Debt funding, as an alternative funding route for tech startups in Southeast Asia, has been experiencing an increase in popularity recently.

In April alone, e27 has covered two stories related to debt funds in the region: Genesis Alternative Ventures’s final close of its US$80 million venture debt fund and ADB Ventures’s ongoing talks to raise a US$100 million debt fund.

An example of a tech startup that has recently announced a debt funding round, combined with equity, is Indonesia-based P2P lending platform ALAMI.

Satoshi Richard Terai, a Senior Analyst at Mars Growth Capital, explains in a call the benefits of debt funding for startups.

“From the founders’ perspective, we are not diluting their equity share … This is kind of the uniqueness of the product compared to other providers,” he says.

Mars Growth Capital is a joint venture by MUFG Bank, the core banking subsidiary of Japan’s Mitsubishi UFJ Financial Group, with Israeli fintech company Liquidity Capital. With a base in Singapore, the company aims to provide debt financing for growth-stage tech startups in the Asia Pacific region.

With MUFG Bank as a limited partner, the fund already has an initial capital commitment of US$80 million.

Also Read: Ecosystem Roundup: Grab confirms US listing plan, SEA gets new venture debt fund

Under the leadership of CEO Ron Daniel, the fund already invested in companies such as Hiver, a San Jose- and Bangalore-based customer support solutions provider. According to an Inc42 report, the startup raised a US$4 million debt funding following a US$4 million Series A funding round from Kalaari Capital and Kae Capital.

It claimed to have helped over 1,500 companies with its solutions.

Deciding on the right startups

As a startup investor, Mars Growth Capital puts Asia Pacific as its target destination with a particular focus on Southeast Asia (SEA), India, and Australia. In the SEA region specifically, the debt fund is aiming for major markets such as Singapore, Indonesia, Thailand, and Malaysia.

Due to the nature of debt funding itself, Terai states that Mars Growth Capital is focussing on Series B and C funding rounds.

“Our average funding deal size is ranging from US$2 million to US$30 million, and represents a facility size of up to 1.5 ARR in average.”

There are several requirements that Mars Growth Capital is asking from a potential investment:

  • The average annual growth rate of 30 per cent or greater.
  • Average monthly revenue of US$300,000 or greater.
  • Possession of 12 months of sales history or longer.
  • Built around a technological IP.
  • Must have a venture capital fund in the CAP table

Commenting on their partnership with Liquidity Capital, Terai further explains the technology that the fintech company provides to help them decide on the startups to invest in.

Liquidity Capital uses a unique credit scoring model based on AI technology and real-time financial and accounting data from client bank accounts, accounting systems and CRM information captured through its API technology to forecast future earnings and cash flow. The company develops this financial solution for startups in the growth stage that may not have ready access to debt financing from financial institutions.

“We will connect our AI system to the companies from the billing system and data come through API connection. So, what we need to analyse is their invoice data. We can know factors such as churn rate, customer retention, unit economics … those kinds of things,” Terai says.

Also Read: Digiasia Bios to raise US$20M in debt funding to provide support for mom-and-pop stores in Indonesia

Founded in 2018, MUFG Bank has earlier invested in Liquidity Capital.

Their partnership was based on each organisation’s area of expertise. MUFG Bank has been establishing its network in the Southeast Asian region while Liquidity already has experience in building startup lending platform in the US and Europe.

In the SEA startup ecosystem, MUFG Bank’s most notable moves include its investment and partnership with tech giant Grab –which had recently confirmed its public listing in the US–  in February 2020.

Outside of the tech startup ecosystem, it has also invested and partnered with several banks in Indonesia, Thailand, Vietnam, and the Philippines.

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