Genesis

Strong investor support with almost half the Fund committed at first close.
80% of first close commitments from existing investors such as Sassoon Investment Corp, Aozora Bank, Korea Development Bank, Mizuho Leasing, Silverhorn; notable new investment from Israel’s OurCrowd.
Genesis’ US$90m Fund I launched in 2019 financed 25 companies across Southeast Asia including unicorns Matterport & Akulaku.

Singapore, 25 August 2022 – Following the success of its debut US$90 million fund in 2019, Genesis Alternative Ventures has launched its second venture debt fund to raise US$150 million to finance start-ups across Southeast Asia. Almost half the fund was raised at first close earlier this month.

In a strong show of support, 80% of Fund II’s first close commitments came from existing Genesis’ Limited Partners (LPs) such as Sassoon Investment Corp, Aozora Bank, Korea Development Bank, Mizuho Leasing, Silverhorn, family offices, charitable trusts, fund of funds and corporate investors. Among new investors is OurCrowd, the Israel-based online global venture investing platform.

Dr Jeremy Loh, Genesis’ Co-Founder and Managing Partner, said: “We are grateful to our investors for their continued support.

Genesis Fund II further strengthens our ability to provide financing for promising start-ups that are catalysts for economic growth in the region.”

Genesis extends debt to revenue-generating, high-growth companies that are backed by venture capital funds. These start-ups typically do not qualify for regular bank loans because they lack collateral, or have not yet reached profitability, and/or their founders are wary of taking on too much venture capital for fear of diluting their ownership.

The venture debt firm founded by Ben J Benjamin, Dr Jeremy Loh and Martin Tang in 2019, will continue to focus on Southeast Asia’s early and mid-stage high growth technology start-ups (Series B to pre-IPO). Dr Loh said Fund II already has a US$60 million deal pipeline in place.

He added: “Southeast Asia remains a magnet for investors attracted by the region’s growth potential, talent availability, high population and reasonable labour costs. In particular, Singapore has strengthened its position as a hub for innovative start-ups in the region.

“While the pace of investing may have slowed due to economic headwinds, interest in Southeast Asia technology companies remains strong. Given the record amount raised by venture capital funds in the last year, there’s a lot of dry powder for start-ups with strong fundamentals.

“Genesis will continue to finance first-class entrepreneurs who are building high-growth companies built on sustainable business models.”

Impact & ESG forms backbone of Fund I portfolio

Genesis Fund I raised an oversubscribed US$90 million and has financed 25 companies from Series A to pre-IPO in sectors such as logistics-tech, fintech, agritech, cybersecurity, and food-tech operating in Southeast Asia. It counts two unicorns among its portfolio companies namely Matterport, a leading global spatial data platform company, and Akulaku, a banking and digital finance platform in Southeast Asia.

Genesis selectively finances companies with meaningful impact objectives and works closely with entrepreneurs to identify and introduce important ESG principles within portfolio companies. Genesis has channelled nearly half of its capital from its debut fund into start-ups with meaningful impact objectives that are aligned with the United Nation’s Sustainable Development Goals. Close to 80% of its portfolio companies have in place formal ESG policies and procedures.

In a joint report last year, Genesis and PwC Singapore noted that venture debt is fast emerging in Southeast Asia as an alternative and complementary source of financing for high-growth tech companies that traditionally only raised equity as a source of capital. The report was presented at last year’s Genesis Forum featuring Tan Sri Mohamed Nazir bin Abdul Razak, past Chairman, CIMB Group, who delivered the keynote address “Profit with purpose, my personal journey to here.”

Victor Sassoon, Chairman, Sassoon Investment Corporation: “We are delighted to continue backing the Genesis team in their mission to provide less-dilutive funding to entrepreneurs across Southeast Asia. We are firm believers that venture debt will play an important role for start-up founders who are confident of their business growth and recognise the long-term value in complementary financing for working capital and other needs.”

Shin Kato, Head of Asia Investment Group, Aozora Bank: “The Southeast Asian and the Japanese venture ecosystems have long been underserved by credit providers. Genesis and Aozora Bank are both tackling this issue in their respective markets, and we are happy to continue our strategic partnership with Genesis to provide non-dilutive capital to innovative and impactful companies through their second fund while exchanging know-how and market insights on Japan and Southeast Asia.”

Jon Medved, CEO, OurCrowd: “We are delighted to be investors in Genesis Fund II. This fund has a tremendous management team whom we have known for years, leading co-investors, superb performance to date, and a brilliant future in bringing the important asset class of venture debt to the fast-growing Southeast Asia market. When we add the power of our global OurCrowd community to Genesis’ already great story, we are confident that this is about to get only better.”

About Genesis Alternative Ventures

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. Armed with a strong reputation among entrepreneurs and investors, Genesis is a trusted partner in empowering corporate growth while minimising shareholders’ equity dilution. Genesis was founded by Ben J Benjamin, Dr Jeremy Loh and Martin Tang in 2019.

