How to Get a VC Partner (Without Giving Up Equity)

Sean Weisbrot: Welcome back to another episode of the We Live to Build podcast. When startups think about how they'll pay for things, they first think of bootstrapping with their own money. The goal is to either get to profit naturally or raise money from investors in order to fuel further growth. Very few people think about venture debt or the act of borrowing money in order to fuel growth.

Sean Weisbrot: That's why I invited Paul Ung to be a guest with us today. Paul is a partner at Innovo Capital SEA, which provides loans to companies backed by venture capitalists in the Southeast Asian region, including India and China. We talked about whether venture debt is something startups should consider and why.

Sean Weisbrot: Despite not taking equity from your company, inov Capital in particular has a very clear value proposition. They can introduce your team to the rest of their portfolio. They can assist with further equity funding, mergers and acquisitions, opportunities, hiring opportunities, and much more. So in essence, they act as if they're a partner in your company, even though they don't take equity, and they do this because they wanna see you succeed because your success means they're increasing the chances that they're gonna get paid back in full with interest.

Sean Weisbrot: So I asked a few questions specifically, and there, do you get more leads from VCs or startups? How is marketing different for this kind of a firm? Why would a founder choose to work with you? What are the terms you normally ask for? What is de-leveraging and how do you justify de-leveraging to future investors?

Sean Weisbrot: So why don't you introduce yourself and talk a little bit about your firm and we'll go from there.

Paul Ong: I'm a partner at Innoven Capital Southeast Asia. Inno Capital is Asia's largest venture debt provider with offices in India, in China, as well as in Singapore.

Paul Ong: for the Southeast Asian region. We have grown to about half a billion in AUM. We've worked with over 300 portfolio companies, we're lucky to count 22 of them that have grown into unicorns. Now as you've mentioned, I think we fully focus on what is known to the market as venture debt, which is, you know, different synergistic capital to venture capital and it's a tool that we hope to continue to educate the Asian market with. Such that more founders know of this avenue of capital to essentially help them grow.

Sean Weisbrot: So off air, you had mentioned that you're in the process of raising your next fund is 200 million US dollars, and you were talking about how the biggest issue you discovered was educating the market.

Sean Weisbrot: So even though probably the people listening aren't. Investors, it might be interesting for them to hear what you told me. I wish I recorded it when you said it 'cause it was perfect. How, as an investor, you're starting to understand the founder mindset.

Paul Ong: Obviously from, from where we sit, as, as venture debt providers, you know, we're essentially on the buy side.

Paul Ong: Companies pitch us and, you know, if it's something that we like, we provide the capital to, we realize now that that's, you know, obviously a very different position. As compared to being a founder with regards to having to, to raise capital to grow. That's essentially the fundraising process for us now as well.

Paul Ong: Going through the motions of that, you know, it is extremely stressful. It's extremely tiring. I. And I have a newfound respect for all entrepreneurs and all founders out there who essentially have decided or, or will decide to take the root of raising capital externally to grow their business.

Sean Weisbrot: It's something that I've been through several times already.

Sean Weisbrot: I used to raise funds for startups. In China years ago. So I got a taste of what it was like to help others. And then when I started my own company, I started to realize it's actually very different from helping others and doing it yourself. 'cause when I was helping others, it was like, okay, well the investor says you need this thing, so go get that thing prepared for me.

Sean Weisbrot: Sometimes it was like, fix your MVP, go tweak this thing, go tweak that, and then just kind of sit back and wait. But when. You are the founder and an investor says, oh, we need to see users. You're like, oh, well I need like another five months to make that happen. And the VC's like, well, all right, well, you know, I'll just, I'll sit back and I'll wait.

Sean Weisbrot: Come to me when you're ready, whether you're helping someone or you're doing it yourself. It's hard. What's the most common way that someone finds you? Is it the investor trying to help their startup, or is it a startup trying to get more money?

Paul Ong: It's actually a bit of both. Typically how people find us is a matter of how they look at utilizing what we do for their companies.

Paul Ong: And, and I'll, I'll shed a little bit more light on that. You know, us as venture debt guys, we, I think, have the fortunate or unfortunate role of. Being both a banker to the company as well as a banker to the founder. Traditionally, if you rock up to a bank, you, it's, it's separate people. There's a private banker, there's a wealthy person for you to talk to as an individual.

Paul Ong: And there is a merchant banker for you to speak to for your business. And we have to do both of those things.

