The growing demand is good news for the likes of InnoVen Capital, a venture debt provider that is partially owned by United Overseas Bank and Temasek Holdings. Chin Chao, who is the Singapore and Southeast Asia CEO at InnoVen, says venture debt is filling an important funding gap in the local market. “Most scenarios are like this: The company has just raised funds, and three months later they find new opportunities that [they did not plan for]. If they raise another equity round so soon, they are unlikely to get a higher valuation. So, they turn to debt to minimise dilution.”
SINGAPORE (July 3): GuavaPass, the start-up that sells fitness centre subscriptions, is profitable and could probably raise equity from venture capitalists quite easily. But the KFit rival prefers to take on debt. “It is less expensive than equity,” says Robert Pachter, GuavaPass’ co-founder. And, taking on debt allows the relatively young startup to grow without further dilution.
Pachter is not the only start-up boss opting to take on debt. Given the low interest rate environment, debt is relatively cheap. Venture investors may seek returns of between 20% and 30% a year, but venture debt interest rates typically hover around 10% to 15%, says Adrian Chng, co-founder of venture capital (VC) firm Fintonia Group. As such, Southeast Asian startups are increasingly turning to this form of fundraising. This year, Indonesian hotel booking site RedDoorz raised $1.4 million in venture debt. Malaysia-based stock photo start-up 123RF, Thai e-commerce platform Pomelo and local digital media firm Conversant Solutions also took out venture loans.