For media queries, please contact:

Catherine Ong Associates

Catherine Ong

Mobile: (65) 9697 0007

Email: cath@catherineong.com

Joel Ng

Mobile: (65) 9873 5728

Email: joel@catherineong.com

We get it. Running a startup is a crazy roller coaster ride. That is why it is important to find and bring the right VC partners on board with you. You will probably meet many before deciding on a core team. And it all starts with a convincing pitch that is engaging, clear and concise.

When I googled “how to pitch my startup”, I got more than 42 million hits. I am sure most of the advice offered is sound, if a little generic.

Having worked in the startup ecosystem in both Silicon Valley and Southeast Asia, I have noticed that there is a difference in the way founders here approach their pitch. I have noticed that Southeast Asian entrepreneurs tend to be more conservative in their pitch approach and more reluctant to talk about their achievements (and I include myself in this category). There are many cultural reasons for this but such reticence does not serve startup founders well, especially when making their pitches.

Over the years, my team at Genesis and I have attended multiple startup pitch sessions and have given my share of feedback and useful tips to help founders in Southeast Asia sharpen their pitch. Here’s a quick summary of those feedback:

Be clear about your ask

It is perfectly fine to be upfront about what you are looking for – be it mentorship advice or an investment. Many founders feel shy about talking about money so early in a discussion but trust me, it is helpful for the VC to know your objective from the start.

For instance, if you are looking for funding, you can start by saying, “Thank you for your time today. I am looking for $6m funding for a 10% share of my agri-tech company.”

Or, if you are looking for strategic partnerships, “Thank you for your time today. I am looking for partners in the agri-tech and/or logistics space who can add value to my business.” It is also reasonable to seek introductions to business contacts or possible advisors.

Be proud of your mission and credentials

Once I sat in on a pitch from an edutech company and it was only after 5 or 6 slides that she revealed that she is a geneticist. Immediately that became interesting to me. What is the connection between genetics and education?

Most founders tend to have business, finance or engineering backgrounds. So when someone with academic achievements and industry experience turns up to share why they are on this mission, it certainly catches the attention of an investor.

Likewise, for your mission. Whether you are solving a payment problem or moving 1 ton of ugly food per day, if you are not excited about your mission, no one else will be.

So do speak with positive energy and conviction. I know this is not natural for many of us in Southeast Asia but it is important to “infect” the VC with your enthusiasm.

Be humble when receiving feedback

This sounds contradictory to #2 but it makes sense. The VC industry is a small one, particularly in our region. One of the first questions that VCs ask themselves is “can I work with this entrepreneur over the next 3-4 years and help build this business?”

“VCs invest in people, not ideas or technology.” Most investors are placing a bet on the founder’s ability to successfully handle the multiple challenges of growing a startup. And founders who are unable to handle a couple of tough questions in a pitch are less likely to raise money from investors.

So treat the feedback as a gift. An hour that a VC set aside to listen to your pitch may not end up in an investment. But the feedback could bring fresh perspectives, new ideas and insights for your business or even how to improve your pitch.

Be concise with your elevator speech

It is always good to be prepared to talk about your startup concisely. You’ll never know when you’ll meet a potential investor.

We suggest an elevator speech along these lines:

Think BIG: What is the end goal (e.g. save 10 tons of ugly food per day)?
Start SMALL: What are the low hanging fruits that you are plucking today?
Move FAST: How are you going to scale?

Starting with your Big Idea allows you to plant a seed into the investor’s mind. And if you get interrupted and don’t get to the other two parts of your elevator speech, at least you’ve communicated your mission. This leads me to the final point.

Be jargon free

Most VCs are finance- or economics-trained. A few of us are engineers by training. Even fewer of us were medical professionals.

While we may have picked up terms like “NFT”, “Metaverse” or “DAO”, it helps if you use layman terms in your pitch. Try pitching to your family or friends first; if they can understand what your business is about, the likelihood of an investor understanding it would be higher.

For an idea of a jargon-free pitch deck, do take a look at AirBnB’s early pitch deck.

Last but not least ….

The tech and venture market will have its up and down cycles. Whatever the climate, there will always be venture investors looking for the next unicorn or decacorn. When you get an hour of time with a VC or a partner, it is more important to be ready with your pitch. And be prepared to evolve that pitch deck. You will be fascinated when you see the 40th version compared to your first deck.

We wish you much success and hope that these tips are useful in helping you elevate your pitch and raising the next round of funds.

(A version of this article first appeared on LinkedIn on 21 July 2022.)

Tech has been through a rocky patch so far this year, what with the gyrations of the stock market, delayed IPOs, depressed valuations, renegotiated term sheets, and layoffs. How does this align with what we’re seeing on the ground in the tech and venture ecosystem in Southeast Asia?

Our observations in the first half of the year are that investors continued to bankroll their fundraising activities and pressed on with new and follow-on investments into Southeast Asian startups despite current market conditions. Surprisingly, as at the date of this report, the pace of investments coupled with ever-growing deal sizes suggest an inverse correlation to the market correction.

