Flowing fast: A guide to alternative fundraising for SVB-hit start-ups

Singapore’s start-ups should see the SVB collapse as a wake-up call to ensure their contingency plans and long-term survival.

This week, the technology industry breathed a sigh of relief when the United States government intervened to rescue US$342 billion in deposits held by Silicon Valley Bank (SVB).

However, with US$465 billion being wiped off global financial stocks this week, repercussions will be felt by those directly hit by SVB’s collapse and the wider start-up community across Southeast Asia.

Singapore – Southeast Asia’s start-up epicentre – is fortunate in that only a limited number of companies have felt the direct impact of SVB’s collapse. Regardless of their links to SVB, Singapore’s start-up community should see the bank’s collapse as a wake-up call to ensure their own safety, contingency plans and long-term survival.

The Monetary Authority of Singapore (MAS) said that the local banking system remains “sound and resilient." In addition, Singaporean banks said they have no exposure to SVB, as well as other collapsing banks, Signature and Credit Suisse.

Although early reports have suggested limited exposure to the US banking crisis, the region’s start-up ecosystem may understandably be feeling apprehensive about its impact.

For the past year, Asia Pacific’s venture capitalists have taken a cautious approach to investment, especially in the case of big-ticket deals. According to a report by analyst firm GlobalData, only two deals valued at more than US$1 billion took place in Asia Pacific last year, in contrast to nine in 2021. Similarly, the number of deals valued at more than US$100 million also decreased to 178 in 2022, down from 346 in 2021.

The collapse of one of the start-up ecosystem’s biggest financial institutions will only exacerbate that cautiousness. As such, the most immediate concern for Southeast Asian start-ups is likely to be cash flow. A strong cash supply is integral to guaranteeing a sustainable business. When more cash is flowing out than in, then founders are left scrambling to pay their employees, suppliers and service providers – essentially everything to keep them operational.

Freeing up cash, or finding new injections of cash while trying to decide which payments can be deferred are likely to have been the focus for many this past week. Fortunately, there are options for helping increase start-ups’ cash flow.

To borrow or not to borrow?

In the immediate future, start-ups can borrow from traditional lenders for instant cover. For companies directly impacted by SVB, then this presents an attractive option. If successful and funds are returned, a company can repay the loan with no need to give away any equity.

However, for early-stage companies, finding a lender may be difficult for the same reason a founder originally raised equity rather than debt funding – namely that unless a company is revenue-generating and usually profitable, banks will not lend funds and neither will investors. Borrowing funds without a foreseeable payment plan put a firm at a high risk of insolvency.

Given the potential risks of borrowing, the next option for a start-up is to raise funds – and raise them quickly. Agile fundraising, a flexible approach to fundraising, from new or existing investors, could prove a safer bet in the current financial landscape.

At present, more early-stage founders, including those looking at pre-seed or seed funding, are opting to use agile fundraising tools like convertible loan notes or SAFEs. These are both converted to equity at a later date provided conditions are met.

Agile fundraising has become more prevalent than equity fundraising on SeedLegals’ platform in recent months - with more money raised outside of rounds using SAFEs and convertible notes. These instruments allow you to raise in small increments, extremely quickly, and give founders time to determine their valuation at a later stage. Through the SAFE, investors are usually given some form of upside or discount at a later fundraising round, rewarding them for the risk of investment they are taking today.

Founders looking to agile fundraise should keep in mind that while they might prefer to take investment through a SAFE, which gives investors the right to purchase equity in the future, a lot of investors in Southeast Asia tend to prefer convertible notes, which are debt instruments that convert to equity at a later date. This is because debt ranks higher than equity if a company is insolvent or looking to liquidate or wind up, meaning investors can get their money back if the company fails.

Even if not hit directly by the ongoing banking crisis in the US, Southeast Asian start-ups will no doubt need to rethink their funding and growth plans for the year ahead. Those feeling anxious or pessimistic should however be mindful that the start-up ecosystem as a whole is working to find a solution. In the meantime, founders should stay honest and open with their teams and existing investors; share the solutions they are exploring and be open to finding news to secure long-term sustainability.

Hsiang Low is the head of Asia-Pacific at SeedLegals

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