The Rise of Venture Debt
Forbes India|January 29, 2021
Startups increasingly turned to venture debt funds to raise capital, making 2020 one of the best years for the VC debt industry
POOJA SARKAR

Last July, in the middle of the pandemic, Vinod Murali and Ajay Hattangdi began working on their second fund. By September, the co-founders of Alteria Capital had applied to the markets regulator to raise their second venture capital (VC) debt fund. It is looking to raise ₹1,000 crore with a green shoe option—a top-up that one can do to their base amount—of ₹750 crore.

A venture debt fund lends money to startups. When a startup is raising equity capital, the founders usually raise a component of debt alongside the equity, which is known as venture debt. Traditional sources of capital like banks are wary about lending to loss-making companies, and that’s where VC debt funds step in. So do a lot of fintech lending firms, but traditional VC debt funds lead the race when it comes to financing new-age companies. While an equity investor stays put for four to eight years, debt providers usually have a tenure of 24 to 36 months.

Venture debt is almost 12 years old in India, and both Murali and Hattangdi have managed to ride the cycle from its early days. Hattangdi had joined Silicon Valley Bank (SVB) India Finance Ltd in 2007 and drew up its business plan. Later, he applied to the regulators to get a non-banking finance (NBFC) licence to launch the venture debt vertical. Murali and Hattangdi looked after the business from 2008.

A LOT HAS HAPPENED SINCE THEN

In January 2015, SVB India Finance was acquired by Temasek, the global investment firm owned by the government of Singapore, which meant the business was set to get bigger. The firm was later rebranded InnoVen Capital and is now headed by Ashish Sharma, who was earlier head of GE Capital.

In 2017, Murali and Hattangdi left InnoVen and started Alteria Capital, and raised ₹962 for its first fund. They expect to recycle capital and do deals worth ₹1,500 to 1,600 crore from this existing fund.

The other active face of the Indian venture debt ecosystem is Trifecta Capital, started by Rahul Khanna and Nilesh Kothari in 2015. They decided to raise ₹300 crore, but ended up with ₹500 crore. Currently, it is deploying out of its second fund of ₹1,000 crore and plans to raise its third in June of nearly ₹1,250 to ₹1,500 crore. The Indian venture debt ecosystem is covered between these firms.

Despite its rapid growth over the last few years, it is still young compared to the US, where the venture debt industry emerged in the 1970s. However, as more startups use venture debt as an integral part of their funding strategy and capital planning, it has become the third important wheel of a deal.

“Venture debt in India is still an under-penetrated market with venture debt constituting only four to five percent of equity funding… a mature market like the US is at 12 to 15 percent on the same parameter,” says Sharma, chief executive officer at InnoVen Capital.

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