For example, three Genesis portfolio companies announced strong follow-on Series C rounds in the first half of 2022, registering between a 1.78x to 2.92x increase in their enterprise value. In April, Sequoia-backed Trusting Social, an impact-driven Fintech focused on creating unique, personalised financial credit scores for the unbanked and underbanked individuals, announced its initial close of $65 million led by Vietnam’s consumer-focused conglomerate Masan Group.

A month later, Believe, a direct-to-consumer (D2C) startup specialising in consumer beauty products and backed by Accel India, raised a $55 million Series C financing led by Venturi Partners. In June, Deliveree closed its $70 million Series C led by Gobi Partners and SPIL Ventures (the CVC arm of Salam Pacific Indonesia Lines). Deliveree has been focused on creating a dynamic marketplace for the trucking industry across Indonesia, Vietnam and Philippines, matching independent truck drivers and customers with cargo.

And this was on the back of various other deals announced publicly. Indonesia’s Fintech Flip raised $100 million Series B (Tencent, Block, Insight); eFishery $100 million Series C (Temasek, Softbank, Sequoia);, Bibit $80 million (GIC); Astro $60 million Series B (Accel, Tiger Global); Singapore’s ShopBack $80 million Series C (Asia Partners); BioFourmis $300 million Series D achieving unicorn status (General Atlantic); Neobank Stashfin $270 million equity/debt Series C (Uncorrelated Ventures); Neuron Mobility $43 million Series B (GSR Ventures, Square Peg); Multiplier $60 million Series B (Tiger Global, Sequoia); Thailand’s Fresket Series B $23 million (PTT Oil, Openspace) and many more.

We also observed a continuation of Seed and Series A funding closes for startups across Southeast Asia. For example, Eratani, an Indonesia-based agritech startup raised a $1.6 million Seed round while Li Ka-Shing’s Horizons Ventures co-invested $7.5 million into Ilectra Motor Group, a 2-wheeler EV targeting the Indonesian market.

A Return to Profitability With Leaner Companies

Growth, especially growth at all costs, requires significant capital to take market share now and worry about profitability later. More often than not, customers and revenue acquired in such fashion are far from ideal, leading to higher churn rates, lower retention rates, and driving up costs even further. Raising too much capital at early stages can result in undisciplined spending leading to layoffs and other painful reactions when the burn rate skyrockets and future funding becomes scarce.

It is sobering to see news on startup layoffs across US and Asia including Southeast Asia (here are some dedicated websites tracking these statistics) and casualties such as Kaodim, an 8-year-old startup in Malaysia, which means “take care of it”, that shuttered its services as Covid halted the home-services industry. Softbank Asia’s Propzy, which bagged a $25 million Series A in 2020, dissolved a major part ofits business and reportedly laid off 50% of its employees.

On the flipside, good founders understand the value of a long-term mindset and the importance of building startups with the right values and structure so they can grow into lasting companies. The “exuberant climate” for start-ups has turned and investors are demanding to see financial metrics that are in line with the company’s stage of development. Therefore, it is prudent for start-up leaders to make adjustments in order to enhance operational efficiency and to focus funding resources to achieve important key performance indicators so as to reach the next funding round.

And there are certainly opportunities for resilient founders and companies in a market correction. As with prior downturns, we believe there is a correlation between economic cycles and the formation of category-defining companies. Companies such as Uber, Airbnb, Square, WhatsApp, MailChimp, and Adobe were all founded during recessionary periods. Moreover, today’s founders have an arsenal of tools ready for them to launch their disruptive companies in a cloud-based world with less capital required for growth and the ability to operate with no hard assets. And venture capitalists are still hunting for startups that could well become tomorrow’s category-defining companies.

A great example is Deliveree. Genesis visited Deliveree at its South Jakarta office in June to catch-up with Tom Kim, Deliveree’s Chief Executive. Tom was wrapping up Deliveree’s Series C fund raise and shared how Deliveree had been keeping a tight rein on hiring and marketing expenses which is why the company was able to garner an industry-leading gross margin in the mid-teens, compared to better-funded competitors, some of whom have low, single-digit to negative gross margins.

Brisk Pace of M&A Transactions

A “buyer’s market” has emerged as deep-pocketed acquirers pick up targets of good value. Acquiring targets in order to bulk up seems to be more attractive as the IPO window remains closed, keeping exit valuations depressed.

For example, India’s Pine Labs acquired Southeast Asian startup Fave for up to $45 million. Singapore’s Funding Societies announced it is acquiring digital payment provider Cardup to expand its payments offering.

In fact, Genesis has been receiving requests from founders who want to strengthen their balance sheet with venture debt for the sole purpose of acquisitions – a smart way to raise lower dilutive capital and add breadth and depth to their business.

We expect the pace of M&As to gather further in coming quarters given the conversations we have been having with founders who want to leverage on venture debt to buy up smaller competitors.

