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Productive Financing For Startups Has Reached $26.2 Bn In Southeast Asia: Report It is estimated that debt components may now be present in as many as 40 per cent of all venture capital deals

By Prabhjeet Bhatla

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The global productive financing often called venture debt, the market has averaged $8-12 billion annually, driven largely by the US venture capital (VC) activity. However, in 2019, productive financing more than doubled to $26.2 billion, representing 19 per cent of total VC capital invested worldwide.

Jakarta-based VC firm BRI Ventures has said to have been considering augmented interest from startup funders in productive financing as a non-dilutive funding option, whereby entrepreneurs can raise growth capital to lengthen their post-pandemic runways or weather the storm without losing equity.

Thereby, in Southeast Asia, the pandemic saw founders shift focus toward non-dilutive financing options. As a newly minted local productive financing provider, BRI Ventures' Sembrani Nusantara Fund (Dana Ventura Sembrani Nusantara) seeks to address growing demand.

According to the capital market company PitchBook, the debt components may now be present in as many as 40 per cent of all VC deals, a massive vote of confidence for this lesser-discussed financing option for startups.

Despite high uptake in markets like the US and nearby India, the productive financing scene remains promising in Southeast Asia, driven largely by foreign productive financing financiers or pre-existing productive financing arms of established banks, said the report.

In recent months, productive financing has gained more prominence as a viable financing option among both founders and funders in the region. The attention comes as COVID-19 dampens deal-making and leads to smaller fundraising rounds and weaker valuations, according to a statement in the survey.

"While equity financing is essential as long-term growth capital, productive financing may be a better alternative for making small capital investments or meeting transitory cash flow mismatches," believes Nicko Widjaja, chief executive officer, BRI Ventures.

The firm's locally-focused tech investment vehicle Sembrani Nusantara Fund claimed to recently partnered with a P2P lender investee to launch its signature productive financing offering, which offers up to international depository receipt (IDR) 60 billion in financing to tech startups entering their next phase of growth.

"Third, productive financing fills the gap between the investment capability of angel investors and the average ticket size of venture capital funds," explains Widjaja. "Fourth, equity financing to meet temporary working capital requirements leads to dilution of ownership, which may not be in the best interest of the micro, small and medium enterprise (MSME) entrepreneur. Even when productive financing is used to meet growth capital needs, an entrepreneur may benefit by deferring the equity raise to a later date."

The report maintains that these mismatches have come to the foreground as a result of the now visible effects of COVID-19 on the local tech space. At first, the process of structuring equity investments is a concerning exercise and generally takes a long time to close. Then, the cost of productive financing is generally lower than the cost of equity.

"There had not been much demand in productive financing in the early phase of the local digital economy, but as the ecosystem is maturing in this part of the world, equity has become more expensive than debt. A big part of this is that entrepreneurs really dislike dilution in the later stages of their companies. So they are keen on any form of capital that is less dilutive-like loans. This is particularly true for emerging tech companies that are already generating healthy revenue, and seek to leverage their books," Widjaja went on.

The report, rather, insists that in the current economic climate, investors who are keeping their powder dry and shying away from backing new startups can look at productive financing as a less risky option of investing. Some investors are looking at productive financing as a way of keeping companies they previously funded with equity afloat during the crisis.

"That said, VCs are more skeptical of productive financing here in Southeast Asia because they tend to have large portfolios and they can see across these portfolios that many companies, frankly speaking, just won't survive," Widjaja further added.

The report further maintains that in the context of investor safety, productive financing is senior to equity obligation. This means productive financing investors become first in line to get their money back in the case of a startup liquidation event.

Markus Liman Rahardja, head, Sembrani Nusantara Fund noted that the fund's productive financing offering is the first of its kind that is regulated by Indonesia's financial services authority (OJK) and launched specifically with digital startups in mind.

"Our fund's thesis takes an Indonesia-only posture that is focused on a mission to unearth the next Indonesian sembrani-or sustainable unicorn," explained Rahardja. "Thus, our productive financing product is a uniquely local offering, tailored by a team that combines an Indonesian VC firm's understanding of the local startup scene with the backing of the country's top small business lender."

The SaaS company has said to have estimated that productive financing loses is just 2 per cent of the capital as compared to a 17.4 per cent default rate for the US small business loans. As, productive financing defaults, even during the pandemic, have been lower than expected.

"Currently we are looking at several exciting companies in their later stages. We are excited to see the development of this new startup funding category in Indonesia," Rahardja concluded.

Prabhjeet Bhatla

Former Staff

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