With so much attention given to private equity, debt, credit, real estate and infrastructure – part of a broader hunt for yield in a world (until recently) of very low interest rates – the debt side of venture funding hasn't grabbed the same attention as the capital part. 

Venture capital is a well-chronicled sector these days, and the doings of VC investors and startups are staple features of the business pages. Less understood, however, is “venture debt.”

Venture debt is a type of loan offered by banks and non-bank lenders which is targeted at early-stage, high-growth companies with venture capital backing. Crucially, venture debt does not replace equity; it follows it. According to one explanation from Silicon Valley Bank (as it used to be called), the amount of venture debt tends to be calibrated to the amount of equity the company has raised, with loan sizes varying between 25 per cent and 35 per cent of the amount raised.

And, while returns for venture debt investors aren’t as stellar as those promised (if not always delivered) by VCs, investors don’t have to wait so long to receive them, and there is less risk and volatility along the way. With family offices and other wealth management actors seeking steady returns for part of their needs, venture debt deserves a lot of attention. And that’s certainly the view of Paul Ong, partner at Innoven Capital SEA, a firm based in Singapore.

Rising central bank interest rates have, paradoxically, benefited Innoven’s approach, he told this news service.

“[Venture debt] is an assessment of a company’s ability to raise equity funding besides just the potential for repayment via cashflow. A lot of doors have started to close…Our pipeline has increased significantly,” Ong said.

About two years ago, when borrowing costs were far lower and venture capital deployment was flowing freely, many VC-backed firms weren’t as interested in venture debt, but since central banks have raised rates and equity deployment has pulled back, the conversation has changed. “Firms used to ask why they should raise money via Innoven when they could easily increase their company valuation in order to reduce shareholding dilution…they realise that this is now an option and can better balance their cost of capital,” Ong said.

With so much attention given to private equity, debt, credit, real estate and infrastructure – part of a broader hunt for yield in a world (until recently) of very low interest rates – the debt side of venture funding hasn't grabbed the same attention as the capital part. 

Three segments
The firm’s focus is on opportunities in Southeast Asia, mainland China and India. It has conducted more than 500 debt deals in the past six years, comprising more than 350 companies. According to its website, Innoven Capital has more than 350 portfolio companies and raised more than $5 billion from investors.

Ong brings plenty of experience to the field. He has worked for more than a decade in corporate debt origination and structuring in Southeast Asia. Ong joined Innoven Capital to kickstart the Southeast Asian business in 2016 and has gone on to lea d more than 30 venture debt investments across the region to companies such as Ruangguru,Tiki, Akulaku and eFishery. Before Innoven, he worked at DBS, conducting more than $700 million in debt facilities to corporates and conglomerates across healthcare, consumer, retail, automotive, real estate, and technology industries.

While Innoven Capital was founded in 2015, it was backed by the capital of its shareholder founders; since 2021 it has moved towards taking in more external capital for three of its funds, Innoven Capital SEA, Innoven Capital China, and Innoven Capital India.

The shareholder founders Seviora Holdings (a wholly-owned subsidiary of Temasek Holdings) and United Overseas Bank (UOB) have anchored Innoven Capital’s initial set of funds.

Innoven aims to provide returns of about 20 per cent on venture debt. That contrasts with the venture capital top returns that can be obtained of 30 per cent, but VC is much riskier. Venture debt holding periods are on average three years – far shorter than VCs tend to be.

Innoven Capital boasts a diverse range of Limited Partners (LPs), encompassing family offices, corporates, and government entities. Moreover, the composition of LPs varies across Innoven's different geographical locations.

Venture debt employed by Innoven tends to be mostly steered towards the tech sector. The business is, however, agnostic about sectors, looking at areas such as consumer goods/services, healthcare and sectors related to climate change.

The firm is launching a second batch of fund vehicles across the three regions it operates in, Ong added. “We are working on some specific debt solutions,” he said.