Abundant Dry Powder Globally For Venture Capital Investments

Preqin estimates there is more than $497 billion of global venture capital dry powder as at May 2022 (dry powder being the amount of capital that has been committed to funds minus the amount that has been called by general partners for investments).

Quarterly funding levels in 2022 remain above quarterly funding levels in 2020 and prior, according to CB Insights (July 2022) with $108.5 billion raised across 7,651 deals. This is despite the fact that quarterly funding has slowed in 2022 amidst tightening liquidity and a global meltdown in technology stocks.

US VC fundraising tops $120 billion for the second consecutive year, according to Pitchbook. A strong showing from established managers in the first half of the year has pushed capital raised to a record pace. These managers have closed 203 funds worth $94.7 billion through the first six months of the year. Already, 30 funds have closed on at least $1 billion in commitments, eight more than the previous full-year high of 22 recorded last year. While this activity is most likely a continuation of momentum from 2021, it’s still an encouraging sign around the level of capital availability through the uncertainty that the next few years may bring.

In Southeast Asia, fund investors have increased allocations to the Southeast Asia venture corridor. Southeast Asia and India-focused VC funds have raised $3.1 billion in the first 5 months of 2022, eclipsing the $3.5 billion these funds raised in all of 2021, according to a Nikkei Asia report in May 2022.

Established Southeast Asia players like Sequoia, Accel, Jungle and Mass Mutual have raised larger, multi-stage funds. Sequoia raised $2.85 billion, which includes its first dedicated fund for Southeast Asia with a pool of $850 million. And despite the shaky short-term outlook in tech, Sequoia remains optimistic about Southeast Asia’s start-ups, as do new entrants White Star, Antler, and Altara. From our conversations within our network of General Partners (GPs), it is evident that companies that can demonstrate financial discipline and prioritise healthy topline growth with manageable bottom-line expenses will be rewarded in this investment climate.

While GPs believe that the pace of investment may slow compared to 2021, this does not also mean that investing into new deals will come to a halt; rather the deal selection and diligence process will take longer as GPs will now insist on observing certain metrics and may choose to sit on the sidelines while monitoring progress.

On the topic of valuation, we also notice that GPs have already lowered their WTP (willingness to pay) and this is a common theme across funds globally. Seed and pre-A startups are likely most impacted and may see as much as 50 – 75% reduction in valuation as investors prefer not to take very early-stage risk. Series B, C and D startups remain attractive for GPs to continue investing in given their life-cycle and more reasonable enterprise values, and as highlighted above, there remains a barrage of early growth startups that have raised $50-200 million in a single round of financing with little to no discount to valuations. It also appears that funding has shifted away from late-stage pre-IPO mega deals which has resulted in the declining minting of new unicorns into the tech sector (which mirrors the global phenomenon).

Summary

While we recognise this will be a tough period for investors and companies alike, we equally believe that this will be a rewarding time for investors and GPs who have stuck to their investment thesis of backing mission-driven founders who are building sustainable businesses and aiming for market leadership positions.

The medium to long-term outlook of venture capital investing will improve as valuations and investment pacing return to more sustainable levels. And not forgetting the abundant VC dry powder waiting to pounce on attractive deals in the shorter term.

All of this should also lead to more robust dealflow for venture lenders like Genesis. Investors are now more focused on more sustainable companies with a path to profitability, healthy gross margins, lower burn, more reasonable valuation ascents etc. These are the very companies that Genesis has always invested in. In fact, in the last 2 quarters, Genesis reviewed more than $100 million of deals, and since inception, our total dealflow has crossed the $1 billion mark, which is a significant milestone.

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It has been an incredibly busy two months for us at Genesis Alternative Ventures, the current market volatility notwithstanding.

In April and May, we took advantage of the reopening of global borders to visit our investors, partners, and portfolio companies in Tokyo, Seoul, and Indonesia. In May, we hosted our General Partners Advisory Board and Limited Partners to share the progress of the Fund and to discuss the macro-economic investment outlook. It was refreshing to catch up with everyone face-to-face and to reaffirm the trust that we built via two years of virtual meetings.

All the discussions I had were enlightening, insightful and relevant in the current market uncertainties and I thank everyone for sharing your thoughts and time so generously. As one good deed deserves another, I thought it would be useful to sum up and share my takeaways that might help guide us through these turbulent times:

Growth of venture debt : Amid rising interest rates and increased market volatility, private debt tends to shine and venture debt providers across Southeast Asia, India and the US are reporting a surge in deals and a growing pipeline.
Cash is King: With tighter funding market environment and falling valuations, startups should look for opportunities to consolidate and acquire good assets to strengthen their position while cutting back on cash burn to focus on profitability and preserve cash runway
Keep Calm and Carry On: Venture investors have indicated continued support for existing companies and will allocate more capital to their portfolio, instead of hunting for new ones. However, with freshly minted Southeast Asia venture equity funds like Jungle Ventures Fund IV ($600m), East Ventures multistage $550m venture and growth fund, Mass Mutual Ventures Fund II ($300m), there is still ample liquidity for early-stage companies seeking entry ticket funding. However, founders are advised to sharpen their pencils as the days of funding back-of-envelope ideas are gone.
There ARE Alternatives to TINA (There Is No Alternative): Navigating a challenging environment, sophisticated investors are pivoting from traditional portfolios that were based on a mix of public equities and fixed income. Increasingly they are looking for an alternative bucket of private equity, venture debt, and real estate where opportunities for better yields than liquid assets, with lower volatility and less correlation to headline risk.

