Updated: May 30, 2020
From left Ong Yiat Liang (Director of SME Product Development, CIMB), Ben Cheah (Investment Director, Innoven Capital) and Joe Wei (Venture Partner, Whitestar Capital) and Endeavor Entrepreneur Fadza Anuar (Co-founder & CEO, FashionValet).
Venture capital (VC) funding is one of the most common ways entrepreneurs fuel their company’s growth. However, VC funding is not the only way for entrepreneurs to grow the business.
ScaleUp Endeavor recently had its third workshop around company financing. Our 15 ScaleUp Endeavor companies learned from multiple touchpoints during the workshop:
The difference between Venture Capital, Venture Debt & Bank SME Lending from Joe Wei (Partner, Whitestar Capital), Ben Cheah (Investment Director, Innoven Capital) and Ong Yiat Liang (Director of Product Development, SME Banking, CIMB Bank)
Top fundraising tips from Endeavor Entrepreneur, Eric Cheng, Co-founder & CEO of Carsome, who recently raised US$50 million in their Series C round.
One-to-one sessions with CIMB Bank managers on the feasibility of debt financing for startups
Summarising the key learnings of the day, here are 6 quick facts about fundraising options entrepreneurs have access to:
1. Venture capital funding is expensive among other fundraising options. Entrepreneurs are required to dilute equity in exchange for capital injection. In comparison, debt financing is typically cheaper in the long term (interest rate charges are typically 8-10%, zero equity dilution) but businesses are required to show that they can fulfil loan repayments – profitability over 3 years, positive monthly cash flow, possibly collateralised loans. This is mainly due to regulation and each bank’s internal risk processes.
Many early or growth-stage companies struggle to fulfil these requirements and do not have the stability of more mature businesses and hence opt for venture funding. VCs are willing to take bets on less-proven companies, given their insight into startup activity in the region and requirement to produce >20% returns for their limited partners. Furthermore, most VCs typically make their returns on a small proportion of companies – allowing them to have a higher risk appetite.
2. Eventhough banks evaluate companies differently, do not overlook them.
Banks place a large emphasis on a company’s ability to make repayments based in a timely manner. Key criteria include:
a. Ability to repay: Profit & loss historical performance, cash flow projections, asset valuation, and profile of key clients (typically B2B businesses). In many cases where possible, entrepreneurs should seek credit worthiness testimonials from your clients, especially if your clients are listed companies. Typically this helps provide banks assurance of the startup’s receivables.
b. Character & attitude: Even banks place bets on the entrepreneur. If the relationship manager is able to build a good rapport and trust with the entrepreneur, the higher the likelihood of a loan approval.
c. External environment: Although you may not be in a position to affect change, bear in mind the macro-market conditions before speaking to your banker. Understand the bank’s financial position and business performance before approaching a banker.
d. Owner’s equity & shareholding: Similarly to VCs, banks are more willing to lend to entrepreneurs that are well-incentivised for the long-term.
e. Collateral: Although not always necessary, having physical assets that banks can collateralise would increase the likelihood of loan approval.
In any case, it is worth exploring options with your banker – you may be surprised, banks may be open to unsecured loans for working capital, extension of overdraft facilities and asset financing. CIMB provides quick business financing of up to RM1 million with no collateral requirement.
3. Build discipline even at the early stage.
Track record is pivotal in building creditworthiness – banks, venture debt firms and VCs alike. As shown above, historical track record is crucial for banks. As you build discipline and cultivate your relationship with your banker, you may be able to increase your credit line over time.
For typical venture rounds, as you progress in larger rounds, later-stage investors would typically instill strong corporate governance structures in place – either in the shareholders agreement, board meetings and reporting or even by encouraging entrepreneurs to hire a strong CFO and management team. Later-stage investors typically exit via IPOs or a trade sale – in any case, having a strong discipline on payments, accountability and financial management will help the company reach its intended eventual exit in the smoothest way possible.
4. Explore hybrid financing options.
Peer-to-peer funding platforms and other alternative financing methods are on the rise in Southeast Asia. One such source is venture debt – Ben Cheah of Innoven Capital shared that this form of funding allows venture capital-backed companies to receive additional financing (up to 20-25% of a single round) without diluting any equity, acting as extra fuel for a particular round. Many venture debt players reserve the right to convert some debt into equity depending on repayment timeliness and potential upside. Unlike bank loans, venture debt players have a higher risk appetite and typically follows the due diligence process of the lead VC firm in a particular round. Companies can be cash-burning but they must demonstrate high growth potential and have a minimum of 12 months cash runway (post-raise).
5. Numbers excite everyone – share your best metrics.
Investors and bankers require an accurate representation of your finances and a strong understanding of your business’ unit economics. It is important not to over or undersell your projections and ensure that your historical figures are well accounted for – nothing puts an investor or banker off than inaccurate or contradictory statements. It is also important to state reasons behind jumps in your figures and benchmark them against other players in the market. Reduce jargon around the technicalities of a product/service, simplicity is key – this allows investors to focus on the business fundamentals.
6. Due diligence is a two-way process.
Investors are doing a deep dive on your business - you should do the same. Run due diligence on your investors - identify how investors can add strategic or operational value to the business by speaking to other investees, learn more about the partners and limited partners of the fund, speak to other entrepreneurs and entrepreneur support organizations. By understanding how investors manage their portfolio – i.e. how involved they can be or the sticking points that a particular investor focuses on, you will have an idea of how the investee-investor partnership may evolve post-investment. Not all investors are compatible to all companies at all stages. Value add varies across investors – success in fundraising can also mean selecting the right partner to accelerate the growth of the business.
The content of the article is summarised from the ScaleUp Endeavor Finance workshop. ScaleUp Endeavor is a local support for high-growth startups through a structured 12-month program. A special shoutout to our main partner TIME dotCom and our supporting partners: CIMB Bank, Prudential Assurance Malaysia and Bain & Company for supporting ScaleUp Endeavor. To find out more about the program, click here!