New venture debt funds look to enter the Indian startup market

As venture debt slowly picks up in India, a host of new funds are coming up to cater to the growing demand. There are several new venture debt funds that are slowly emerging in the space that was until now dominated by the likes of InnoVen Capital, Trifecta Capital and Alteria Capital.

At least three new venture debt funds are looking to launch alongside a handful of venture capital funds that are also tinkering with the idea of venturing into debt, according to multiple people Entrackr spoke with. 

“There are three funds that are currently at a concept stage and are looking to launch a venture debt fund,” said one of the people cited above, requesting anonymity. “Apart from that, there are some equity funds and a couple of limited partners (LPs) that are eyeing the space.” 

For instance, Mumbai-based IvyCap Ventures, which has until now focused on equity deals is in the process of making the first close of its debt fund. They believe there is a gap of almost $600 million of venture debt in India that needs to be bridged. Similarly, equity funds such as Ankur Capital and Unicorn India Ventures are also toying with the idea of potentially having a debt fund, although without any concrete plans. 

Moreover, Stride Ventures which recently closed its maiden debt fund has already made its first investment in Stellapps with the second one in the works. Stride is looking at co-lending with banks unlike other venture debt funds. Even Sachin Bansal’s Navi Technologies (earlier BAC Acquisitions) had done a few venture debt deals in 2019 including Rs 20 crore in consumer audio brand boAt. 

New debt funds are coming at a time when startup founders have started turning to the venture debt vehicle to fulfil their working capital needs without having to dilute their shareholding. Last year, the three venture debt firms — Temasek-backed InnoVen, Alteria and Trifecta — which dominate the landscape invested a total of $300 million.

This trend of founders raising debt has spilled over into 2020 as well with companies such as fashion brand FabAlley raising Rs 8 crore from Trifecta, while Dunzo raising $11 million and Rebel Foods raising Rs 35 crore from Alteria. 

Founders see a clear advantage in doing so: no dilution of equity and rights.

“As we scale both our offline and online presence, while incubating new offerings and brands in complementary spaces, it is imperative that we upgrade our infrastructure and working capital simultaneously,” said Tanvi Malik, cofounder of FabAlley. “The capital expenditure required to fund this growth is best done through debt, since it reduces the cost of capital and improves return on equity.”

Industry experts say that it’s natural for venture debt to follow after equity funds have been established in a market as debt, unlike equity investment, is usually given to companies which have established a clear business model. 

“In the developed countries also the venture debt funds came 10 to 15 years after the venture equity funds started,” said Vikram Gupta, founding partner at Ivycap Ventures. “It’s usually difficult for early-stage companies to raise debt due to extremely high risk. But as the companies start raising capital at Series A and B, they have institutional investors, business models start showing value, and then venture debt funds get more comfort to evaluate them for debt funding.”

That said, experts in the space warn that while many new venture funds look to launch, it’s a sector that needs to be understood well before simply foraying into it.

“Venture debt is not as easy as it seems — there is a lot to underwriting cash flows of a startup and providing debt,” said Aditya Singh, a principal at Stride Ventures. “As the startup ecosystem goes through disruption, venture debt firms need to be able to add value to the startup.”