Next month, we hope to share some insights on Founders’ sentiments from a survey of the entrepreneur community. I thank you in advance to all those who have kindly agreed to be surveyed and share your thoughts with us.

Disclaimer: The content in this article is meant to be informative and for general purposes only. It is not and shall not be construed as investment advice.

(A version of this article first appeared on LinkedIn on 3 June 2022.)

Words cannot express how delighted we were to meet our investors, partners, and portfolio companies at Genesis’ first-ever, physical event.

Held on 12 May 2022 in the charming Grace Hall of the Jacob Ballas Centre, we welcomed our guests, some of whom have travelled from Korea, Japan, and USA to join us. We are also grateful to those who joined us via Zoom from Indonesia, Israel, Malaysia, UK and USA.

In addition to sharing the progress of our Fund, our guests were treated to a packed agenda full of insights:

AI driven consumer research and analytics by Stephen Tracey, COO, Milieu Insight (portfolio company)
Advanced 3D technology for the fashion e-commerce industry by Harindar Keer, Flixstock (portfolio company)
South-east Asia investment landscape by Jeff Benjamin, CEO, Bank J Safra Sarasin
Panel: Due South – Why SEA Continues To Be A Magnet For Investments
- Tony Huang, Managing Partner, KISO Capital (moderator)
- Yasuhiko Hashimoto, Managing Executive Officer, Mizuho Leasing
- Chang Ha Park, Deputy General Manager, Korean Development Bank
- Kayo Sengoku, Deputy General Manager, Aozora Bank
Perspectives of Asia and US Venture Debt by Tony Huang, Managing Partner, KISO Capital, K2 Venture Finance

The afternoon ended a guided wine and cheese tasting session led by master wine-maker, Eddie Gandler and a tour of the Jews of Singapore museum.

We would not have made it this far in our venture debt journey without the support, encouragement, and belief of our stakeholders. Thank you and see you in 2023!

Special thanks also to Teabox for their exclusive selection of Darjeeling teas for all our guests to enjoy.

Relive the afternoon’s highlights with the recap video

A bull run for venture capital funding in 2021

Global technology startup funding clocked in at a record $621 billion in 2021. Southeast Asia startups raised almost $25 billion marking its coming of age as an important, albeit young, tech corridor. In the first quarter of 2022, as macroeconomic and geopolitical conditions continue to evolve in a melting pot of spiralling energy costs, inflation, and interest rates coupled with a war in Europe, how will the rest of the year play out?

Data from Crunchbase seems to indicate continued strength as global startups raked in $61 billion, the 4th month above the $60 billion mark in the last 12 months. Close to $3 billion was invested globally at seed stage. Startup investors deployed another $18 billion at the early stage and just over $40 billion at the later stage and technology-growth stage. This is amidst a changing landscape where global VC funds are raising record mega funds. Andreessen Horowitz closed on a host of new funds this year, with its eighth fund at $2.5 billion, its fourth bio-related at $1.5 billion, and a third growth fund at $5 billion. Fintech specialist Ribbit Capital closed its seventh fund at just under $1.2 billion, marking its first billion-dollar fund.

While the figures for Q1 2022 Southeast Asia funding are yet to be released, funding news throughout the first three months of the year seems to suggest a good quarter for the region, especially with regard to smaller deal sizes of below $50 million.

Sequoia-backed Multiplier, a startup that enables companies to hire and pay remote workers while complying with local laws, raised $60 million at a $400 million Series B valuation with New York-based Growth Equity Tiger Global as its lead. This came barely 3 months after the company’s Series A of $13.2 million. Tiger Global, together with Cathay Innovation and Sequoia, wrote a cheque to Singapore-based AI Rudder, the leading voice artificial intelligence start-up, leading the $50 million Series B funding – less than 6 months after the company wrapped up its US$10 million Series A in November 2021. Tonik Digital Bank targeting Philippines unbanked consumers closed a $131 million round of Series B equity funding in February 2022 led by Japan’s Mizuho Bank. A VC syndicate led by Vertex and includes Prosus Ventures, AC Ventures, and East Ventures injected $30 million in Series A funding into Indonesia-based fishery and marine platform Aruna. Who would have imagined a Southeast Asia Series A round ballooning to $30 million 12 to 24 months ago!

In parallel, investors have raised concerns about the rapid pace of deals and high valuations. Having said that, it could take time for a correction to reveal itself on a market-wide scale. VC and private equity firms are sitting on immense piles of cash earmarked for startups, and competition for deals remains high. The deal-making pace of Q2 2022 will dictate the direction of venture funding for the rest of the year.

