FINANCIAL SERVICES | Staff Reporter, Singapore

Innoven Capital's Chin Chao reveals why venture debt is the next big thing for Southeast Asian start-ups

Southeast Asia is fast becoming a hotbed for start-ups, and here’s how venture loans can fuel their growth.

If Southeast Asian start-ups wanted to take their businesses to the next level of growth, it would often require a significant sum that most founders do not have and most banks will refuse to finance. The risk of lending is simply too great, banks would reason out, especially to start-ups that are currently racking up losses despite their huge profit and scaling potential in the coming years.

As the newly appointed interim CEO for India operations and current CEO for Singapore and Southeast Asia operations of Innoven Capital, Chin is making it his mission to champion venture debt in Southeast Asia, a region that is becoming a hotbed for start-ups and growth-stage companies.

A venture capital veteran, Chin is making some headway in this regard. In less than two years since starting operations in January 2016 Innoven Southeast Asia has already completed roughly 20 transactions in the region including Singapore, Indonesia, Thailand, Malaysia, Myanmar and cross border deals with the firm's India team.

In this exclusive interview with Singapore Business Review, Chin explains the advantage of venture loans over equity and bank financing, and how his firm is helping Southeast Asian companies in reaching their growth potential through venture loans.

SBR: Please tell us more about Innoven Capital. What is it and what does it do? How is it different from other firms offering the same services?

Innoven Capital funds start-up and growth-stage companies through venture loans. The firm is a JV between Temasek Holdings and UOB Group, with offices in Singapore covering Southeast Asia, Mumbai covering India, and Beijing covering China.

Venture loans complement equity financing but are a much cheaper source of funding than equity financing. The key benefit for companies taking a venture loan is minimizing equity dilution for founders and existing shareholders.

First, there are very few entities in SE Asia that provide venture loans to early-stage growth companies. Moreover, Innoven is an independent organization and is NOT housed inside a bank or financial institution. This gives us the independence and the focus needed to be responsive to the needs of early-stage growth companies.

Innoven also has the ability to lend across geographies, having completed multiple cross-border deals to-date. With over 160 loans extended, Innoven not only has the operational experience to fund high-growth companies, but also a strong reputation with entrepreneurs for supporting portfolio companies through both strong and volatile periods.

SBR: What are the gaps in the venture capital scene that you aim to address?

Traditionally, early-stage growth companies have not been able to access debt because they possess few, if any, hard assets, which can serve as collateral. In addition, early-stage companies by definition have no track record of profitability. As such, debt financing from banks and other financial institutions has been virtually non-existent.

Innoven fills this gap by providing venture loans to early-stage growth companies and serves as a complement to venture capital financing. The capital raised through a venture loan accelerates a company’s growth and extends its runway while increasing the valuation of the company and decreasing equity dilution for founders and existing shareholders. And a venture loan is a much cheaper form of financing than equity financing.

While still a relatively nascent concept in Southeast Asia, venture loans are a common form of funding in the US. For example, 18 of the top 20 unicorns in the US have taken debt alongside equity financing to grow their businesses.

SBR: Name one major challenge you have encountered and how did you overcome it?

Because loans to early-stage growth companies was hardly ever available in SE Asia before Innoven, a major challenge has been to get the word out to both the entrepreneur and venture capital communities that loans to early-stage growth companies are not only possible but also very advantageous as a funding source.

If you take a look at Silicon Valley, venture loans are commonplace. For example, 18 of the top 20 unicorns in the US have taken debt in the early stages of their lifecycle to grow their businesses while minimizing equity dilution. Venture loans are simply a less dilutive and cheaper source of capital than equity capital.

We have overcome this challenge by facing the problem head on. We meet with founders, VCs, angel and seed investors. We make presentations at start-up events, attend conferences and sit on panel discussions regarding funding of start-ups. We actively participate in the entrepreneur ecosystem.

SBR: How do you compare venture debt vs traditional bank lending as a solution for startups? How do you think has venture debt evolved in the region?

As stated earlier, early-stage growth companies cannot typically get a loan from a bank or financial institution. Banks typically expect companies to have a track record of profitability of at least 2-3 years. Banks also want to see hard assets such as land, a building or machinery that they can take as collateral. Most early-stage companies only have soft assets such as intellectual property. And finally, banks want personal guarantees from the board members and major shareholders, which is impossible to give for many early-stage companies.

Innoven is able to lend to loss-making companies and to companies without hard assets. Moreover, we do not require personal guarantees from anyone. In summary, venture loans as a funding solution enables companies, which otherwise would not be able to get loans, to receive debt financing.

As mentioned, venture loans are a relatively new funding concept in the region. I initially saw a gap in the market while investing as a VC in Southeast Asia and China, so I co-founded the TechFinancing Centre in 1999, a JV between KeppelTatLee Bank, Venture TDF, and the Economic Development Board of Singapore. The TechFinancing Centre offered loan solutions to growth-oriented companies in Asia.

Years later, I was brought on by Temasek and UOB to head Innoven Capital’s Southeast Asia office, and I am seeing that the ecosystem is not only more mature, but also more ready to utilize venture loans.

SBR: What are your biggest milestones at Innoven Capital so far? 

While Innoven’s Southeast Asia operations only began January 2016, we have already closed around 20 transactions across the SE Asia region including Singapore, Indonesia, Thailand, Malaysia, Myanmar and cross border deals with our team in India.

SBR: What are your plans for Innoven Capital in the next 3-5 years?

We will continue to build out Innoven Capital’s presence in Asia and to entrench ourselves in the ecosystem. We will also continue to emphasize cross-border transactions between SE Asia, India and China as that is one of the strengths of the Innoven platform.

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