From capital to good demand, here's what is driving venture debt in India

Six months ago, two top executives at India’s top venture debt provider Innoven Capital quit to float a Rs 10-billion venture debt fund. Since then, Alteria Capital, the fund floated by former Innoven honchos Ajay Hattangdi and Vinod Murali, has roped in two banks as investors and will soon announce the first close for its maiden fund.

But they are not alone. At least three other firms have announced plans to raise a venture debt fund. These include Unicorn Ventures, IvyCap Ventures and Intelligrow, while early entrant Trifecta Capital is gearing up to raise its second fund after deploying Rs 3.5 billion of its Rs 5-billion maiden fund. What’s driving venture debt in India? Both demand and supply. 

There’s good demand for venture debt in India, with several start-ups like Urban Clap, Rivigo, and Flipkart raising venture debt past year. Venture debt firms have deployed around Rs 9 billion in 2017, with market leader Innoven alone deploying $75 million (Rs 4.87 billion) across 30 deals. 

The year 2017 saw India attract $2.5 billion in venture capital (equity) if one leaves out big money deployed by big investors like SoftBank or Tencent, estimates Sudip Bandyopadhyay, managing partner, Unicorn Ventures. Globally, venture debt is typically 10-15 per cent of venture capital and “India can absorb Rs 20 billion in venture debt,” says Bandyopadhyay.

Venture debt firm invest only in start-ups which are backed by VCs and have raised Series-A and Series-B round of capital. “By the time a start-up raises Series-B funding, the founder’s stake is down to about 30 per cent, and they don’t want to dilute more. Investors also don’t like such situations,” says Vikram Gupta, managing partner, IvyCap Ventures. Founders prefer venture debt as it is non-dilutive, especially at Series-C stage.

If demand is a key driver, supply of capital is a bigger factor driving venture debt in India. Banks, insurance companies, and family offices are investing in venture debt. Ninety per cent of Trifecta’s Rs 5-billion maiden fund was institutional money, which included three banks, 13 insurance firms, two development finance institutions and five-six Indian family offices. Ratnakar Bank was an early backer of Trifecta Capital. 

An RBI directive in September brought more clarity. Banks are allowed to invest up to 10 per cent of the paid-up or unit capital of Category-I or Category-II AIFs or Alternative Investment Funds. Category II AIFs include private equity and venture debt funds.

It had earlier allowed banks to invest in the paid-up or unit capital of Category I AIFs, which include venture capital funds and social venture funds.

Venture debt targets 10-12 per cent post-tax returns. Venture debt firms also distribute quarterly income they earn from investee firms, and hence generate regular income for investors. ‘’With yields coming off on fixed-income instruments and equities being volatile, the investment officers at insurance firms are looking to diversify and betting on alternatives,’’ says Rahul Khanna, managing partner, Trifecta Capital.