SINGAPORE (July 17): When start-ups accept money from venture capitalists, the founders are often asked to give up a significant portion of their ownership in return for additional equity financing. Venture debt funds are an alternative way for start-ups to raise funds, minus the equity dilution.
“When you have to sell equity in your company to raise money to buy, for example, depreciating assets, it is an expensive exercise,” Ben Benjamin, co-founder and partner of Genesis Alternative Ventures, tells The Edge Singapore in an interview. Genesis is Southeast Asia’s first private venture debt firm.
“So if the company is already doing quite well, they’ve got good investors, revenue and business model, why not take debt financing? It’s what SMEs would usually do — go to a bank and ask for a line of credit. So, we give these companies the opportunity to take on some debt, and at the same time lessen the equity dilution in parallel with equity fundraising,” he says.
Meanwhile, the venture debt business model also benefits the venture fund as it brings about at least two streams of income. The first is the interest payable on the loan from the borrower, and the other is warrants. “When we give a loan, as part of the package, we are issued equity warrants in the company,” adds Benjamin.
But why would a start-up turn to a venture debt fund instead of a bank for a loan?
Banks generally have more stringent requirements and criteria when approving loans to companies. The banks typically want some semblance of earnings before they are willing to lend. The very nature of start-ups, where growth is often prioritised over profitability, unchecks this box right away. This is where Genesis comes in.
Firm believer
Similar to most venture capital (VC) firms, Genesis looks for start-ups from the Series B stage and beyond that have sound business models with steady revenue growth and scalability. But on top of that, Benjamin looks at the people behind the business. To him, that is an equally important criterion as the business model itself.
“We look for founders who have got a strong handle on the financial side of their businesses as well. To understand cash flow and capital structure is absolutely critical in today’s environment. So, the fiscal ingredients in these companies are important,” says Benjamin.
Although Genesis has zoomed in on companies that are operating in the Southeast Asian region, it does not focus on any particular industry. But the companies have to be tech-enabled and have a strong tech backbone.
Currently, some of the start-ups that Genesis has invested in include Horangi, a cyber security firm; Lynk Global, an artificial intelligenceenabled, on-demand expert network platform; Hmlet, a co-living space; Matterport, a 3D image capture and data platform firm; and GoWork, a co-working space.
The thing about venture debt is that it is also a complementary source of funding to what the start-ups have already obtained from a VC firm. In fact, that is how Genesis hunts for its start-ups to invest in — through its VC partners.
“One of the key cornerstones of this model is that we invest in companies that already have investors. And these investors are top-tier VC funds or professional investors, who have been around the block and know the value of venture debt,” explains Benjamin, who adds that Genesis’ VC partners will introduce to them potential companies to invest in.
Genesis typically invests about 20% to 30% of the equity funds that the companies have been able to raise. This loan will last for a term of three years.
The firm sees plenty of growth potential for venture-debt funding. A recent study by Kruze Consulting shows that US venture debt grew 30% in 2019, and accounted for 10% of total venture capital investments. In comparison, venture debt made up between 1% and 3% of overall venture funding in Southeast Asia last year.
Genesis as a firm might be relatively new — it was launched just last year — but its three partners bring with them plenty of experience. Benjamin trained as a lawyer and worked as legal counsel for his family business, the fashion retailer company FJ Benjamin. He subsequently took on operational roles, overseeing the company’s luxury division. He helped start Sassoon Investment Corp, the family office of entrepreneur Victor Sassoon, and is also a non-executive director of OurCrowd Singapore, a US$1.2 billion ($1.67 billion), Israel-based online VC investing platform.
With his doctorate in engineering, managing partner Jeremy Loh did not go into the academia but built a career in investing, and is described as a pioneer of venture debt investing in Southeast Asia. He was previously with Bio*One, the Singapore government’s Economic Development Board Investments (EDBI) US$1 billion healthcare fund.
During his time at EDBI, Loh ran its Silicon Valley Office and helped make investments worth US$180 million in more than 10 companies. He also spent five years with DBS Venture Growth Partners, Southeast Asia’s first dedicated venture lender, further building up his expertise and ties in the tech and start-up community.
