In today’s turbulent economic landscape, start-up founders face the challenge of securing capital to fund their business growth.
In response to high inflation, rising cost of capital, and fears of a recession, venture capitalists globally have tightened their belts. In what has been dubbed the VC (venture capital) winter, venture capital investment has slowed down, posing roadblocks for start-ups in need of funding.
As a founder, how can you secure the cash flow you need to fuel your goals? Here is a breakdown of five start-up funding options in ASEAN that you can explore at every stage of your journey.
Start-up incubators
Suitable for: New start-ups in the pre-seed and seed funding stages
If you’re just starting to grow your idea into a business, start-up incubators can help you get off the ground. Designed for founders that often do not yet have a business model or team, incubators offer the specialised mentorship and resources needed to get a start-up ready for launch.
Besides services like business education classes and community networking, one key offering that many incubators provide is access to seed capital. Depending on the incubator’s funding model, start-ups with a strong value proposition may be able to leverage such resources by paying a participation fee or giving equity in exchange.
Southeast Asia is home to its fair share of renowned incubators, each with its own funding model. For example, Silicon Valley-based innovation platform Plug and Play has a strong presence in ASEAN, providing up to $500,000 in seed capital to promising start-ups without requiring equity in exchange.
| Pros of start-up incubators | Cons of start-up incubators |
| Rigorous mentorship and training Incubators are often described as a “school for start-ups”, and with good reason. Expect to benefit from an intensive schedule of workshops and mentorship in all areas of your business, from building a minimum viable product to managing a team. |
Time-intensive commitment Depending on the incubator, founders should be prepared for a time commitment of one to two years. You may also need to commit to a schedule set by the incubator, such as mandatory meetings and training sessions. |
| Robust support structures Incubators provide some much-needed structures to help a fledgling business take shape. This includes a physical space to house your office, a development timeline, and guidance through milestones like releasing a first prototype. |
Challenges with culture fit Every incubator has its own cultural DNA, shaped by its team of mentors and its corporate values. Before applying for an incubator programme, it’s crucial to research on whether that incubator aligns with your start-up’s core values and mission. |
Start-up incubators offer a launchpad for new start-ups, from seed capital to robust mentorship. Source: Pexels
Equity crowdfunding
Suitable for: Early-stage to mid-stage start-ups
Whereas VC funding relies on a small group of professional investors, equity crowdfunding is a method of fundraising from a larger number of public investors (aka the “crowd”). Investors typically contribute smaller amounts of capital, and receive a stake proportionate to their investment in the start-up.
You can apply for equity crowdfunding through specialised online platforms that are licensed by the relevant regulatory bodies of a country. Depending on the platform, start-ups will typically go through a rigorous screening process. This may include a crowdfunding pitch, presentation of your business plan, and background checks on your financial statements and operations.
For instance, leading global equity crowdfunding platform OurCrowd employs a five-step vetting process for applicants. Beginning with initial contact, OurCrowd’s team of investment professionals will perform due diligence meetings to analyse areas such as financial, technical, and legal. Once launched on the platform, start-ups will be invited to host a webinar with prospective investors, and can begin participating in fundraising events.
| Pros of equity crowdfunding | Cons of equity crowdfunding |
| Less dilution of power Unlike VC funding, equity crowdfunding does not result in an over-dilution of power in your start-up. Power is spread across a larger group of shareholders, allowing you to retain control of your business. |
Time-consuming process From doing your research on crowdfunding platforms to undergoing due diligence, the entire process of getting your funds in the bank can take over six months. Engaging with potential investors can also be laborious and time-intensive. |
| Access to a larger pool of investors Launching on an equity crowdfunding platform means reaching thousands of global investors. OurCrowd, for example, has nearly 220,000 registered investors from 195 countries. |
Less suitable for B2B If your business direction is B2B or has a complex value proposition, you may find it more difficult to get public investors to relate to your idea. However, this also depends on the platform’s investment community. |
Venture debt financing
Suitable for: Early-stage to mid-stage start-ups, particularly high-growth and VC-backed
Venture debt financing has gained prominence in Southeast Asia in recent years, on the back of government initiatives like Singapore’s Enterprise Financing Scheme – Venture Debt (EFS-VD). As VC funding dries up, more start-ups are exploring this alternative — over 60 per cent of Southeast Asian start-up founders would now consider tapping venture debt.