Geopolitical risk threatens to trip up venture capital’s global stride

The venture capital model is predicated upon fast growth and rapid scaling. Adding to the lingering pandemic woes is a crucible of geopolitical risk involving the world’s largest nations US, China, and Russia. For VCs, these geopolitical risks can make it more difficult to raise capital from LPs from sanctioned countries. Increased and enhanced due diligence will be necessary to avoid raising capital from sanctioned sources. Speaking to entrepreneurs in Singapore, Indonesia, and Malaysia, we observe that Southeast Asia startups have little to no dealings with Russian investors. However, some startups we spoke to have reported various delays in their supply chains, especially for parts that originate from Europe.

A Reuters report in March 2022 highlighted that global investors have pursued a re-allocation strategy into crypto and blockchain and away from real estate and bond funds, seeking exposure to a sector they believe could withstand the fallout from the Russia-Ukraine conflict. Venture capitalists invested around $4 billion in the crypto space in the last three weeks of February 2022. Bain Capital Ventures, a unit of private equity firm Bain Capital, for instance, announced in March 2022 that it is launching a $560 million fund focused exclusively on crypto-related investment.

Rising Inflation, Rising Interest Rates: A Threat To Venture Capital And Entrepreneurship?

For the first time since 2018, the Federal Reserve lifted the target for its federal funds rate by a quarter of a point, in order to battle rising inflation, thus signalling the end of a long-lasting pool of cheap capital for companies. Based on historical rate hikes globally, interest rates when they do change are expected to do so gradually. Three or four rate increases by the end of this year could add up to 1% or more to base interest rates in the US.

While higher interest rates will likely lead to a pullback in liquidity, this might have a balancing effect in that it may prevent market pricing and valuations from being driven up to unsustainable levels over the next few years.

The reduction in liquidity may also push VCs and founders to seek alternative forms of capital financing, including venture debt, which will in turn come at higher borrowing costs with venture lenders mirroring (or at least partly mirroring) any interest rate increases in the market at large.

There are two types of companies that need to be careful: companies that are “all tech and no revenue” or “all revenue and no tech”. The critical question is whether these companies are indeed solving real problems for people in a sustainable manner.

Further, such a liquidity pullback may have a disproportionate impact on later-stage technology companies that are pre-IPO (as we witnessed in Q1 2022 in the US). In this scenario, founders and investors will likely delay major liquidity events in order to prevent valuation discounts, given the recent poor performance of many newly listed technology companies.

It’s not all doom and gloom, however. Many technology companies that had a funding event in the past 12 months have likely raised more cash than needed. These companies will likely have to cut expenditures with the aim of extending their cash runways.

Companies can also raise extension rounds, offering shares at the same price as the most recent funding round. Extension rounds were common at the start of the COVID-19 pandemic as they allowed investors to double down on promising companies without having to face steep valuation uplifts amidst an uncertain trading environment.

Many companies with healthy cash flow turn to venture debt and growth debt to shore up balance sheets. A prime example in 2020 was AirBnB which turned away from equity in favour of $2 billion debt at a 10% interest rate from Silver Lake, shoring up its balance sheet despite having close to $4 billion in cash reserves already.

And not to forget that such moments can offer a silver lining for strong founders; market share can be hard to grow when times are good and competition fierce, and perhaps more easily gained during a downturn provided the company is well-financed with a strong team in place.

John Chambers, Chairman Emeritus of Cisco and founder and CEO of Palo Alto’s JC2 Ventures, shared his views that startups are nimble and flexible which works in their favour, highlighting examples of how Cisco and Amazon had trod on similar paths to becoming industry leaders.

Tight Labour Market

It is likely that the Southeast Asian tech ecosystem is entering a golden phase as the tech market continues to grow strongly over the years, speedbumps notwithstanding. Global and pan-Asian tech giants have recognised the region as a strong potential growth engine as part of their global ambitions. As these giants expand in Southeast Asia, the competition to attract and retain talent is becoming a challenge among startups and their larger counterparts. Startups are finding it tough to hire new and replacement employees and expensive to compete with their better-funded, larger, global competitors.

Speaking to regional startup founders and CFOs, we observed a few notable trends. Product, Technology, and Sales are the most challenging positions to fill. There is a growing trend of candidates who accept job offers but do not turn up for work on Day 1. Their reason: they have been offered up to 50% or even 100% more in salary to jump ship. Candidates are also asking for sky-high salaries and are attracted to “frontier” tech like crypto and Metaverse companies.

Startup CFOs tell us that they try to counter these trends with strong and regular internal communications and frequent external initiatives aimed at potential new applicants. Social media, such as LinkedIn, is a valuable tool to grow the employer brand influence of a company. A startup we surveyed is launching what it calls a “Craftsmen Program” to retain team members who have strong coding skills by providing them with visible career path progressions. Last but not least, the delayed nature of the ESOP (employee stock option plan) vesting schedule does also help with retention.

