1. Startups

How "Venture Debt" Help Indonesian Startups

Several local startups have taken advantage of venture debt, the number of investors in this segment is still minimal

It is now very common for startups to get funding from venture capital through equity funding (equity financing). The founder sells some of the shares after the valuation is calculated by investors to get funds to support business development.

The minus value of equity funding is the potential ownership of the founder who is increasingly deluded if he often raises funds. Instead of being able to control the company, the founder must be willing to be controlled by investors who have controlled the majority shares. If performance does not meet expectations, he is prepared to be kicked out.

Actually there are other methods to get funding, and have been regulated by OJK, namely profit sharing and convertible bonds.

Overseas, with an ecosystem of mature technology companies, such as the United States, Europe, and even India, the concept was actually introduced earlier venture debt (venture debt). Its presence was due to market needs at the time.

The way it works is more or less similar to financing from a bank. The founder gets credit and must be returned with an agreed tenor and coupon based on the company's risk profile.

A number of important technology companies have been helped through venture debt, such as Airbnb and Uber. Actually, what is it venture debt? Then what is the potential for Indonesian startups?

Know venture debt

DailySocial ask for general opinion about venture debt from MDI Ventures represented by Kenneth Li and Aldi Adrian. Aldi explained venture debt generally go hand in hand with equity funding. Very risky for the firm venture debt enter alone.

Thus, the founder will have runway longer for business expansion without its shares much deluded. He gave an example, when startup X wants to raise funding with a valuation calculation, it can only get around $5 million-$10 million.

But with addition venture debt, there's an additional $5 million to payback in a year or two, meaning the startup will have a longer runway. "There is an expectation that startup performance and traction can be much higher in valuation without having to raise funds again in the middle of the road."

The combination of incoming funds, in the form of equity and venture debt, will make the founder more comfortable because they do not have to release more shares. They will still control the company.

"If the founder doesn't want to give up equity, can take venture debt Karena can if you love equity can't be taken anymore, different from venture debt," added Kenneth.

Aldi continued, the tendency venture debt the funds are used for working capital, not to be channeled again as disbursement, or called loan channeling, although this method can actually be used venture debt.

Generally, venture debt comes together with equity financing / DailySocial

This statement at the same time straightens debt financing (debt financing) earned Kredivo. This fintech lending startup get debt financing from firm venture debt Partners for Growth (PFG) for $20 million. Funds are fully redistributed as loans to consumers through product lines Kredivo.

Kredivo separate the pockets of business funding in two. The first is equity funding from VCs to finance all operating expenses and support the company's growth.

"The second is credit line funding (debt line) originating from financial institutions such as banks or finance firms such as PFG. We use it fully for lending to consumers through several financing product lines: e-commerce, cash loans, and offline," said the Head of Marketing. Kredivo Indina Andamari.

He reasoned that this separation was limited to business practices and fund management which were considered healthy for the growth and sustainability of the company. "We will continue to implement this in the future. Both are crucial to our business."

Venture debt This is not much different from financing from a bank. There are tenors and coupons that startups must pay regularly monthly. Estimated tenor is quite short, there are one to two years.

However, according to Kenneth, the coupon is certainly lower than the bank because investors generally offer warrant options (warrants). The debt can be converted into shares near maturity or when the startup raises new funding.

There are investors who make warrants as options, but there are also those who are locked into stocks. It goes back to their respective powers. This warrant option is the main distinguishing point venture debt with convertible notes. Convertible notes must be converted into shares.

"If it turns out that in the middle of the startup road it is less attractive when converted, in the end it's just come back as usual the money every month."

There are no nominal provisions in venture debt. So there is no term Series A, B, and so on. The amount of funds will be given according to the needs of the startup, of course, after investors measure their risk profile.

Player venture debt this, actually doesn't just come from the firm venture debt. Banks also participate. In the United States, Silicon Valley Bank (SVB) is touted as a pioneer. In addition there are also Comerica Bank, Bridge Bank, Pacific Western Bank, and Square 1 Bank.

Meanwhile, those from the firm are Western Technology Investment (WTI), Triplepoint Capital, Hercules Technology, Lighthouse Capital, Pinnacle Ventures, Horizon Ventures, and many more.