Paul Ong: So the difference really comes in the form of. What is a founder or a company trying to achieve from raising this debt? Now, if it's a matter of dilution or if it's a matter of wanting to cheapen your cost of capital, that cost savings, typically it's to the founder and not to the company.

Paul Ong: If I as a founder raise equity, I'm diluting my shares. If I as a founder raise debt, the company is paying the interest to the lender. So the messaging and the utility really sort of differs. We get more introductions from VCs when there's a specific utility, a specific use case that they want us to explore.

Paul Ong: So for example, if a B2B SaaS company has a growing receivables book, or if a hardware company needs. You know, more financing to, for inventory or, or production. You know, that's typically when we get the leads from VCs, but otherwise, generally, the leads are organic through founders as venture debt guys, also across, at least I speak for us in Asia.

Paul Ong: We try to plug ourselves into the ecosystem as much as possible because we need to have a deep relationship on both sides. For us to be able to uncover the leads and educate the market in the way that we believe it needs to be done best are VCs, your competitors.

Sean Weisbrot: You get leads from them, but it feels like you're also trying to compete with them for startups attention.

Paul Ong: We don't see ourselves as competitors. We see ourselves really as a synergistic party, a partner to, to what they do. You know, that being said, I think, there's always gonna be a level of competition between capital providers, be it venture debt versus venture capital, or even venture capital versus venture capital.

Paul Ong: And I think that part of the equation is there and remains and, and will remain. and it's healthy. Generally. They understand that the value we bring to companies is different. What's more important is them understanding us and who we are and vice versa. Because when you understand a lender in terms of where their money's coming from and how, whether or not they are a responsible party.

Paul Ong: Those things could affect anyone's portfolio companies going forward. So, you know, we always make sure that, as far as possible our communication channels with the VCs are extremely open. we're happy to share insight and info about the companies we work with, especially the portfolio companies of those VCs.

Paul Ong: And, you know, bottom line is, be honest.

Sean Weisbrot: You mentioned talking about the process, so I want to go a little bit deeper on that. So, why would a founder choose to work with you and what is your process for determining whether or not to loan them money?

Paul Ong: So typically when we start to look at whether or not a company make sense for us to lend to, there are certain parameters that generally we look at, the kind of companies that we look for as a start.

Paul Ong: They are companies that are in the technology space and that they're burning money so they're not profitable.

Paul Ong: There's still a cash burn for growth, et cetera. So we look at the cash balance and then we look at the business model and try and assess whether or not we believe a company can either be a market leader in its own right, in its own vertical, or achieve some sort of.

Paul Ong: Sizable market share. the next thing we look at is, is essentially the, cap table and whether or not there is the presence of one vc, and two VCs that we are familiar with and that we've worked with before, and have relationships, et cetera. So these things help us to assess the ability of a company to be able to stay healthy and continue to grow such that they're able to at least raise.

Paul Ong: An additional funding round in terms of founders wanting to work with us. The value that we bring from the financial product that we put forward, that value differs from what VCs provide. So clearly it's a cheaper option and one in which, a founder could then utilize to actually help grow its business.

Paul Ong: By the same point in time, protect their shareholding base. Which ultimately, if all goes well, and if we're talking about a company that you know, is a unicorn and is a, you know, a, a, a multi-billion dollar company, potentially could save a founder, millions and millions of dollars. And we've seen that for, you know, several of our founders.

Paul Ong: but outside of that, I think it comes down to one, the reputation of, of how we've operated in the market. So we've been operating, you know, in Southeast Asia for six years. We've been operating in India for. 14 years in both those instances, we were there at the start of when technology ecosystems in the regions were starting to blossom.

Paul Ong: But being plugged in into the ecosystem and working with, both VCs and, and companies over, and founders across that time, I think we've just garnered a very strong reputation as a lender that can be trusted and that can bring other value to the table. What I mean from that other value is. A couple things.

Paul Ong: We're a fund that is owned by Temasek, which is the Singapore and the Sovereign Wealth Fund, as well as a bank called UOB Bank, which is a highly acclaimed regional bank headquartered in Singapore that has a footprint all across Southeast Asia. We bring our portfolio companies into both the ecosystems of our two stakeholders.

Paul Ong: On the TEMA side, you know, there's a lot more introductions that we can make with regards to, you know, larger funds. Under the Tomasek umbrellawe are potentially able to do larger debt deals at future rounds or even equity deals at future rounds for our companies and on the UOB side, you know, we're talking about operational finance across the region.

Paul Ong: So if a company needs to expand in, from Indonesia to Malaysia, for example, et cetera, you know, we hope to leverage UOB to be able to support these companies as they grow across the region. With regards to. Opening bank accounts, fx, you know, invoice financing and trade finance and things like that.