A complementary option to equity financing, venture debt is a type of loan ideal for start-ups that have already raised a few rounds of VC funding — but still lack the revenue-earning track record needed for more conventional loans. Typically, the loan amount will be capped at up to 30 per cent of your start-up’s most recent round of equity financing.
Venture debt lenders may take the form of banks or specialised non-bank providers, such as venture debt provider InnoVen Capital SEA. Your lender will assess your start-up’s financials and business plan, followed by negotiating terms such as interest rate and repayment period.
| Pros of venture debt financing | Cons of venture debt financing |
| Rapid access to additional capital If you have a high-impact project that calls for a short-term cash boost, venture debt financing can provide the leverage you need to take your business to the next level. |
Higher interest rates and conditions Since the risk taken on by a lender is greater, venture debt typically comes with higher interest rates of 10 to 15 per cent, as compared to traditional loans. Repayment periods are also shorter, with most loans calling for repayment within three to four years. Your loan may also be tied to conditions such as the achievement of certain milestones, giving you less flexibility to pivot your business plan. |
| Avoids equity dilution In contrast to equity financing, debt financing enables you to raise capital without selling your shares. |
Increased debt may be risky Taking on too much debt can put you at risk of financial distress and limit the capital you can access down the line — especially if you already have other debt obligations. |
Venture debt financing is emerging as an attractive option for start-ups to boost their cash runway between funding rounds. Source: Pexels
Direct private equity investment
Suitable for: Mid-stage to late-stage start-ups in the growth and expansion phase
While venture capital is targeted at younger start-ups, direct private equity investment is largely designed for mature businesses that are not (yet) publicly listed.
Here, high-net-worth individuals and firms make a direct investment in your company, in exchange for ownership or even a complete buyout. The amount of capital invested and ownership acquired will vary depending on the deal, but tends to be higher than a typical VC deal.
Start-ups can access such funding by connecting with institutional investors, including commercial and investment banks. One such example is UOB Venture Management, a UOB subsidiary dedicated to financing private companies in the ASEAN-China region through direct equity investment.
| Pros of direct private equity investment | Cons of direct private equity investment |
| Access to expert guidance and networks Beyond capital, direct private equity investors often add value through their business expertise and extensive networks, helping your company to drive growth. For instance, UOB Venture Management supports investee companies through board participation. Start-ups can tap the UOBVM team’s insights into business strategies, debt/equity raising, and more, while connecting with potential partners and suppliers in their network. |
Potential loss of control over your business Investors will gain a stake in your business, ranging from a minority growth investment to a majority stake of over 50 per cent ownership. This means an additional voice in your company decisions, with increased pressure to drive a positive ROI. |
Private capital
Suitable for: Mature start-ups and established companies seeking to scale or restructure
Private capital refers broadly to investments in non-public assets, a chief subset of which is private equity — investments in privately owned businesses.
Private equity firms generally look to invest in promising companies with an established track record. In exchange for ownership or a buyout, such investors aim to increase your company’s value by driving revenue growth, improving operational performance, and even restructuring. In fact, firms may specialise in certain stages of the business life cycle, such as expansion and turnarounds.
While the APAC private equity market has taken a plunge amidst global uncertainty, investors remain on the lookout for companies with a strong value proposition. Heliconia Capital Management, for one, has recently partnered with leading capital market company Yangzijiang Financial to launch an SGD 150 million fund to invest in promising Southeast Asian SMEs.
| Pros of private capital | Cons of private capital |
| Faster growth with expert guidance If you’re looking to scale up or restructure your business, private capital offers the backing to achieve this more easily and efficiently. The right private equity firm will offer specialised expertise for your specific goals, from expansion to repositioning your business. |
Giving up of ownership To gain such strategic support, start-up founders will need to be prepared to give up at least a controlling share of ownership (over 50 per cent) in the business. This typically means that the private capital investor will be represented on your Board of Directors and play a role in setting strategic objectives. |
Fuel your growth with the right funding
Uncertainty still looms for the global economy, but that doesn’t mean you need to put your business plans on pause. Start-ups that look beyond VC funding will discover a range of funding options that can take their business to the next level.
As a robust ecosystem partner to start-ups in ASEAN, UOB offers a suite of financial solutions and strategic partnerships to accelerate business growth and innovation. Find out more about how UOB can help your business seize regional opportunities and enter new markets quickly.