In Southeast Asia, there are Genesis Alternative Ventures, InnoVen Capital, and DBS all operating in Singapore.

Differences in the level of investment risk tolerance of each investor / DailySocial

The difference between the two is the risk and return profile of each. Banks have always been investors with cheapest form of financing, but rarely take significant risks. The biggest loss they estimate is only 1%-1,5% of each portfolio.

For firm venture debt, term sheet they are often equated with banks, but this is considered inappropriate. They are more categorized as a hybrid version of bank and VC financing.

Firms have various sources of funding, including taking from banks, such as Partners for Growth, one of SVB's strategic partners.

InnoVen itself was previously known as SVB India Finance, which is part of SVB. It has been operating since 2008 and is recorded as having disbursed more than 75 loans to 50 companies in India worth $110 million per year 2015. SVB India was purchased by Temasek Holdings in 2015, marking Temasek's entry into the market. venture debt.

Development venture debt globaly

Market share of venture debt and venture capital in the US / DailySocial

There is an interesting survey released Kruze Consulting (August 2019). They explained, 85% of respondents who represent the market venture debt in the United States stated that it had disbursed an cumulative $23 billion in loans over the past three years.

It is estimated that this year's distribution will be $10 billion (Rp141,6 trillion) or a 20% growth from the achievement in 2018.

In India, although not as big as Uncle Sam's country, the development venture debt quite fast according to the startup conditions there. The presence of firms such as InnoVen Capita, Trifecta Capital, Alteria Capital, and individual investors such as Sachin Bansal and Binny Bansal (Co-Founder of Flipkart) also contributed to enliven this market.

According to research YourStory Research, venture debt disbursed in India in 2017 was $1,2 billion (Rp16,9 trillion) with 47 loans. The following year it rose to $1,4 billion (Rp19,8 trillion) with 62 loans. Then in the first seven months of 2019, the amount reached $547 million (Rp7,7 trillion) with 35 loans.

The names of startups that take venture debt including Ninjacar, Bigbasket, UrbanLadder, Bounce, and Oyo. The latter has already expanded to Indonesia.

"Venture debt success depends on equity funding. Which has a lot of players in India. The VC funds focused here are pretty dry, $3-$4 billion at one point, coming in in the next two to three years. For venture debt"The important thing is that startups must continue to have good performance in order to continue to attract capital, where it is already available," said Alteria Capital Managing Partner Vinod Murali.

Meanwhile, in Southeast Asia, precisely in Singapore, venture debt it's only been crowded since 2015 after Temasek took SVB India Finance and in-rebrand became InnoVen Capital. They operate in three countries, India, China and Southeast Asia. They have disbursed 190 loans to 170 companies.

In detail, 26 startups in China, 24 startups in Southeast Asia, and more than 100 startups in India. In Southeast Asia, InnoVen has invested in Pomelo, Face, Tabsquare, Akulaku, Cargo, RedDoorz, Sorabel, Sepulsa (rebrand so Alterra), Wego, Tada, Zuzu, and others.

Meanwhile, Genesis Alternative Ventures, which was founded in 2018, was initiated by the conglomerate Sasson Investment Corporation and CIMB Niaga Bank to support the debut of Genesis in Indonesia.

How about Indonesia? Is the potential the same as other countries?

To DailySocial, Co-Founder and Partner of Genesis Martin Tang said, "We see Indonesian startup founders very savvy and began to realize the need to hold on to their shares for as long as possible. Venture debt is a source of capital that can help startups extend runway or fund working capital with a lower equity dilution."

He continued, outside Indonesia, venture debt more widely used due to wider availability. Genesis is actively starting to fund local startups with Bank CIMB Niaga, as well as marking its debut here.

For the initial commitment, both parties jointly prepare funds venture debt IDR 300 billion to be distributed. Martin is still reluctant to reveal the names of the startups that will receive the funding. He just mentioned there are some already in pipeline.

"We looked market Indonesian startups are very attractive, as can be seen from the many high-quality local entrepreneurs with a large population to serve."

InnoVen Capital Associate Director Paul Ong added, venture debt has a close correlation with the amount of investment flowing into any country. In Indonesia itself, the startup ecosystem has grown and matured in the last five years.

