For Choco Up, non-dilutive funding addresses funding gap for growth without being costly in terms of equity [Q&A]
Having enough resources can spell the difference between a company achieving traction and failing. When there are concerns about cash burn and lack of growth resources looming on an entrepreneurs’ head, it could end up stifling innovation.
In our TechNode Global Q&A with Percy Hung, Co-founder, and Chief Executive Officer of Choco Up, we learn how non-dilutive funding drives value for both founders and even equity investors. Choco Up is a revenue-based financing (RBF) platform that provides startups with non-dilutive funding and a flexible repayment schedule. The company was created by founders for founders with the aim of providing financial support to companies that deserve to thrive.
RBF is a model whereby companies raise capital based on future revenue. In revenue-based financing, RBF platforms put up funds for companies’ growth in exchange for a regular share or a certain percentage of the recipient companies’ revenue. This arrangement continues until a predetermined amount is repaid in full. Typically, this predetermined amount is the capital plus a flat fee.
Below is our TechNode Global Q&A with Choco Up’s Percy Hung.
What are the trends driving innovation in investing/investments in the Asia Pacific region?
Asian founders are used to raising millions of dollars in equity to support their startups. This is suitable for some, especially the ones that require intensive R&D and long development cycles. However, for most businesses that are already generating recurring revenue and have significant traction, equity often does not make sense as the cost of equity is too high, especially when you use the money for short-term ROI-driven activities.
We believe non-dilutive funding (non-dilutive funding refers to any capital a business owner receives that doesn’t require them to give up equity or ownership) is still a new and nascent space in APAC, but it’s a proven model in the West when it comes to the value it brings to founders and even to equity investors. APAC’s venture funding totals ~$100 billion a year, and it is estimated that only 10 percent comes from non-dilutive funding.
We believe both the total APAC venture funding amount and the relative proportion of non-dilutive funding would rise significantly as founders are becoming more educated and informed about different types of funding available besides vanilla equity.
What are the three key challenges encountered by businesses, as well as investors?
We believe businesses currently face three major challenges:
- Funding gap – especially for young, fast-growing businesses that may not have the brand or collateral to acquire bank loans, financing is virtually non-existent. Many of these businesses have strong traction and great potential, and the funding they want is often to fuel their growth instead of general working capital.
- Speed – in today’s day and age, speed is everything. Trends move quickly, and opportunities come and go. When a business is able to identify a good opportunity, it needs to move quickly to monetize, and that includes the alignment of the companies internal operations (i.e. sales, marketing, and product), but the one most critical item is the ability to access funding to unlock opportunities and knowing recurring funding is readily available.
- Education – business owners are busy. Often they get caught in the day-to-day and do not have the time and resources to understand their growth needs and plans. And when the business plateaus, the owners often get caught in the hamster wheel and get stuck in an endless loop of trying to sustain the business.
We believe investors currently face three major challenges:
- Because of the unprecedented scale of money printing, investors are facing low yields and inflation fear. There is simply too much money chasing assets and it is a competitive market for investors. Investors often have to be okay with frothy valuations because of that.
- Investors are used to well-known and well-tested regions and asset classes, such as US stocks, resulting in big supply/demand imbalance and concentrations amongst “trophy” assets. New locations and asset classes, such as Southeast Asia (SEA) and revenue-based financing (RBF), are now explored heavily by investors as a spillover from too much cash circulation in the market. However, investors still need time and education to fully understand what they are.
- The uncertainty of COVID, global markets, and geopolitical tensions are making many investors nervous about allocating their capital and maximizing their returns. This is no easy task.
How is Choco Up addressing these challenges in your unique way?
Choco Up understands young, high-growth, and tech-enabled businesses. The fact that they may not fit into the guidelines of banks and traditional financial institutions is not an issue. We understand and can underwrite these new-age businesses with new-age assessment models and systems. Where banks see high risk because they don’t understand how to assess, we are able to view them through a different lens.
Choco Up is an advanced data-driven fintech platform that leverages data analytics and vast integration to automate growth fund deployment. We understand time is money and are able to provide funding in as little as 48 hours. We can also provide recurring capital access so companies can have peace of mind knowing that we are able to help at any time.
Choco Up publishes press releases and thought leadership articles, to inform and educate business owners on the different ways to grow and the pros and cons of such. After having worked with hundreds of companies, we believe in sharing our experience, which has shown that the more businesses grow, the more Choco Up succeeds – a win-win symbiotic relationship.
Choco Up provides recurring access to capital to companies looking for short-term ROI-driven growth. The short but repetitive nature of our funding model generates attractive returns to investors without investing with a “leap of faith” into the frothy valuation of companies.
Southeast Asia is projected to be one of the highest growth regions in the world for the next decade. Many investors currently lack exposure in the region. At the same time, investors are also looking for alternative asset classes that could be a great return and yield enhancement for their portfolio allocation strategy.
Never put all your eggs in one basket. Investors are always looking to achieve the highest risk-reward ratio for their portfolios. Non-dilutive funding for tech businesses operates relatively independently from other asset classes, achieving diversification for investors.
Can you tell us more about revenue-based financing? How is it providing a solution to businesses’/entrepreneurs’ challenges in raising capital or funding?
Revenue-based financing is a relatively new concept in APAC. Choco Up invests in companies based on a “principal + flat fee” model where the return is generated every month from revenue sharing until the outstanding is fully repaid.
Our funding solution is quick, seamless, and founder-friendly. Companies choose Choco Up because there is no dilution, no fixed repayment, no hidden fees, and no governance or restrictive covenants.
Our funding model allows our portfolio companies to grow their revenue, resulting in an increase in profitability and valuation of the businesses while preserving equity for future equity fundraising rounds.
Can you provide some case studies or data that can help explain the benefits? What kinds of businesses benefit best from RBF?
For case studies, you may refer to our recent announcements:
- BuzzAR, Singapore Deep Tech Firm Secures US$630k in Funding Partnership with Choco Up
- Popsical secures SGD$200K from Choco Up
- Cleva Gets US$600K Funding From Choco Up
Startups and tech-driven businesses (e.g. e-commerce and SaaS) are underbanked because of their novelty. Yet, they experience the highest growth and with technology, they are infinitely scalable. RBF is all about growth. Our funding is best suited to companies that already have traction and are looking for economical funding to further drive sales and margin. We have served hundreds of companies and are proud to be their funding champion.
Tell us about your entrepreneurship journey. Do you have any advice for entrepreneurs and businesses in navigating today’s challenges?
I have been a serial entrepreneur and started my first company in 2009, and over the following decade, I have worked on multiple startups with my co-founder Brian Tsang before founding Choco Up.
Brian and I met at the Georgia Institute of Technology over 15 years ago. And during my journey as an entrepreneur, I realized that there is a big $4 trillion funding gap, with many startups unable to raise capital due to the rigid, restrictive banking system. So in 2018, I co-founded Choco Up as a revenue-based financing platform for fellow entrepreneurs, offering a “Grow Now Pay Later” solution to solve one of the biggest market pain points in the world.
P. Diddy once said, “Don’t be afraid to close your eyes and dream, but then open your eyes and see.” Every startup has its own challenges and founders often get sucked into tunnel vision and end up losing sight of what to do. If you are stuck, there is likely a solution out there trying to solve the problem you are facing. The world is a fascinating place with countless creative minds. Seek help, get out of your comfort zone, learn new ideas. It’s the best advice I have come across and, I hope that by sharing, it inspires others too.