Paul Ong: That's a big part of, I think, the extra sort of value that we bring. And over time, I think the other interesting value that we bring. Attracting founders is the fact that India and Southeast Asia, for example, there's a lot of synergies with regards to business models that work. The founders of Indian startups are very intrigued by what's happening out here in Southeast Asia.

Paul Ong: And if you look at Southeast Asia, the founders are very inspired by the growth of their counterparts. You know, similar industries, similar business models, and. India, us having a strong presence in both these countries actually allow us to connect these guys to impart insights that otherwise not be as easy to be derived and then shared so that you know the entire portfolio parts of the portfolio can grow.

Paul Ong: And I'll just give you a couple examples. So we have a portfolio in India called Oil, which is, you know, about to be a listed company in the accommodation space. They are essentially counterparts in Southeast Asia.

Paul Ong: Us understanding the model and us understanding how all the business operated, you know, really sort of went a long way to them trusting us.

Sean Weisbrot: I've been traveling for the last 15, 16 years around the world, and as I go through different countries, I try to stay for a month or two at a time in each place, and doing so gives me the ability to start creating little networks everywhere I go.

Sean Weisbrot: And I've found tremendous value in that. As an individual, as a founder, because let's say I go to Singapore and I meet a friend who's from Greece, and then later two years I will need to go to Greece. This guy knows people in Greece that I can reach out to. And then when I get to Greece, I can meet the people that they know and see what's going on there.

Sean Weisbrot: So as a firm that helps people like that, I see tremendous potential. So it's really good that you're able to do that, especially when there's potential for acquisitions and mergers and public listings and foreign markets and things like that.

Paul Ong: And, and you add on the fact that. I think there's a huge talent pool in Asia that would love to gain experience in a different part of the region.

Paul Ong: The transfer of talent is also something that working with, with so many companies in, in different sorts of markets in Asia, that helps us to, to help facilitate that as well, potentially.

Sean Weisbrot: That's why my company is in Singapore and my team is in the Philippines. For the most part, we've got. Some people in Pakistan and India and Malaysia as well and like, and I've invested personally across Asia, so I definitely see that Asia has a huge potential because the talent is there.

Sean Weisbrot: They just need guidance and, and opportunity. Let's go into the terms that you offer companies when you decide to. Loan the money.

Paul Ong: This is a blanket sort of summary, but it's typically a term loan with a tenure of somewhere between two to three years. What that basically means is that we provide the capital upfront and it gets paid back essentially on a monthly basis.

Paul Ong: Principle plus a little bit of interest every month for the life of the tenure of the loan. We do that because what we want to ensure. Is that as a company continues to grow, especially one that's cash burning, that they are de-leveraging. At the same time. A big point of trying to utilize venture debt is that the money that you borrow and depending on how it's spent, essentially should make a company be more attractive to a future round of investors rather than take away.

Paul Ong: From that attraction. And what we've realized is that companies that don't deleverage, let's say you borrowed 5 million, prefer to pay 5 million all at one shot after like two years or three years. And that takes away from the allele of a company, in the eyes of potential future investors on the equity side because they know that their money that's going into the company is being utilized to pay a chunk of debt as compared to being spent on growth.

Paul Ong: So that's the reason why we sort of do that.

Sean Weisbrot: What I've been taught is that investors don't want to invest in a company that has debt because they feel like the money they're giving you is being used to pay off debt rather than fuel growth. So how can you justify de-leveraging to a future investor?

Paul Ong: I don't think that what you are taught is inaccurate.

Paul Ong: I think that the devil is always in the details. There's a big difference in paying off a dollar a. Of a loan versus not paying anything and paying everything at the end of the and what I mean is that by the time an investor looks at your round, let's say you're raising 18 months after you've raised your debt and have started repaying, what the investor is looking at is a much smaller loan outstanding quant as compared to if you didn't pay half of that back and you are still sitting with paying off the entire sum of the loan that you initially.

Paul Ong: Borrowed at the end. If you had borrowed five and you paid back half, that would be 2.5 that a potential investor seeing if you borrowed five and, and you didn't pay anything off. Then that's five. And from an investor standpoint, the way the cash goes out of a company and the speed of that plays a big part in what they would be worried about.

Sean Weisbrot: If I were a VC, the way I would look at it is, if I've given you 10 million, I want you to spend that 10 million in 12 to 24 months. Hopefully there's like a 15 to 18 month bar. So I would expect there to be no debt because everything is going into fuel and growth. If I see my founder, then go and raise. 3 million from you, and they're then using maybe some of the money that I've given them to pay you back.