"As more and more founders are on the cusp of success, they are starting to realize they are reducing their shareholdings to protect their personal wealth. Venture debt can help with that by providing cheaper funds and less dilutive make the company accelerate growth."

Paul confirmed that InnoVen had not yet made its debut in Indonesia, let alone provided special funds. It has only provided funding for startups through its Singapore entity.

Profit and loss for startups and investors

This funding concept sounds interesting because the founder can still keep his shares from being diluted. Quoted from the page Kauffman Fellows, additional capital provided through venture debt enabling startups to make more progress before moving on to the next funding or increasing the certainty for certain milestones, while minimizing the dilution that would occur by securing additional capital in the previous round.

For example, a SaaS startup received venture debt $1,25 million to increase sales figures. The cost of this financing is $250 thousand in interest and warrants representing 0,79% of the company's shares.

If seeking equity funding in this round, the founder must give up 10,7% of the shares owned by new investors of the same value. With venture debt With this, the founder can save a significant share of almost 10%. 22 months after financing, the company was purchased at a significant multiple of its last valuation.

For founders, maintaining control over the company is not just about maximizing power, it's about maintaining control over strategy and operations. The stock is very valuable. Giving it up to meet short-term opportunities, even though it can be funded through debt, is not necessarily the best way to run a business.

Considerations that must be considered before taking venture debt funding / DailySocial

On the other hand, not all startups are right to choose venture debt as an alternative to choose from. Although contradictory, but this is charm from venture debt. Limiting startups is one way investors mitigate risk.

Aldi explained, startups that are usually targeted by investors venture debt are those who have stable cash flow, have started monetization, and have at least received Series A funding. Speaking of target consumers, investors prefer those who move in B2B to support the points above.

"In Indonesia, most of them move direct to B2C, so for monthly track it's a bit challenging. That's why investors are more I prefer to B2B because clear look for that it's clear. So there are no specifications for which industry to move, but rather must be clear."

Venture debt not suitable if the startup often burns money, have revenue streams varied, the purpose of using the funds was unclear, and debt payments accounted for more than 25% of operating costs.

"Don't accept money but you can't" return it. That's why this is more appropriate for startups that have already mature and proven the business model. Not for startups who are still looking for a business model."

Venture debt can also create problems in the next equity round. The new investor must agree to pay off debt or invest under debt as both options. Both of these situations will be difficult for new investors to accept because they are generally more comfortable seeing the capital injected directly into the company.

All these advantages and disadvantages should be taken into consideration for startups when they want to take this method. Kenneth mentions trend venture debt This is still very early in Indonesia, so it can be said that not many people understand. The players who are clearly visible are also new to Genesis Alt Ventures with Bank CIMB Niaga.

"In Southeast Asia alone this is still happening challenging, especially in Indonesia. But maybe in the future venture debt this will have its share."

Aldi also chimed in, "Perhaps in fact investors are already eyeing Indonesia but have not dared to be aggressive because Opportunitythere are not many that match appetite they."

Aldi and Kenneth's statement was reinforced by Paul and Martin. Paul explained that there are metrics used in targeting new startups, including what the market opportunities are, the company's main advantages, and a solid team.

In addition, they also see how much equity capital the startup has collected and who the investors are. "We are sector and [funding] stage agnostic, but we typically lend to startups that have raised equity capital from institutional investors or VCs."

Once a startup receives funding, InnoVen does not regulate how the money is used. However, the allocation must be clear, for example for marketing spending, opening new offices, developing products, working capital, buying more inventory, or opening outlets if they are engaged in business. brick and mortar.

Throughout InnoVen's journey, Paul claimed that InnoVen managed to reduce the risk of default (default rate) zero percent in Southeast Asia. This performance will be maintained, at least suppressed to below 4% in the long term.

"Our portfolio companies, which have been able to repay loans, are now continuing to grow at a healthy pace and continue to attract new investment capital."

Genesis is no different either. Martin is looking for startups that have secured at least Series A funding and above with a real business proposition towards sustainability. In addition, startups also need to have economic units strong and loyal customer base to buy premium products, this proves that there is a gross margin going into the coffers.

"We are also looking for startups that have a strategy 'burn money' under control, commensurate with growth and gross margins."

He emphasized the above points as a determining factor for success for the firm venture debt when disbursing funds.