The role of debt financin

2008 (GFC), 2020 (COVID-19) and now 2022. Bumpy years where prudent leadership teams were/are eager to hold on to more cash and shore up balance sheets.

Debt financing can help companies prolong the life of expensive equity already raised. Having an extra 20% or 30% cash cushion gives leadership teams more options by extending the company’s runway, accelerating growth, and staying ahead of the competition.

As for rising interest rates, venture lenders will continue to price in risk and mirror market movements. Where bank rates edge upwards venture lenders are expected to generally mirror that movement by way of interest rate adjustments and even adjustments to warrant option coverage, all with the objective of risk-adjusted pricing. In fact, increased interest rates notwithstanding, our conversations with other regional venture debt operators point to strong deal flow in H1 2022. From Europe to India, and in Southeast Asia considering our own deal flow pipeline, indications are positive that a strong lending pace will continue into the rest of the year. However, lenders are also more cautious of who they lend to and will necessarily tighten the qualification requirements and their credit lens.

What a difference these past two years have made!

Whenever I was invited to speak about venture debt in the past, I always start by explaining to the audience that venture debt is a form of business financing that is tailored for venture-backed, high-growth startups who do not have the collaterals nor track record generally required by traditional banks. When used appropriately, venture debt is an attractive form of growth funding because it minimizes dilution of a founder’s (& early investors’) ownership stake.

Fast forward to February 2022 where I addressed a virtual room of startup entrepreneurs from SEA Founders – a community of growth-stage founders in Southeast Asia. I was very heartened by the sophisticated level of understanding about financing tools to power startup growth. Comparing this to when I first started out in venture debt in 2015, these founders have certainly become more acquainted with its use case.

However, I thought it would be useful to clarify some terminology and practices. This will be a handy guide for founders when talking to venture lenders as part of their next fund raise:

Convertible debt is not venture debt.

Venture debt is a bit like a mortgage loan. If we want to buy a house, the bank will provide us with a mortgage loan that we progressively pay down. Before we accept the loan, we would do our maths, asking ourselves, “how much do we have to pay on a monthly basis for this home loan? What are we comfortable with?” Once we decide, we don’t think about it much until the home bank loan is fully repaid. Once fully repaid, the house is ours.

On the other hand, convertible debt is where we borrow money to buy a house, but the lender has the option to decide if he wants the loan repaid in cash or take a portion of the house in return. Here the borrower has to deal with the uncertainty of whether a part of the house may eventually belong to someone else. Hence, a convertible debt is not venture debt.

Shares are not given free to lenders via warrants.

Due to the risk profile of a startup company, venture lenders will ask for warrants, which is an option to buy some shares in the company in the future at an agreed price. I think it’s important to understand that you’re not giving the equity warrants to the lender for free. The lender actually needs to pay and convert the option into shares of the company at a cost.

The way we describe it at Genesis is that we are investing debt into the portfolio company while simultaneously playing the role of small-time equity investor. Because we believe in your company, we’re willing to provide debt financing to grow the company. And because we have done our homework as an investor, we would love to be able to put some equity to play too.

Covenants can be used for instilling financial discipline

Many founders’ initial reaction to covenants is generally negative. However, I believe if designed reasonably, it can bring financial discipline and performance milestones for startups.

Early-stage start-ups tend to have big dreams. Founders would say to me “I am aiming for five million revenue this year and twenty million next year. Based on P&L. I think I am comfortable with a debt to equity ratio of forty percent, so I want to borrow five million dollars in venture debt.” But when we propose business and financial covenants around the loan, founders would come back and revise their projections e.g., “I can’t grow 4x within 12 months.”

A very canny CFO from one of our portfolio companies once shared that taking on venture debt has allowed him to introduce financial discipline within his startup. An example would be working out the mortgage repayment I described earlier and discipline is needed to make repayments on time. Having a venture lender onboard gives him the confidence that he has passed the stringent credit litmus test and he can confidently tell prospective VCs that he has a track record of being financially disciplined. Therefore covenants that are structured reasonably will help companies grow, rather than suffocate. Hence it would be useful to have a candid conversation with your venture debt lender on the purpose of the proposed covenants.

I hope the above “advanced level” clarifications about venture debt is useful for you. For an elementary overview of venture debt, please read this article on the “Top 10 Questions Every Founder Asks About Venture Debt.” If you have any questions on how venture debt can support your startup’s growth, please do not hesitate to contact me.

(A version of this article first appeared on LinkedIn on 28 February 2022.)

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Partner Martin Tang talks to David Kim, CEO Roundtable Bridging Asia podcast host and seasoned banking professional, about his career journey and the use case of venture debt.

In summary:

- A venture debt is a loan for start-ups to minimise the dilution of founders and early shareholders’ equity stake.
- Venture debt has been in Southeast Asia for six years; still relatively young compared to US and Europe.
- We will stand on the shoulders of these giants and learn how to accelerate development.
- Venture loans work similarly to mortgage loans in that the principal and interest are repaid in equal measure. Usually there is no collateral as startups usually do not have collateral.
- Genesis’ investment philosophy focused on Southeast Asia; agnostic of sector but must have impact and ESG components.