Sean Weisbrot: That's money. That's not going into fueling their growth, even though they also got the 3 million to help fuel growth.

Paul Ong: If a VC gave a company $3 million. And they borrowed, you know, let's say a million from us, the total amount of capital that a company would have to spend on growth is 4 million. And that 1 million would then have to be repaid over, let's call it three years.

Paul Ong: So essentially what you are doing is you are leveraging. The dollars that you bring in as a founder to unlock even more capital, to bring you nearer term value, such that when you need to go out to market again, you incorporate that value into your valuation, for example. And then the idea of. The dollar costs that you then use that you're bringing in to pay off the remaining debt, which is still being paid over time, is essentially cheaper.

Sean Weisbrot: Have you spoken with VCs about this concept? Do they generally find this something digestible?

Paul Ong: I won't lie. I think it's debatable 'cause I. VCs themselves have Capital Two deploying their end. I think the way they think about that being provided to their companies is really on a case by case basis with regards to how those companies can utilize that money.

Sean Weisbrot: Yeah. The reason I ask is because I'm thinking about this from the point of view of a founder and an investor at the same time. And trying to go. I know that from the start of a company, the founder and the investor's goals are different, and how do you remain aligned so that the relationship is positive as you move forward?

Sean Weisbrot: Because as a lot of people have told me, when you raise. Equity funding from investors, you're basically married to them until the company has an exit. So it's really important to maintain a positive relationship with your investor. And I think this question also goes to the kind of investor they are, because there might be investors that go, you know what?

Sean Weisbrot: I have billions of dollars I can throw at you. So like, don't worry about these guys. Just come to me and I'll give you more money. Because they would rather increase the amount of equity that they hold in your company, where others might go, oh, you can save me the energy and, and the time of potentially losing more money.

Sean Weisbrot: Sure, let's do it. Go for these guys. Right. So, as you said, it's very poignant to me that it's not just who the founder is, it's also who their investor is. And if your company can fit into that relationship, because my assumption, I guess, from your side is also that we wanna loan you money. We hope you're successful and you pay us back.

Sean Weisbrot: And if you are, we'd love to give you more money. Why is it that you specifically got interested in working in this area? In lending.

Paul Ong: That's a, that's a great question that I ask myself, all the time sort of coming up from school. So I went to school and, and, you know, obviously did, did finance, got my Bachelor of finance.

Paul Ong: You know, at that time I think I had greater interest to go into the world of wealth management. Something that they don't teach you in school though, or at least the school that I went to, is the ability to assess companies from a credit stem. And I believe that after learning a lot about credit,

Paul Ong: I think you can actually tell a lot about any company by being able to use that credit lens and break it down via its annual report, et cetera.

Paul Ong: And so I wanted to bolster, just learn about credit and wasn't a course in school, and therefore I thought, okay. Best way to do it is coming out of school. Let's get a job in essentially the corporate bank or the, you know, the lending side of the business.

Paul Ong: So I joined, you know, DBS, which is another regional bank that's headquartered in, in, in Singapore, and owned my credit skills.

Paul Ong: And I realized that was something that, you know, really was beneficial to me, not just in terms of. Sort of growing a career, but personally when I, you, you look at, you know, investing in stocks, for example, with a totally different,

Paul Ong: like having that power and that ability to look at any stock, both of the equity lens as well as the credit lens.

Sean Weisbrot: Is there anything you'd like to add or any advice you'd like to leave the audience with?

Paul Ong: We've always got to be honest and responsible. If we get people in for a ride, we gotta get 'em out, whatever the situation.

Sean Weisbrot: It sounds like you feel responsible for the teams that you lend to.

Paul Ong: Absolutely. Absolutely.

Paul Ong: You know, and I think, look, at the end of the day, I, I think a, a, a big reason why sometimes that has a little bit of a taboo is because if, if you are unfamiliar with, with, with borrowing or if you're borrowing. If you're borrowing too much, you always fear a situation in which what happens if things go south and can't pay you back, et cetera.

Paul Ong: While I won't go into what happens then, because I think once again it's highly situational. From a lender's perspective, it doesn't bring any positive vibes whatsoever for us to. Have to react or act in a bad way. Once again, we have to be responsible for our stakeholders and at the same point in time, balance out being responsible to the portfolio companies that we work with.

Sean Weisbrot: Sounds like a heavy burden.

Paul Ong: Always, always.