Should you consider Venture Debt Financing?
Founders Friday is a monthly webinar that touches on topics that most Founders usually face in their entrepreneurial journey. For the Month of August, we are honoured to have Mr Martin Tang, Co-Founder of Genesis Alternative Ventures to share on alternative financing.
Prior to co-founding Genesis, Martin worked with Lazard, Standard Chartered, and DBS, accumulating over 10 years of experience in M&A and equity/debt fund raising transactions. At each stage of his career, he focused on different industries, developing a strong understanding of each company’s financing needs.
In 2015, seeing a clear opportunity for venture debt in Southeast Asia, Martin asked for an internal transfer to help establish and launch DBS Venture Growth Partners, spearheading DBS’ new venture debt business. During his 4 year tenure, Martin completed nearly US$40 million worth of venture loans to Southeast Asia based VC-backed technology start-ups.
After his 4 year tenure, Martin co-founded Genesis Alternative Ventures along with Mr. Ben J Benjami and Dr. Jeremy Loh. The firm provides venture debt capital to Southeast Asia’s best startups.
Genesis Alternative Ventures (https://www.genesisventures.co/)
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.
Genesis advocates for impactful developments among a selection of our portfolio companies. Genesis identifies and selectively invests in companies with meaningful impact objectives as they continue to scale across Southeast Asia.
Genesis finances companies through venture debt which complements early-stage equity financing. Venture debt financing is meant for pre-profit, venture-backed companies to augment their cash positions without as much share dilution as an additional equity financing round would cause.
Transcribed Fireside Chat (Highlights)
Sam Lee: Would you like to give an introduction on venture debt?
Martin Tang: Venture debt is a very mature asset class in US. Many giants, especially Silicon Valley Bank, Hercules Capital, Triple Point, etc. provide this. Venture debt is not an alternative to VC; Genesis only provides venture debt to VC-backed start-ups. We make it less dilutive and more capital-efficient for business owners. We take a fair bit of risks to loan to young and loss-making start-ups, thus we need to see sources of cash for repayment – partially from cash flows from operations or equity infusions from VCs.
Sam Lee: What makes Venture Debt more attractive than other forms of financing?
Martin Tang: It is capital efficient; you can get more capital that costs less. It is also less dilutive (equity warrants 1-2%) and it is raised as insurance or cash buffer for longer cash runway.
Sam Lee: When to consider venture debt? When is it suitable or unsuitable to take on venture debt? Why is it tagged to venture capital?
Martin Tang: Venture debt is suitable for companies with sustainable business model, strong unit economics, good margins, and possess cashflow visibility. Venture debt is NOT suitable for companies with high cash burn, razor-thin to negative margins and no clear cashflow visibility for debt repayment.
Sam Lee: Is venture debt suitable for pre-revenue companies?
Martin Tang: It is possible for pre-revenue companies – e.g. in US, VC firms invest in biotech. Most companies raising such capital are loss-making and young, hence the need to see new investors as basis for lending.
Sam Lee: Should revenue-based financing be considered only if we expect high revenue growth, given the high interest rates?
Martin Tang: I would say the devil is always in the details. We have looked at revenue-based financing before and we think that it is suitable for certain profiles but need to calculate effective IRR for assessment. Venture debt do not require personal guarantees but lenders typically look for balanced, risk-weighted returns.
Sam Lee: What are the typical terms of venture debt term sheets like?
Martin Tang: We charge upfront fee, interest fee, warrant component. Interest rate is not cheap but not somewhere over the top. We charge an interest rate around what banks and P2P rates to SMEs are; we are in between of them. We also look out for cash covenants, performance covenants. What we pride ourselves in making clear on the terms for the founders, having a clear repayment schedule to make it easy for founders to understand. We want to build a long-standing relationship with the founders and help them achieve their goals in the long run.
Sam Lee: What is the difference between SAFE/KISS note and venture debt? Any similarities?
Martin Tang: We are none of the above. SAFE/KISS is a convertible loan but venture debt is effectively a fully repayable term loan with equity kicker and warrants. Warrants work like stock options; we have the right to buy shares at a specified price.
Sam Lee: Buy2Sell Vietnam is not a startup anymore and they are profitable. What is the best move for expansion?
Martin Tang: Assuming they have expansion plans, they should know the budget and financing means. You should explore financing options with sources and users of funds.
Sam Lee: A business owner has a good combination of an established company and a startup. How does he/she raise funds for both entities?
Martin Tang: We need to see the parent company’s performance first, what is their cash needs and are they self-sufficient. If the parent company is self-sustaining, then it should support the start-up (subsidiary). If the parent company is trying to find an alternative source of funds, it could raise a red flag. It could also be risk-sharing but it could be hard to get buy-in from possible investors. Any arrangement is not impossible, but Genesis will listen to what Founder has to say first, discuss and then see if there exists any opportunity.
Sam Lee: What are minimum requirements to qualify for venture debt?
Martin Tang: You must have raised $3-4m Series A from well-known VCs, must have proven revenue streams, commercialized products and real customers. It should also have decent gross margins with variable costs ideally exceeding fixed costs. We also look out for interesting business ideas that solve real issues. In addition, we look at founders’ reputation, tenacity, integrity and the chemistry/relationship between all stakeholders. Genesis usually sees Series B and beyond but we will not totally rule out Series A if they are outstanding and fit for venture debt.
Sam Lee: Does Genesis do supply-chain financing?
Martin Tang: It is seldom done; it is probably part of a larger venture debt financing structure.
Sam Lee: How transparent is the Singapore financing market or will it always come down to the same few players?
Martin Tang: Small enterprises can rely on government micro-loan program. On the other end, venture debt is tailored for start-ups with VC investors. However, bootstrap start-ups with little revenue/vintage can only get equity from family and friends as it is hard for any lender to do debt financing for them.
Sam Lee: How does Genesis value-add to Founders?
Martin Tang: We have a strong network and shared knowledge. We have aligned interests due to portfolio companies. For example, we decided to lend to Melapod – 3D digital internal spaces – since we already have GoWork and Hamlet, we see synergies in creating value for portfolio companies. We also decided to help them network together and create value for each other.
Sam Lee: How does Genesis see debt and project financing change post-COVID?
Martin Tang: We see it as life with COVID-19 and debt financing will become a more complementary form of capital.
Sam Lee: Fundraising landscape amidst and/or after COVID-19 – more or less? What kind of ventures are getting financed these days?
Martin Tang: Fundraising or deal flow is still very strong; we have seen quite a wide range of deals announced. If there is a vaccine, the deal flow is expected to increase. It is a small ecosystem, thus there is a need to network with VCs/investors/founders. I feel we are unlikely to see any dip in fundraising.