Read the full interview in the Korea Economic Daily (Korean) here.

Watch the CEO TV (CEO Roundtable Bridging Asia) podcast (English) here.

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Genesis is exploring various deeptech startups in healthcare, energy storage, sustainable energy, and smart mobility. We believe that beyond the first wave of Southeast Asia startups that are disrupting retail, commerce, and finance for consumers and businesses, the next wave of disruptive startups is already in their early growth phases. For instance, plant-based to lab-grown food companies; sustainable farming and energy; and healthcare technologies are leveraging cheaper, faster processing chips to develop home-based devices that can monitor individuals outside the clinical environment.

Battery Technologies That Could Power The Future

Cheaper, denser, lighter, and more powerful. These are the attributes of a futuristic battery pack that every device maker wants. From iPhones to laptops and electric vehicles (EVs), a battery that can store energy for use continuously without having to charge for at least 24 hours would be a breakthrough.

At CES 2022, HyperX showcased the Cloud Alpha Wireless, claiming the wireless headset can operate for 300 hours, (or more than 12 days of use.) Avid gamers would be thrilled to have this device. Range anxiety is an issue that all car manufacturers are working hard to resolve; and the Mercedes-Benz Vision EQXX concept EV was unveiled with a claimed range of 1,000 km, packed with a 100kWh battery that is 50% smaller and 30% lighter. Current Tesla EV models can push the 600km range with additional specifications. With more EV models launching into mass production, would 2022 be the year that the EV tsunami comes ashore?

Entering The Metaverse Will Become A Necessity For Brands

For the uninitiated, the metaverse is an immersive virtual world that will serve as a form of the embodied internet. It is a general term most commonly associated with Mark Zuckerberg’s dream of migrating social media platforms into virtual and augmented realities.

Bloomberg shares that fashion and beauty companies are selling visions of metaverse makeovers, in which avatars get dressed and dolled up. Luxury brands like Gucci, Balenciaga and Burberry have been sketching and planning digital fits to adorn digital users. Louis Vuitton released an exclusive capsule collection that featured the League of Legends gaming universe, including special Prestige skins for the League of Legends Champion, Qiyana. PulpoAR will offer virtual makeovers. Other companies, like Procter & Gamble, are adding more subtle beauty experiences like BeautySPHERE, which walks users through the ingredients and processes used to make their cosmetic products.

Digital Twins in Healthcare

Digital twins of human organs and systems are a closer prospect, according to a Forbes article on The Five Biggest Healthcare Tech Trends In 2022, and these allow doctors to explore different pathologies and experiment with treatments without risking harm to individual patients while reducing the need for expensive human or animal trials. A great example is the Living Heart Project, launched in 2014 with the aim of leveraging crowdsourcing to create an open-source digital twin of the human heart. Similarly, the Neurotwin project – a European Union Pathfinder project – models the interaction of electrical fields in the brain, which it is hoped will lead to new treatments for Alzheimer’s disease

TeleHealth Could Be A Quarter of Trillion Dollar Industry

According to the HIMSS Future of Healthcare Report, remote healthcare and telemedicine have gone mainstream with the pandemic restricting people from going out. During the first months of the pandemic, the percentage of healthcare consultations that were carried out remotely shot up from 0.1% to 43.5%. Analysts at Deloitte say that many doctors and patients have shed their discomfort with video visits, setting the stage for their continued use post-pandemic. McKinsey is of the view that Telehealth could be worth $250 billion with the acceleration of consumer and provider adoption of telehealth and extension of telehealth beyond virtual urgent care in the US.

In line with the envisaged growth in remote healthcare and aging population demographics, new generation wearable technologies equipped with heart rate, stress, and blood oxygen detectors are needed to enable healthcare professionals to accurately monitor vital signs in real time at home. GE Healthcare is creating the next generation of patient monitoring with wearable sensors. In the future, light-weight, even printable technology could help in ensuring patients’ safety in recovery after medical operations. Monitoring technologies offering precision in performance could give healthcare officials new possibilities to monitor patients from afar.

Some of these technology trends may be available very soon and others will be very important in the future as they begin graduating from R&D labs and enter the marketplace. We hope to see more great tech become commercially ready as these will impact our lives and make us healthier people. Until 2023!

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19 May 2021/ by CrestBridge

With market awareness of venture debt low, it is private debt’s best kept secret. That hasn’t stopped venture debt from substantially growing its market share of the start-up ecosystem.

Here are 5 reasons why this under-utilised asset class will boom over the next 3 years:

It is a growth powerhouse with $47b worth of assets under management in 2021.
There are only a few venture debt managers in the market right now.
Start-ups like not giving up their equity in return for a cash injection.
The returns are high relative to other fixed income investments.
The rise of SPACs complements venture debt.

Read the full article here.

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