Start-Ups Get ‘Debt' Serious

Growing companies have found a new friend in venture debt funds, who help tide over bad times and enforce much needed financial discipline

- Kripa Mahalingam

Who could have imagined that one of the fastest-growing asset classes in the country today was conceived over a poker game? This was in the early eighties. The game was played every Friday night, the players included technologists, builders and Ivy League alumni from Silicon Valley, among them Bill Biggerstaffand Robert Medearis, and they discussed business. The group had observed the rise of start-ups and the neglect that they experienced from conventional financial services. One weekend in 1981, after a game and while cooking for their families that Saturday, Biggerstaff and Medearis pitched the idea of Silicon Valley Bank (SVB) to their poker gang and surprisingly all were in. The bank was registered in 1983, more than two decades after venture equity took off in the US. It was the formal start of venture debt financing.

Nearly three decades later, Indian start-ups started looking at debt to finance their short-term needs. And recently in July 2019, Bigbasket raised ₹1 billion in venture debt from Trifecta Capital. What makes it even more noteworthy is that it came two months after the online grocer became a unicorn — the company had raised $150 million at a valuation of $1.2 billion.

So India’s largest online food and grocery retailer had no dearth of cash flow or investors. Then why take on debt at all, you ask? Let’s break it down — what venture debt really is and why unicorns and fledgling start-ups are warming up to the idea.

CHANGING THE GAME

Over the past five years, venture debt funds have invested just $800 million, around 2% of the total venture equity funding in India. Undoubtedly, venture capital is the moneybags of the start-up ecosystem, investing $53.14 billion during the same period. But debt funds have been growing at 50% annually since 2015 (See: Universe expands).