Eyes on InnoVen: This Venture Lending Firm Will Extend Your Start-up’s Runway
Venture debt is an attractive complementary tool for start-ups looking to have a leg up in the game
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When it comes to the business of raising funding, venture capital (VC) is clearly the undisputed star of the show. There isn’t a day in Southeast Asia’s burgeoning start-up ecosystem that goes by without a headline announcing a new round of venture funding raised by a promising new start-up.
This isn’t entirely surprising, as issuing shares to angel investors and VC firms in exchange for capital is the logical route early-stage start-ups often take. But as a company grows, when cash flow becomes more predictable and you have the credibility needed to expand your business, other options spring up.
One worth looking into, especially if you’re no longer keen on giving up further equity, is venture debt. A form of debt financing for venture equity-backed start-ups, venture debt gives founders access to capital without having to dilute additional shares.
“The more shares you exchange for capital, the more control of your company you tend to give up,” explains Paul Ong, Associate Director at InnoVen Capital, a venture lending firm with offices in Mumbai and Singapore.
Venture capital and venture debt are not interchangeable
Started in India in 2008, InnoVen offers venture debt financing to early-stage cash-burning start-ups throughout Asia. While India remains its largest market, the company is steadily growing its portfolio in Southeast Asia.
Industry-agnostic, the firm has offered loans to around 15 to 17 start-ups across different industries including GuavaPass (Singapore); KFit (Malaysia); RedDoorz (Indonesia); Pomelo (Thailand); and Oway Ride (Myanmar), with check sizes ranging from $500,000 to $10,000,000. “As a company that does venture loans, we’re not necessarily looking for companies that will give us a high return in terms of high valuation or a high exit. We’re looking at companies that, essentially, can service the loan. We want to be the loan financing partner for most of the ecosystem,” says Ong.
However, Ong is quick to clarify that venture loans, at least in InnoVen Capital’s view, is not substitute capital for venture equity money; venture debt and venture capital are not interchangeable. Instead, InnoVen offers complementary financing, with the average venture debt borrower being a fast-growth company that has raised money from venture capital firms.
“We usually go in during the slightly, pre-series A stage onwards. Our internal guidance is we do about 20 to 25% of a financing round. We believe that’s actually where the maximum leverage of early-stage companies should be at,” says Ong, adding that start-ups would often use venture debt “in order to operate certain business models efficiently.”
InnoVen’s brand of venture lending is different from that of a bank’s
With most Southeast Asian entrepreneurs still raising capital the old-fashioned way—selling equity to early-stage investors—there’s plenty of room for growth for venture debt in the region, and InnoVen is keen to take advantage.
“Venture debt is something that’s going to be very attractive to the tech ecosystem here, especially since it’s growing larger. Our focus is definitely on developing venture loan financing throughout Asia, and we are growing up the expertise to do that,” says Ong.
Currently, venture debt financing in the ecosystem is quite young, with InnoVen’s direct competition comprising mainly banks. But Ong, a former banker, relates that it’s quite challenging to do venture loans within a banking framework. “If you look at the way banks traditionally assess whether or not it would lend to a company, it often boils down to profitability, hard assets, and having founders, CEOs, and shareholders willing to pledge guarantees,” he says.
While there are now banks in Southeast Asia, including DBS and OCBC in Singapore, that look at early-stage companies to do venture lending, Ong says there is still a fundamental difference between banks and organizations like InnoVen Capital. “We tend to be a lot more founder-friendly,” he points out, adding, “Even as banks explore venture debt financing, internally, this entails changing cultures and mindsets that have been part of the bank’s operations for the last 30 years. In fact, the reason why a firm like InnoVen exists is largely because banks do not lend to early-stage companies in the first place.”
As the tech ecosystem grows in Southeast Asia, that mindset might eventually change as banks become eager to build relationships with start-ups that could be the unicorns of tomorrow. But with its business fundamentally built to support Southeast Asia’s tech ecosystem, InnoVen Capital would undoubtedly have a good head start.