business model and clear growth prospects. A venture lender provide the debt financing which is repaid over a period of 2-4 years and come with a equity kicker for the lender to purchase preferred stock.

Who are Venture Lenders

Traditional banks are reluctant to lend to businesses which don’t have a profitability track record or hard assets that can be secured. Start-ups often don’t have these and this is where Venture Lenders play a big role. Venture Lenders come in two forms: either as a bank lender or a venture fund specialising in debt. In the US, Silicon Valley Bank (SVB) is probably the go-to bank lender for venture debt. Genesis Alternative Ventures is established as a specialist venture debt fund and we only provide debt financing, to be absolutely clear. Genesis collaborate with venture capital funds (VCs) to provide venture debt to their portfolio companies.

Why raise Venture Debt

Emerging start-ups often view debt financing as a means to augment equity and a building block towards a balanced capital structure. In the US where venture debt has been around for more than 4 decades, start-ups raise venture debt as a form of insurance buffer. Some start-ups could have a slow start to their revenue and require an additional 3-6 months of cash runway to get to their planned targets.

Venture debt can be a very useful tool for working capital requirements. Financing inventory stock, accounts receivables are excellent use cases of debt leverage. In fact, venture debt in Silicon Valley started life providing much needed financing for equipment leasing. In 2008, Facebook purportedly raised $100 million from Triplepoint Capital to purchase additional servers, certainly very wise as that amount of equity could incur severe equity dilution.

More than often, start-ups are laser-focused on building products and growth and neglect creating financial discipline within the company. And as one of my portfolio CFO rightly pointed out, a good venture lender will be able to help whip the financials into shape and with some debt on the books, the company has the financial rigour which incoming venture investors will appreciate.

Which Venture Lender to work with

It really depends. Interview the various venture lenders and have them go through with you what you are looking for and how they can value add to your business. Founders are always going after “smart capital” but would often end up negotiating for bank-loan rates with no strings attached. A good venture lender want to provide more than just debt. The lender must be able to value add through understanding the business and value add comes in the form of business development, fund raising for subsequent rounds and helping to refine the way that financial line items work through the financial model.

Summary

Start-ups operate in a dynamic and uncertain environment where customer loyalty and competition are hard to gauge. Raise appropriate amount of capital and some insurance buffer – but raise capital when you don’t need it. Founders often delay the extra fund raise till they are few months of cash runway which puts them in a precarious situation and financing dilemma.

In my next article when I find time in-between fund raising, I will go into the details of what a founder should be looking out for when looking for venture debt financing. That’s it for now. Go get those revenues and start fund raising! Reach out to the Genesis Alternative Ventures team if you are keen on venture debt.