Start-ups take to venture debt

Venture lending provides start-ups more bandwidth without dissolving equity

It is an exciting time to be a start-up, is an oft-repeated line these days. Exciting is a term used liberally, especially when start-ups are struggling to raise venture capital (VC), and heavyweights such as Tiger Global are adopting a cautious approach to funding. With the exit season looming, consolidation is another buzzword being thrown around. The reality though is that it is not the best time to be a start-up looking to raise quick funds.

Amid the gloom, venture debt players have stepped up. India currently has two venture debt funds — InnoVen Capital and Trifecta Capital. The former, owned by Singapore-based Temasek Holdings, has been in the news for its “101 deals over the past six years”.

Read more from our special coverage on "STARTUPS"

• Mayank Kumar: Dont be scared - Launch early!
• Malaysias Carsome raises $2 million in series A funding
• A look at some of the richest startups in Bengaluru
• KerjaDulu, Indonesias LinkedIn raises money from MNC Group
• From Hollywood to startups: A look at Leonardo DiCaprios investment portfolio

Start-ups are warming up to venture debt. Companies primarily use this money for “tactical purposes”. It works exactly like debt raised from banks with equated monthly instalments (EMIs) and a steep interest rate attached but with a few caveats. “We will lend money to a company only if there is a strong VC backing,” says Ajay Hattangadi, group chief operating officer and India chief executive officer of InnoVen’s India arm.

That is not the only check InnoVen has in place. “As a lender, we need to know if another round is on the way. We also check if the company has a strong enterprise value, a strong balance sheet,” says Hattangadi. Along with facts, Hattangadi also goes by his instinct. A minimum $4-5 million investment from VCs help. But, why not bootstrapped companies if they have steady growth? “The presence of VCs lends a certain degree of credibility. They have compliance norms in place and VCs mean there is a market valuation in place,” he adds.

But, that doesn’t absolve the risk that accompanies a debt where there is often no collateral. “Rule of the venture debt game is to manage risks. We analyse the needs of the company and if we feel that bank loans are possible, we insist they opt for that instead,” he says. InnoVen says the debt doesn’t restrict growth potential. “It is about finding a happy balance.”

The company usually comes in between Series B and C, say start-up founders. The average ticket size of any of these loans is between Rs 2 crore and Rs 30 crore for a period of four years with interest ranging from 15-18 per cent. start-ups use these loans instead of dissolving equity. “Typically, we would ask founders to use the money for non-core purposes. We always tell them to dissolve equity for product development and research because the payoffs are higher. But, when it gets to buying office space or an acquisition, you should use debt funds. It means your company has grown and as a founder you have nothing but equity. He gets to hold on to his most valuable resource,” explains Hattangadi.

Peppertap co-founder Navneet Singh agrees. “The presence of debt funds means we get an additional runway without dissolving equity,” Singh says. He believes that venture debt funds will capture the imagination of start-up companies, especially if these founders are targeting aggressive growth. InnoVen had dispensed loans worth Rs 275 crore in 2015 alone.

In the past six years, $150 million has been deployed and about 50 companies have repaid their loans. And there is more to come. “About 15 more companies will pay back in 2016 and we should be giving out loans to 30 companies this year,” he says. A number he admits is high. “But who else is out there?” he asks. Trifecta, its closest competitor, has a fund size of Rs 200 crore. InnoVen is several times bigger. An open playing field means trickier returns. “It is difficult sometimes. But we work with companies and make it happen,” he says. “We have a saying in the company: giving a loan is optional but getting the return is not.”

Hattangadi started InnoVen Capital in 2008 as SVB India Finance. In 2015, Temasek acquired the company and rebranded it InnoVen Capital to tap the Indian start-up ecosystem. InnoVen, however, is not partial to just e-commerce companies. It has lent to a diverse portfolio, which ranges from fast food to education.