Temporary working capital

Productive startup finance reached $ 26.2 billion in Southeast Asia: report

January 8, 2021

5 min read

Opinions expressed by Contractor the contributors are theirs.

Global productive finance often referred to as venture debt, the market has averaged $ 8-12 billion a year, largely due to venture capital (VC) activity in the United States. However, in 2019, productive finance more than doubled to $ 26.2 billion, representing 19% of total VC capital invested globally.

Jakarta-based venture capital firm BRI Ventures said it has considered the increased interest of start-up lenders in productive finance as a non-dilutive financing option, through which entrepreneurs can raise growth capital. to lengthen their post-pandemic tracks or weather the storm without losing equity.

So in Southeast Asia, the pandemic saw the founders focus on non-dilutive financing options. As a newly established local productive finance provider, BRI Ventures’ Sembrani Nusantara Fund (Dana Ventura Sembrani Nusantara) seeks to meet growing demand.

Debt components could now be present in up to 40% of all venture capital deals, according to capital market firm PitchBook, a massive vote of confidence for this less-discussed funding option for startups.

Despite strong adoption in markets like the United States and neighboring India, the productive finance scene remains promising in Southeast Asia, largely driven by productive foreign financiers or the pre-existing productive finance arms of established banks, indicates the report.

In recent months, productive finance has become a viable financing option among founders and funders in the region. Attention comes as COVID-19 dampens deal-making and leads to smaller fundraisers and lower valuations, according to a statement from the investigation.

“While equity finance is essential as long-term growth capital, productive finance may be a better alternative for making small capital investments or for addressing transient cash flow mismatches,” says Nicko Widjaja, CEO of BRI Ventures.

The company’s local tech investment vehicle, Sembrani Nusantara Fund, said it recently partnered with an invested P2P lender to launch its productive finance offering, which provides up to IDR 60 billion in funding to emerging tech startups. their next phase of growth.

“Third, productive finance bridges the gap between the investment capacity of angel investors and the average note size of venture capital funds,” says Widjaja. “Fourth, equity financing to meet temporary working capital needs leads to a dilution of ownership, which may not be in the best interests of micro, small and medium enterprises. (MSME) entrepreneur. Even when productive finance is used to meet growth capital needs, an entrepreneur can benefit from postponing fundraising to a later date. “

The report argues that these mismatches have come to the fore due to the now visible effects of COVID-19 on the local tech space. To begin with, the process of structuring equity investments is a worrying exercise and usually takes a long time to complete. Second, the cost of productive finance is generally lower than the cost of equity.

“There hadn’t been a lot of demand for productive finance in the early stages of the local digital economy, but as the ecosystem matures in this part of the world, equity has become more expensive than debt. A big part of this is that entrepreneurs really don’t like dilution in the later stages of their business. They are therefore fond of any form of capital that is less dilutive than loans. This is especially true for emerging tech companies that are already generating strong revenues and looking to leverage their books, ”Widjaja continued.

Rather, the report insists that in the current economic climate, investors who keep their powder dry and shy away from backing new startups may view productive finance as a less risky investment option. Some investors are looking at productive finance as a way to keep companies afloat they previously funded with equity during the crisis.

“Having said that, VCs are more skeptical of productive finance here in South East Asia because they tend to have large portfolios and they can see through those portfolios that many companies, frankly speaking, just won’t survive. “. Widjaja further added.

The report further argues that in the context of investor security, productive finance outweighs the capital requirement. This means that productive finance investors become the first to get their money back in the event of a start-up liquidation.

Markus Liman Rahardja, director of the Sembrani Nusantara Fund, noted that the fund’s productive finance offering is the first of its kind to be regulated by the Indonesian Financial Services Authority (OJK) and launched specifically for digital startups.

“The thesis of our fund adopts a posture reserved for Indonesia, centered on a mission to unearth the next Indonesian sembrani or sustainable unicorn,” explained Rahardja. “So our productive finance product is a unique local offering, designed by a team that combines an Indonesian venture capital firm’s understanding of the local startup scene with support from the country’s leading small business lender.”

The SaaS company said it estimated that business finance losses were only 2 percent of equity, compared to a default rate of 17.4 percent for small business loans in the United States. Like, productive financing defaults, even during the pandemic, have been lower than expected.

“Currently, we are looking at several exciting companies in their final stages. We are delighted to see the development of this new category of seed funding in Indonesia, ”concluded Rahardja.

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