How many of you have heard of venture debt? If you’re an early or growth-stage startup, venture debt could just be the financial tool you need to you move to the next stage of growth.
It’s a relatively new term in the Indian startup ecosystem, but venture debt has been around in the global markets for years. Unlike traditional bank loans, venture debt providers don’t ask for collateral but collect interest on the amount loaned to the startup.
Aakash Goel, a partner at Venture Debt provider Trifecta Capital shared some insights into the world of venture debt funds at Startup Saturday Bangalore. We’ve listed below key takeaways from his talk:
- Venture capital is vital for the growth of the startup ecosystem
Venture capital is a form of financial support that businesses get from those who are willing to back their venture. The beginning of organised venture capital in India can be traced back to roughly 13-14 years.
There are broadly 2 ways to raise venture capital – venture debt and venture equity. Today, the venture industry has matured to include unicorn startups with high growth potential, and the risk profile has gone down significantly.
Globally, 80% of funding is raised through debt and the remaining 20% through equity. However, in the Indian startup context, it’s the opposite.
- Venture debt & venture equity are two opposite ends of the spectrum
If you’re a startup and raising equity, it means that you’re selling a percentage of your startup/ firm and giving a percentage of the profits to the equity holder in return. This is a less risky form of funding both for the startup and the equity buyer.
Venture debt, on the other hand, is like a loan that is taken by the startup which then has to be returned to the venture debt provider.
So, venture debtors are taking a bigger risk by lending to these startups as compared to venture equity firms.
- Venture debt firms look for predictability
Startups that have raised an initial round of funding are more likely to get venture debt. This is because such startups have already proved themselves, the risk is lower, they’re already been exposed to the market, and have a proven commercial market that works.
For Venture debt firms, predictability is important. The startup should have their 3- 5 year plan in place before applying for venture debt.
Venture debtors give loans for maximum of 3 years and not longer. If a startup is able to achieve their targets for the 3 years, it means they will be able to get to the next level of equity funding. And venture debt firms act as the support till then.
Also, raising some part of the funding through debt will save the startup a significant percentage of dilution of the company. This is another reason for the entrepreneur and shareholder to consider venture debt.
- Venture debt works similar to loans
Venture debt firms provide an amount as loan to the startup for an annual rate of 14 – 15%. During this period the startup is expected to repay the amount, both principal and interest in instalments.
Working partly like a venture capital firm and partly like a bank, the venture debt firm shortlists startups primarily based on the VC funding received, the founding team and the market capability.
Factors like collateral and cash flow are secondary. In worst case scenarios, where a startup is unable to return the payment, the debt firm works closely with the startup to resolve the issues. It is only when all options run out that the firm uses the startups collateral to liquidate assets.
- Venture debt is nascent in India
The venture debt market is a mature market in the US with sector specific venture debtors for technology, healthcare, fintech, etc. But in India, it will take another 20 years for the market to reach that level of growth.
About the Speaker: With over 14 years of experience across investing, mentoring and management consulting, Aakash Goel, currently partner at Trifecta Capital has built a knack for identifying high potential growth startups.
While at Bessemer Venture Partners, Aakash was a board member at LivSpace, BigBasket, UrbanClap, Perfios, Cashify and Hungama, to name a few.
Prior to this, as an associate at Sequoia Capital Aakash got JustDial, Pine Labs, Citrus Payments, Mobikwik and UnitedLex onboard. On the whole, Aakash has been instrumental in investing over 250 million dollars across internet, payments, financial and healthcare businesses.
Contributed by: Ashika Devi
Volunteer- Headstart Bangalore