SINGAPORE — With the stock market slowdown making it harder for Southeast Asia’s growth-hungry tech startups to raise funds, they and their venture capital firm backers are turning to a traditional, if often overlooked, source of cash: bank loans.
Startups typically raise money from venture capital firms and larger companies in exchange for a slice of their equity as most of them are unable to obtain large loans from banks, given their short track records and heavy spending in their early stages.
But more investors, including banks like HSBC, are setting up dedicated debt funds to complement startups’ fundraising, allowing young companies to lay hold of short-term working capital without diluting the founders’ ownership.
In an interview with Nikkei Asia, Amanda Murphy, HSBC’s head of commercial banking for South and Southeast Asia, said the bank is preparing to set up a dedicated lending fund for Indonesian startups, following successes elsewhere in the region.
“We’ve lent almost half a billion dollars in this space. We’ve launched [a fund] in Singapore for $200 million, and India for $250 million. … And now we’re looking at Indonesia,” Murphy said, though she declined to say when the new fund would be established or how big it would be. Each of the bank’s local subsidiaries determines how much to lend from their own balance sheets and manages its own supply of credit.
In the last few years, HSBC has been extending credit to some of the biggest tech firms in the region, including Singapore-based superapp operator Grab. Southeast’s Asia’s young population and growing ranks of promising startups makes it a promising market for HSBC, one which Murphy calls a “growth engine” for the British lender.
Regional startups “think that the risk appetite for traditional banks doesn’t exist to bank them,” Murphy said. “So we thought that by launching specific funds, we will be able to communicate to those companies that … we are open for business, and we understand how your industry works.”
The initial loan relationship could also expand the bank’s services to startups, including cross-border payments, facilitating credits and connections to potential clients in new markets. “These companies want much more than just debt,” Murphy said.
Among the deals HSBC concluded last year was $50 million in loans to Singapore-based fintech startup Funding Societies, which it offered as working capital for their loan products aimed at small and medium-size companies. Another $100 million went to the city-state’s “buy now pay later” and digital lending startup Atome Financial, which was among the largest venture debt deals in the region last year.
In Southeast Asia, however, debt financing is a relatively new concept that only emerged from Singapore in 2015, according to a PwC report. While loan types and sizes vary, depending on the scale of the business, the method has become more familiar to potential borrowers as the fundraising environment grew more challenging last year amid the market downturn.
Venture-backed startups in Southeast Asia completed at least 51 debt deals in 2022, raising a total of $1.97 billion, according to DealStreetAsia. This compares with just 30 deals in 2021 worth $2.57 billion. Grab alone accounted for nearly 80% of the lending in 2021, with a $2 billion loan facility.
Last year, debt funding in the region accounted just 12% of the total fundraising deal value, including equity deals. Still, with “Southeast Asia’s macroeconomic environment expected to turn more bumpy this year, the appetite for private debt is only going to go up,” DealStreetAsia said in a January report.
Lenders use venture capital’s support as a source of validation to help them determine whether a startup is a good bet and as the primary yardstick for underwriting loans. Murphy said HSBC is also “talking to a number of venture funds and venture capital firms” in Singapore, to cultivate startups that seek to complement their equity fundraising with loans.
Meanwhile, venture capital firms have also been setting up their own lending funds. Singapore-based Genesis Alternative Ventures recently began investing through its second $150 million fund launched in August last year, counting Japan’s Aozora Bank among the limited partners.
Founded in 2018, Genesis Alternative Ventures has invested in 25 startups, including Indonesian online lender Akulaku, which is also backed by China’s Ant Financial, a fintech affiliate of Alibaba Group Holding. The venture debt provider expects demand to “remain robust” as more startups look for new ways to raise capital.
“There is demand from companies that are trying to avoid excessive equity dilution at a time when valuation sentiments remain weak,” Genesis Alternative Ventures co-founder and partner Martin Tang told Nikkei Asia. “Venture debt is a good complement to a funding round in such instances.”
Singapore-based InnoVen Capital SEA, a leading venture debt provider, with over $210 million invested, said it has seen more appetite from startups because of a “valuation mismatch” between the equity investors and founders.
“On the demand side, I think we have definitely seen a significant increase in venture debt,” InnoVen partner Paul Ong said in DealStreetAsia’s report. “But I think recently we have had a lot more conversations with growth-stage companies that are willing to take smaller check sizes to sort of help them out in their funding rounds.”
Nevertheless, lending to startups is riskier than with more established companies, considering their lack of a long financial history, and most assessments of their financial viability are based on forward projections of earnings, according to Tang of Genesis Alternative Ventures. Investors must look closely at a startup’s track record, business model, sustainability of their growth plans and cost structure.
“Financial projections mostly tend to be overly optimistic and based on assumptions that are not sufficiently benchmarked, or thought through,” Tang said. The lack of audited financial statements means more time needs to be spent conducting due diligence on fund flows and controls.
Moreover, the current rising interest rates could also weigh on such startups as they are forced to pay back more to their investors. “There have been pressures on some of these companies, but we haven’t seen this in terms of loan defaults,” Murphy of HSBC said.
But on the overall lending business in Asia, “in terms of our commitment to lend and our appetite to lend, it remains the same,” Murphy added. “We’re working with our customers across the region to ensure we can support their ambitions.”