Therefore, before choosing this option, Martin suggests that the founder understand the strategy 'burn money' them, working capital cycles, and business models, to decide whether having debt helps or hinders them.

"Leverage (use of assets and sources of funds/source of funds) will always be good if used correctly. However, this is on the basis that the company can meet its debt obligations," said Martin.

In search of debt venture partner In the right direction, Paul encourages founders to always work with investors who are credible, experienced, and aligned with the company's business plan. The goal is to ensure that companies can still manage their debt optimally and not exceed what it should be.

"Even though we don't have fundlife, we were able to support our portfolio of companies with various loans at different stages of fundraising, as the company grew."

Debut venture debt in Indonesia

In fact, among InnoVen's portfolio in Southeast Asia, a number of Indonesian startups have emerged that have taken advantage of this venture debt fund, such as Akulaku, Alterra (formerly Sepulsa), RedDoorz, and Sorabel.

In addition, UangTeman in 2017 raised $12 million in Series A funds in debt and equity led by K2 Venture Capital.

Basic comparison between venture debt and venture capital / DailySocial

DailySocial have tried to contact Bank CIMB Niaga to ask for details on their strategy to bring in venture debt in Indonesia. No answer has been given as of this writing.

Previously, during the inauguration of the memorandum of understanding with Genesis, CIMB Niaga President Director Tigor M. Siahaan explained the initiative to enter venture debt because they want to fill the funding gap in startups. That besides equity financing, startups also need loan financing.

"Actually, the target may be startups that have been running for one to two years, but are difficult to develop because it is difficult to get funding," he said.

The targeted startup segment is not only related to startups engaged in the technology world. They also target fashion, culinary, property, transportation, health, to manufacturing.

Outside of banks, there are actually local venture capital players who are interested and are preparing to dive into venture debt. They are Ideosource. To DailySocial, Ideosource Managing Partner Edward Chamdani explained that before the end of the year Ideosource hopes inaugurated the new business The.

The research has been done since two years ago. Ideosource's consideration for entering this segment is because Indonesia has a funding void in the industry brick and mortar and conventional, not only in tech startups. According to him, the concept of startup investment in Indonesia is a little misguided because there is too much mirroring in Silicon Valley.

There, many products are developed with a long process and require qualified engineers. In Indonesia, such an ecosystem does not yet exist. Therefore, many startups here were born and grew because they started from problems in the market.

"If you focus on the market, startups usually have which is good because product developmentit does not take long and can be directly marketed. The effect is the average product needs working capital, it's good but no one can help because it's not yet bankable. there so spot switches make venture debt come in," said Edward.

This new business will be under PT which will act as operating holdings. They will have access to institutional investors with a project-based financing model, not pool of funds like most VCs use.

"All value what we have will be entered and managed by holding by asset. The same concept has actually been applied to the financing of the film, managed by Mr. Andi [Boediman, Managing Partner of Ideosource]."

While waiting holding operational, Ideosource prepares a special incubation for fostered startups before accepting venture debt. They do proof of concept of its business model and its business direction in the market after being given a certain amount of funding.

In its debut, Ideosource chose businesses engaged in fintech, infrastructure, logistics, marketplace, plantations. The three initial segments became the focus because they were considered substantial in supporting the initial ecosystem that Ideosource wanted to build.

The targeted startups are not only engaged in technology, but also conventional with the potential to collaborate with technology. Edward emphasized that the startup has a target of B2B consumers and good cash flow. "If pure tech, but good still can. The point is that there is ."

Later, Ideosource assigns warrants that were locked from the start before venture debt injected. They still position themselves as VCs, but this has all been negotiated with the startup and entered through venture debt. The conversion of its shares is behind before the maturity of the debt ends.

Because Ideosource's goal is to build an ecosystem, every transaction will be directed to taking a majority stake. "Depends value, the count varies. But it can be up to 50% [take shares] because of us operating holdings so want to be together with the startup. We won't leave it they."

According to him, Ideosource's old concept of releasing shares when new investors enter is now considered no longer attractive. As a result, he chose to invest once and for all, in order to go to an IPO and build an ecosystem together.

"We will stay so on, so it is more suitable to enter venture debt,' concluded Edwards.

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