Start-up & entrepreneurship: Genesis bets on growing appeal of venture debt funding
When start-ups accept money from venture capitalists, the founders are often asked to give up a significant portion of their ownership in return for additional equity financing. Venture debt funds are an alternative way for start-ups to raise funds, minus the equity dilution.
“When you have to sell equity in your company to raise money to buy, for example, depreciating assets, it is an expensive exercise,” Ben Benjamin, co- founder and partner of Genesis Alternative Ventures, tells The Edge
Singapore in an interview. Genesis is Southeast Asia’s first private venture debt firm.
“So if the company is already doing quite well, they’ve got good investors, revenue and business model, why not take debt financing? It’s what SMEs would usually do — go to a bank and ask for a line of credit. So, we give these companies the opportunity to take on some debt, and at the same time lessen the equity dilution in parallel with equity fundraising,” he says.
Meanwhile, the venture debt business model also benefits the venture fund as it brings about at least two streams of income. The first is the interest payable on the loan from the borrower, and the other is warrants. “When we give a loan, as part of the package, we are issued equity warrants in the company,” adds Benjamin.
But why would a start-up turn to a venture debt fund instead of a bank for a loan?
Banks generally have more stringent requirements and criteria when approving loans to companies. The banks typically want some semblance of earnings before they are willing to lend. The very nature of start-ups, where growth is often prioritised over profitability, unchecks this box right away. This is where Genesis comes in.
Firm believer
Similar to most venture capital (VC) firms, Genesis looks for start-ups from the Series B stage and beyond that have sound business models with steady revenue growth and scalability. But on top of that, Benjamin looks at the people behind the business. To him, that is an equally important criterion as the business model itself.
“We look for founders who have got a strong handle on the financial side of their businesses as well. To understand cash flow and capital structure is absolutely critical in today’s environment. So, the fiscal ingredients in these companies are important,” says Benjamin.
Although Genesis has zoomed in on companies that are operating in the Southeast Asian region, it does not focus on any particular industry. But the companies have to be tech-enabled and have a strong tech backbone.
Currently, some of the start-ups that Genesis has invested in include Horangi, a cyber security firm; Lynk Global, an artificial intelligenceenabled, on-demand expert network platform; Hmlet, a co-living space; Matterport, a 3D image capture and data platform firm; and GoWork, a co-working space.
The thing about venture debt is that it is also a complementary source of funding to what the start-ups have already obtained from a VC firm. In fact, that is how Genesis hunts for its start-ups to invest in — through its VC partners.
“One of the key cornerstones of this model is that we invest in companies that already have investors. And these investors are top-tier VC funds or professional investors, who have been around the block and know the value of venture debt,” explains Benjamin, who adds that Genesis’ VC partners will introduce to them potential companies to invest in.
Genesis typically invests about 20% to 30% of the equity funds that the companies have been able to raise. This loan will last for a term of three years.
The firm sees plenty of growth potential for venture-debt funding. A recent study by Kruze Consulting shows that US venture debt grew 30% in 2019, and accounted for 10% of total venture capital investments. In comparison, venture debt made up between 1% and 3% of overall venture funding in Southeast Asia last year.
Genesis as a firm might be relatively new — it was launched just last year — but its three partners bring with them plenty of experience. Benjamin trained as a lawyer and worked as legal counsel for his family business, the fashion retailer company FJ Benjamin. He subsequently took on operational roles, overseeing the company’s luxury division. He helped start Sassoon Investment Corp, the family office of entrepreneur Victor Sassoon, and is also a non-executive director of OurCrowd Singapore, a US$1.2 billion ($1.67 billion), Israel-based online VC investing platform.
With his doctorate in engineering, managing partner Jeremy Loh did not go into the academia but built a career in investing, and is described as a pioneer of venture debt investing in Southeast Asia. He was previously with Bio*One, the Singapore government’s Economic Development Board Investments (EDBI) US$1 billion healthcare fund.
During his time at EDBI, Loh ran its Silicon Valley Office and helped make investments worth US$180 million in more than 10 companies. He also spent five years with DBS Venture Growth Partners, Southeast Asia’s first dedicated venture lender, further building up his expertise and ties in the tech and start-up community.
The third partner, Martin Tang, was formerly a investment banker with Lazard Singapore, where he provided independent corporate finance advisory to companies across the region, and handled more than US$3 billion worth of deals. Tang also worked at Standard Chartered Bank and DBS Venture Growth Partners.
Impact investing
Given the partners’ background and experience, they are able to keep up with the trends. For example, they recognise how asset managers are paying more attention to so-called ESG (enterprise, social and governance) factors, which include the company being not just environmentally-friendly but also having positive impact on the environment and the community.
As such, apart from strong fundamentals, Benjamin explains that Genesis is also looking for socalled “impactful” companies. Already, Genesis has identified several impactful companies and is interested in providing venture debt to them in the coming months.
“We back companies that are returns-first, as we ourselves are a returns-first fund. Not all our investments will be impact-driven, but those that are will have a strong impact angle,” explains Benjamin, who believes that in some ways, impact does play a part in delivering returns.
“You know, if you can find a company that has impact built into its business model, it means that as the company scales, so does the impact. And that’s fulfilling as an investor to see — the company you invest in being successful, growing, and at the heart of the growth lies an impactful outcome,” shares Benjamin.