US-headquartered Silicon Valley Bank, financial partner to technology companies and venture capitalists worldwide, has been active in India. In the past two years, it debuted its venture debt arm and has been growing. Ajay Hattangdi, managing director of SVB India Finance, shares his perspectives with Raghuvir Badrinath on the growth in venture debt. Edited excerpts:
With venture capital (VC) bouncing back, why would one need venture debt?
We often see a mix of equity and debt working best for growing companies. Every situation is different, but we often see equity from VC funds best used for building a team, developing a product, pursuing the mission, while debt is a less expensive way to finance working capital, for example.
How does SVB straddle VC and venture debt without cannibalising either?
Venture debt and VC are complementary. Companies use capital investments and loans for different purposes and they work well together. We believe early-stage, high-growth companies primarily need risk capital as equity for funding the early part of their buildout. Some debt adds a little financial cushion or helps fund asset purchases.
Accordingly, SVB prefers to limit the size of its loans to a percentage of the VC equity raised (determined case-by-case), as a way of encouraging its companies to target a balanced mix of equity and debt.
In India, SVB is present with both, as a VC investor and as a venture debt company. However, these are two distinct businesses and while both groups might potentially work with the same parent company, each team evaluates the company from different angles and makes its own decision on the opportunity.
If I were an entrepreneur, what needs would you address in my firm’s growth?
How different is a venture debt organisation from a regular debt-funding one?
Venture debt is not typically available from a traditional bank. Compared to traditional forms of lending, aimed at profitable, established corporations, venture lenders deal with early-stage companies that often have inadequate hard collateral or cash flow. An inappropriate loan structure may itself affect the financial viability of the company. A venture loan structure is more closely tailored to the company’s ability and potential to generate positive cash flow, whether through current operations or additional fund raising efforts.
SVB is also recognised by both clients and investors as a patient lender. The philosophy has always been to build on the trust and relationships with clients and work through tough situations, especially in deals where there is a greater need for flexibility as lenders.
Since starting in India, how has venture debt been accepted?
The acceptance of our product has grown steadily, as we spent a lot of time to educate the market. Our conversations helped us modify our approach to the nuances of the local venture ecosystem. These efforts have begun to pay off. We have already made half a dozen loans and have an equal number of deals in the pipeline.
Your range of exposure?
The amount of debt to a company can range from a couple of crore to Rs 12-15 crore, but varies depending on capitalisation, stage of development and other factors. Repayment can vary from a year to three years. Pricing is a function of debt terms and risk profile, and competitive with what most banks in India would price three-year loans to small and medium enterprise (SME) clients, though many of our clients would be younger than what banks typically qualify as SME.
What internal rate of return (IRR) parameters do you operate on?
Our loans are typically for one to three years. These carry a high degree of risk, given the early-stage nature of the companies to which we lend. So, our IRR expectations would be higher than those sought through typical bank loans, but much lower than those from VC investments.
How’s the venture debt market growing?
In India, SVB intends to make loans to early and growth-stage companies that have already raised at least one round of equity from established institutional VC firms.
We have always maintained that rather than setting a deal number target, our growth in India will be dictated by the quality of deals and our ability to add value to those companies through our specialised debt product. Our first loan was made in late 2008 to Prizm Payment Services, a young start-up in the financial payments infrastructure space. Since then, we have made many loans to high-quality start-ups and emerging growth companies.
We are in discussions with at least an equal number of other promising companies, including a few in the clean technology space.