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Venture debt can help weather the crisis, but it is not for everyone: Q&A with Genesis Alternative Ventures

More entrepreneurs are discovering venture debt as a way to extend their cash runway.

Founded in 2019 by Ben J Benjamin, Dr Jeremy Loh, and Martin Tang, Genesis Alternative Ventures believes there’s an increasing interest for venture debt financing among Southeast Asian startups today. Venture debt allows companies to raise additional capital at a lower dilution than pure equity, according to the firm. Although most startups look for fresh investment through equity financing, it can cause dilution or a decrease in stockholder’s ownership percentage, which makes venture debt an effective alternative in some stages of growth.

Genesis recently added global investment fund Capria as a strategic investor to its blue-chip backers Sassoon Investment Corporation and CIMB Niaga, the Indonesian bank. Its portfolio includes co-working space chain GoWorkcybersecurity firm Horangi, and co-living company Hmlet. The firm aims to double its portfolio size and it is currently on track to close a USD 50 million debut fund by early 2021.

Genesis says it has seen a 30% increase in deal flow from promising companies and founders, but remains cautious in providing funding, as venture debt may not work for every company. KrASIA recently spoke to two of the co-founders, Jeremy Loh and Martin Tang, about how COVID-19 is changing the perception of venture debt financing.

KrASIA (Kr): How do you adjust your funding strategy during the COVID-19 crisis?

Martin Tang (MT): The way we approach it, as a venture-debt fund, it has always been companies that have a proven revenue model and good unit economics. It’s the same if there’s a crisis or not. However, we’re also looking for companies that have a clear advantage or a bit of a “Zoom moment” in times of crisis like this.

(Kr): How do you see COVID-19 changing the companies’ perception of venture debt?

Jeremy Loh (JL): Before the crisis, I think most of the startup founders thought that there’s a lot of free-flowing equity around. So venture debt became secondary. Maybe they thought: Why extend the cash runway when they can always reach out to new investors and get an increase in valuation. But with the crisis, we’re seeing that companies who look for venture debt are those with good backers who managed to raise a very sizable equity round. They want to have extra insurance. Having extra cash in your pocket gives you a chance to weather the crisis and continue to grow.

MT: There are two types of companies looking for venture debt. First, the companies that have raised a good amount of equity. They are looking for venture debt to extend the cash runway or to supplement their working capital needs. Second, companies whose performance has been severely impacted by COVID-19 and they are unable to attract venture capital money. They come to us as “funder of last resort”, but unfortunately, we are unable to fund those.

There’s another bucket of companies at which we selectively look. They have been performing well, but they are struggling with the short term impact of COVID-19. They are reluctant to raise a new round of funding that would potentially result in a flat round or a down round, so they want to use venture debt.

(from left to right) Genesis’ co-founders: Jeremy Loh (managing partner), Ben J Benjamin (partner), and Martin Tang (partner). Courtesy of Genesis Alternative Ventures.

Kr: Does it mean that venture debt is the better financing option in times of crisis?

JL: I wouldn’t say that we are a better choice of funding because venture debt in Southeast Asia doesn’t stand alone. We won’t go into a deal without other venture capital partners. However, we want entrepreneurs to realize that this is the right time to have more cash on the balance sheet as it can give you the extra buffer to survive the crisis.

Kr: For startups looking for venture debt, how can they estimate how much they can get, to make sure it’s worth their while?

MT: The amount they can get depends on a few things such as the cash they raise. But generally, the rule of thumb would be that 20–30% of venture debt can be provided based on their equity financing. For example, let’s say a company is raising USD 10 million in a Series B round, it could be USD 8 million in equity and USD 2 million venture debt. Or the startup could raise USD 10 million in equity and USD 2 million of venture debt, to give them an additional cushion if it needs more time to get to the next milestone.

Kr: How is the interest in venture debt growing in Southeast Asia since you founded Genesis last year?

JL: Entrepreneurs in the region are learning about venture debt as we speak. They need to understand that it is not for everyone. We don’t fund companies at a very early stage, as we need to see an established business model and clear growth prospects. It’s an educational process that will take some time, probably it will get more mature in the next three or four years. If you look at the US, it has taken them about 40 years to get to where they are today. Now, venture debt has become very prevalent there. Every company that is raising equity is bound to have venture debt involvement in that financing round.

In Southeast Asia, we won’t take that long as we see increasing interest from both sides. On one side, investors are starting to understand venture debt as an asset class, and on the other side, entrepreneurs are also beginning to appreciate it as a form of financing that will lower the cost of capital for their company.

Kr: How did you land the investment from Capria?

JL: Capria was looking for emerging fund managers. It has invested in Latin America and Africa, and was looking to invest in Asia, particularly Southeast Asia, for the first time. Capria was also looking for an interesting investment asset class. They liked the fact that venture debt is a new thing here.

Then they also trusted in the quality of our team. Martin and I used to work for bank lenders who started a venture debt business in 2015. We saw the opportunity in this segment, so we decided to leave our corporate jobs to build Genesis, which is the first private venture debt firm in Southeast Asia.

Kr: Do you think that, after Capria, we’ll see more LPs coming from the US and Europe to tap into the venture debt opportunity in Southeast Asia?

MT: Absolutely! Although still in its infancy in Southeast Asia, venture debt is very well understood in the US and Europe. As many startups in this region have attracted a lot of equity from VC funds from international LPs, they’re learning more about the venture debt environment here. I think Capria’s investment in Genesis provides further validation of the strong potential of the Southeast Asian startup ecosystem.

Kr: What’s next for Genesis?

MT: We are currently working on five opportunities and we hope all of them will come through. In the coming few months, it’s really about helping our portfolio companies to navigate through this crisis and emerge stronger. So they can use the crisis to gain a leadership opportunity.

The interview has been edited for length and clarity.