In 2008, InnoVen Capital provided the first-ever venture debt of about ₹5 crore to Sequoia-backed Prizm Payments (now Hitachi Payment Services), and ever since, its popularity has been on the rise. Venture debt is slowly coming of age in India, with the country dispersing more than $40 million (₹280 crore) as of September 30, 2016, especially with start-ups making a beeline for funds.
“For companies that have raised venture capital, venture debt gives them an alternative layer of capital, which is much cheaper than equity. For the founders, it is useful as they end up getting more money into the business without worrying about diluting stake, unlike in equity,” said InnoVen Capital Managing Director Vinod Murali.
“Traditionally, debt was not available to start-ups as loans came with a number of pre-conditions,” he said, adding that venture debt comes with a 2-3-year horizon and a clear expectation that the money will be returned during this time-frame.
The largest provider of venture debt in Asia, InnoVen Capital dispersed about $150 million during 2008-2015 and had invested in companies such as Snapdeal, Portea, AppsDaily and BlueStone.com.
Venture-debt providers lend about ₹5-25 crore to start-ups and small and medium enterprises with a 15-17 per cent interest rate, and they usually invest in companies that have raised Series A funding or come in jointly with an equity investor. In some cases, the lenders have the option to convert a portion of their warrants into equity.
Trail funding
“Venture-debt funding is usually trail funding, which means that funds will be provided only if the business is backed by VCs. Further, it is not generally offered immediately after a round of VC funding,” said R Narayan, founder and CEO of Power2SME.
“The reason for start-ups preferring to raise capital through venture debts is primarily because of the limited borrowing costs for raising capital and fewer documentation hassles. Venture debt is like bank loans that have to be paid back in 2-3 years,” Narayan added.
Kalaari Capital-backed Power2SME, a platform for SMEs to procure raw materials, had raised ₹11 crore from InnoVen Capital in late 2012, post its first round of funding in October 2012. This helped the firm postpone its Series B funding and focus on business.
However, all are not in favour.
“We are not too enthused by it. Venture debt is a need-based funding and generally used to fund the intangible assets because these start-ups are not profitable,” said Mahesh Singhi, Managing Director at investment banking firm Singhi Advisors.
Source: The Hindu Business Line
