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Venture Debt Funds on the Rise Due to Increased Demand from Start-Ups

OpenGov speaks with Dr Jeremy Loh of Genesis Alternative Ventures

Venture capital returns reached an all-time high in 2020, even as the coronavirus pandemic decimated global economies! That growth came as industries disrupted by the global pandemic—work, health care, education, finance, shopping and entertainment—shifted dramatically to online services. It was lead by entrepreneurs who raced to achieve their dreams. These entrepreneurs cannot do this alone. Funding is key.

Genesis Alternative Ventures occupies a unique space in the Venture Capital world. Genesis Alternative Ventures is Southeast Asia’s leading private lender to Venture and growth-stage companies funded by tier-one VCs. And they predominantly operate in the realm of Venture Debt.

The Concept of Venture Debt

Venture Debt is primarily a form of Debt financing from specialist lenders to pre-profit Venture-backed companies with an established business model and clear growth prospects. These emerging companies often view Debt financing to augment their cash position without giving up a significant portion of their ownership as required by additional equity financing.

Venture Debt can complement Venture capital and provide value to fast-growing companies and their investors. Unlike traditional bank lending, Venture Debt is available to start-ups and growth companies that do not have positive cash flows or significant assets to use as collateral.

Venture Debt is complementary and not a replacement for early-stage equity. It is a form of risk capital with typically a lower cost than equity when structured and appropriately deployed.

OpenGov Asia had the honour to talk to Dr Jeremy Loh, Co-Founder and Managing Partner at Genesis Alternative Ventures has been involved with the Venture Capital industry for 14 years, including starting the Venture Debt Business at DBS Bank in 2015.

He said that companies suitable for Venture Debt investment are companies that first have demonstrated rapid growth, proven product or business model and prudent cash flows. It is important that businesses seeking to take on debt financing have well thought out and robust business plans. Company founders have taken on Venture Debt alongside equity as the debt brings in flexible capital and is minimally dilutive. Dr Loh explained that there is an element of risk in these fast growing, pre-profit companies and this is why specialist lenders with a hybrid VC and credit background are required to understand the calculated risk in such debt financing.

Venture Capital Investments During the Pandemic

Venture Debt funds are shaping up to raise new funds based on the current higher demand from start-ups. Technology start-ups in logistics, hyperlocal delivery, agritech, and SaaS sectors were the largest applicants for Venture Debt during the pandemic so far.

The uptick in the number of start-ups looking to raise Debt, may not necessarily mean an increased number of Venture Debt deals, since Debt investors must carry out their own analysis and due diligence before closing a deal.

Dr Loh explained that this current difficult period during the pandemic has made Venture Capitalists look more closely at companies to invest, but it was quite astonishing that that  VC investments in start-ups were at an all-time high in 2020.

He said that Venture Capital companies usually look for Potential Unicorns (aka billion dollar valuation companies) to invest in, but a unique class of companies have emerged during the pandemic. This class of company labelled as ‘Camels’ – desert kings that can survive in harsh conditions, yet still balancing growth.

Getting your new business off the ground

Dr Loh added that it is getting easier to start a business, “the challenging bit is getting the business off the ground.”

He emphasised that for any young company, building a network is of utmost importance. He would advise them to find out who are the VC’s investing in their area, get to know HNWIs, Family Offices, and be aware of all available government grants. He said as a mentor, his first step is to make appropriate introductions to the right people, whether it might be to an angel investor or even a government agency to discuss grant options.

When asked what his mantra is for any start-up, he replied, “stay true to your mission”. He also stressed the importance of resilience – ‘you must have it in you’.  He advised finding a co-founder for any entrepreneur, “solo entrepreneurship is a long, lonely journey”. Adding that you must bring in people with different skill sets into the company and ensure that everyone moves at the same pace – is key to success.

VC in 2021

While 2020 might be a peak year for VCs, Dr Loh said it was too early to predict what will happen in 2021. But he did note that in a crisis, innovation and entrepreneurship is accelerated. VCs are looking for the rare entrepreneur gem that comes with a touch of resilience. 2021 should be an exciting time as there are many funds who have raised new capital seeking their next investment.

Dr Jeremy Loh is also an adjunct professor teaching innovation and entrepreneurship at Lee Kong Chian School of Business, Singapore Management University (SMU).

SMU’s Institute of Innovation & Entrepreneurship (IIE) exists to nurture changemakers and founders who aspire to make the world a better place. They have a vision to nurture and grow an innovation culture and entrepreneurial community in SMU and beyond and a vision to be the preferred partner for the research and practice of innovation and entrepreneurship.

VC  Office Hours is another initiative by SMU that allows budding entrepreneurs to get advice from rainmakers of the VC Industry. Through it, they have got Southeast Asia’s largest congregation of over 30 veteran venture capitalists to open their calendars for one afternoon only. With assets under management (AUM) exceeding US$16 billion, this is is an opportunity to receive one-on-one business advice at no cost!

Powered by Protégé Ventures, VC Office Hours from Lee Kuan Yew Global Business Plan Competition aspirants get a chance to consult investors on their business ideas, growth strategy, fundraising plans and more!

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