The third partner, Martin Tang, was formerly a investment banker with Lazard Singapore, where he provided independent corporate finance advisory to companies across the region, and handled more than US$3 billion worth of deals. Tang also worked at Standard Chartered Bank and DBS Venture Growth Partners.
Impact investing
Given the partners’ background and experience, they are able to keep up with the trends. For example, they recognise how asset managers are paying more attention to so-called ESG (enterprise, social and governance) factors, which include the company being not just environmentally-friendly but also having positive impact on the environment and the community.
As such, apart from strong fundamentals, Benjamin explains that Genesis is also looking for socalled “impactful” companies. Already, Genesis has identified several impactful companies and is interested in providing venture debt to them in the coming months.
“We back companies that are returns-first, as we ourselves are a returns-first fund. Not all our investments will be impact-driven, but those that are will have a strong impact angle,” explains Benjamin, who believes that in some ways, impact does play a part in delivering returns.
“You know, if you can find a company that has impact built into its business model, it means that as the company scales, so does the impact. And that’s fulfilling as an investor to see — the company you invest in being successful, growing, and at the heart of the growth lies an impactful outcome,” shares Benjamin.
Genesis receives boost from Capria for war-chest
Seeing an absence of venture debt funds in the regional market, Genesis introduced the Genesis Alternative Ventures Fund I in May 2019. The five-year venture debt fund is currently on track to reach its target of US$50 million to US$70 million ($69.7 million to $97.6 million) by early next year.
Jeremy Loh, managing partner of Genesis, has been optimistic that venture debt will become a mainstream source of financing for companies across Southeast Asia.
“We see a robust pipeline of companies coming through and we believe that entrepreneurs value the need for a judicious balance of debt and equity to fund their expansion. Singapore is a major hub for tech start-ups aiming to capture the region’s rapid growth, huge markets and youthful, mobile-savvy consumers,” he says.
As Southeast Asia’s first private debt fund, it has gathered a strong group of investors. Most recently in June, Seattle-based global investment fund Capria was welcomed as a strategic investor. This investment is Capria’s first in Southeast Asia and first in a venture debt fund.
Capria leads the largest network of collaborating fund managers in emerging markets. Currently, it has 24 fund managers with 157 investments across 25 countries, and US$400 million of assets under management (AUM) which is expected to achieve US$1 billion by the end of this year. Capria counts International Finance Corp, Ford Foundation, Vulcan Capital, Omidyar Network and Sorenson Impact Foundation among its investors.
Genesis will leverage Capria’s expertise in impact investing to identify and provide venture financing to companies with meaningful impact objectives such as financial inclusion, sustainable food production, small business digitisation and gender diversity, as they scale across Southeast Asia.
Capria says that it applies the global best practices of impact investment and environmental, social and governance (ESG) management in order to increase the resilience of its portfolio. Capria and its global network aim to deliver profits, while providing capital to address environmental and societal issues, aligning its aim with the United Nations’ Sustainable Development Goals.
Dave Richards, co-founder and managing partner at Capria, says: “The idea of investing for superior financial returns, coupled with sustainable impact, is catching on in Southeast Asia. Capria is proud to partner with Genesis to further this wave.”
“Until recently, ‘impact investing’ was very nascent and mostly associated with concessionary financial returns in Southeast Asia. This has started to change, with more leading funds implementing impact strategies to tap underinvested sectors and companies,” he adds.
As part of Capria’s investment, Genesis will also join Capria Network, the largest network of emerging market fund managers collaborating to deliver market-rate returns to investors as well as scaled impact. Capria also joins a growing list of blue-chip investors in Genesis, which includes Sassoon Investment Corp, family office of entrepreneur Victor Sassoon, and other notable corporates, family offices and high-net-worth individuals across Asia, Europe and the US.
Genesis also has CIMB Niaga, a leading bank in Indonesia, as a strategic partner. The bank made a US$10 million commitment to Genesis last year to fund fast-growth tech companies in Indonesia.
