Venture Capital Debt Investors in India Eye Deployment of up to Rs 2,000 Cr in 2018

Last year was a banner year for India’s startup ecosystem, with venture capitalists investing over $2.8 billion in startups, not counting strategic investors.
So it’s only natural that venture debt, which typically follows the path of venture capital, is about to change the landscape in 2018.
A host of venture capital debt funds such as InnoVen Capital, Alteria Capital, Trifecta Capital, Unicorn India Ventures, IntelleGrow and IvyCap Ventures have capital or are looking to raise over ₹2,500-2,800 crore in 2018.
VC debt investors in India expect 2018 to offer them the opportunity to deploy between ₹1,500 and 2,000 crore ($300 million) in a market where VC deployment is expected to hit 3 billions of dollars. On a venture capital basis, venture capital debt typically represents around 10% of the equity market in developed markets.
But the ability of Indian startups to absorb such large amounts of debt funding would depend on the risk-return profile that investors are looking to achieve.
“As new funds come into the market, they will aggressively seek opportunities. what category,” said Rahul Khanna, managing partner at Trifecta Capital.
Investors argue, however, that unlike equity, the addressable market for venture debt financing; generally used for working capital and capital expenditure requirements, are not just transactions waiting to be closed, but must be developed with the quality of the lender in first place regarding the criteria.
“The equity market is showing a very barred approach, with very few but massive rounds. The venture capital debt market will also start to show such behavior,” said Vinod Murali, Managing Partner at Alteria Capital, which is in the final stages of the first close of its ₹1,000 crore fund.
Alteria Capital is eyeing a deployment pace of ₹300-400 crore in 2018, with the fund looking to invest ₹2,000 crore in startups over the next four years.
Indeed, the ecosystem has matured as growth-stage startups have begun to show significant potential to service debt and generate sufficient cash flow. Note size in VC debt has increased from ₹5-10 crore to well over ₹50 crore at startups such as BigBasket, OYO Rooms and even ₹100 crore at Yatra, reflecting India’s alignment on the United States with startups finally gearing up to absorb the vast pool of debt funding that awaits us in 2018.
“There is a certain debt ratio which we would seek to maintain over the next 2 years. Our business is now larger, our ability to better service debt and cash flow is greater, so we would seek to raise at minus twice as much debt or more than we have today,” said Ambareesh Murty, CEO of Pepperfry, which raised $5 million in venture capital debt from Innoven Capital in early 2017.
However, as the supply and demand dynamics change for the venture debt sector, the amount of debt that can be absorbed by startups will be determined by the multifaceted usefulness of debt financing. As the market continues to consolidate, 2018 will see venture capital debt play a key role in several situations beyond just building assets, experts believe.
“We’re talking about companies using debt to buy back shares from certain retail investors, thereby using the asset to enable secondary stock transactions as well as fund acquisitions,” Khanna told ET.
Trifecta Capital and Alteria Capital are among the few exploring opportunities for companies where pre-IPO financing can be done through debt. However, some of them may take a long time to complete, given the large ticket sizes of these transactions and fund size limits.
“Pre-IPO situations, financing acquisitions and even takeovers are potential end uses which can require up to ₹100 crore of debt in a single transaction. It will happen more frequently over the next two to three years and we are prepared for that,” Murali said.
But venture capital debt experts argue that the experience of investors as well as the ability to differentiate and provide various services and products to match different debt financing use cases will determine how well startups absorb the $300 million at stake this year. This alone will be the main differentiator to separate the men from the boys for the risky debt ecosystem.

Carol M. Barragan