On Sunday, venture debt firm InnoVen Capital India announced that it had extended debt funding of almost Rs 400 crore (approx $60 million) to 35 startups across 43 loans over the course of last year. Of this number, 26 companies were new additions to the portfolio.
Just last quarter, InnoVen claimed to have extended debt funding of more than Rs 110 crore in 13 new deals, among which some notable names included food ordering and delivery service Swiggy; online insurance provider Coverfox; furniture rental company Furlenco; and apparel rental company Flyrobe, among other names.
Also, the venture debt company claims to continue to co-invest in sectors like e-commerce, food tech, logistics, education, enterprise tech, and healthcare.
Moreover, 55 percent of their total funding last year was made up of venture debt to early-stage companies whereas 45 percent was growth capital. According to Vinod Murali, Managing Director at InnoVen Capital, this marks another metric of growth for the firm.
Speaking to YourStory, he said,
This year, we have been successfully deploying $12–15 million in venture debt every quarter, which previously stood at $10–12 million. Also, our cheque sizes have expanded from $2–3 million earlier to all the way up to $5 million. The runway for raising venture debt has increased to 18–24 months, which earlier was 12 months.
This, according to the company, is a 50 percent growth over 2015 in terms of venture debt deployed.
He further adds,
We are also actively exploring debt funding for growth-stage non-VC-backed companies as well, which have the ability to show differentiation that translates to enterprise value. In these cases, our underwriting approach is a little bit different but we try and restrict this to new economy sectors where there is familiarity.
Just this year, InnoVen Capital also made cross-border funding to Capillary Technologies and Simplilearn in order to finance the global operations of these companies. Vinod says InnoVen can now fund Indian businesses across any geography outside India where there might be a capital burn.
Otherwise, the company also makes investments across geographies (non-Indian) in their various capacities.
This year also saw InnoVen Capital launching their ‘Credit Assistance Program’ to help select portfolio companies meet their working capital or capital expenditure needs in partnership with banks while structuring tailor-made debt solutions.
Hence, according to Vinod, InnoVen Capital becomes a bridge between the banks who invest in the funds, and their portfolio companies. Being a part of InnoVen’s portfolio further gives confidence to partner banks to invest in these startups.
InnoVen might also design and stitch the right financial solutions for debts.
There are some instances which make it a good idea for companies to raise venture debt.
Usually, venture debt is taken by businesses to give themselves better runway (of about two to three months) before entering into fundraising negotiations. This runway allows companies to get better bargaining power considering the increase in their traffic, and hence, valuations.
Moreover, the increased bargaining power also allows companies to raise more money with lower equity dilutions.
One such use case from InnoVen’s portfolio is online fashion marketplace Voonik, which has raised a total of $3 million in venture debt from InnoVen.
Speaking to YourStory earlier, Voonik CEO and Co-founder Sujayath Ali said,
“We started looking at term sheets for raising Series B in January (2016) and thought we should subscribe to venture debt for increasing our runway. In January, we took venture debt and invested it in our television campaign and saw the difference in our Series B funding amount.”
Further, Sujayath believes that Series A or after is the right time to raise venture debt since the product is shaping up to hit the right product-market fit and the business models are more formalised.
After raising a $20-million round in June 2016, Voonik subscribed to another small round of $1 million as venture debt.
On the other end, Srini Vudayagiri, Director – Investments at Peepul Capital, believes that venture debt complements equity funding. He states its advantages:
Discipline: The raising of venture debt brings a lot of cash flow discipline, avoiding any unnecessary burns since the debt needs to be serviced. Therefore, the orientation to service cash flows come in.
Collateral-free and cheaper: Venture debts are also collateral-free and are cheaper than those offered by banks.
Complements equity funding: With venture debt funds coming in, equity funds can commit lesser to the requirement of capital.
Further, Srini adds,
“Venture debt goes by the reputational risk of the investors of a certain firm. It usually draws its comfort from a known venture capitalist. Moreover, VCs can also somewhere get in touch with venture debt funds for their portfolios' working capital needs. Also, new equity investors might look at debt records of the company before investing.”
But InnoVen faces competition from Trifecta Capital in India. It was reported earlier that Trifecta Capital was expecting to deploy Rs 60–75 crore by the end of March 2017.
Further, in January, it was reported that the Gurgaon-based venture debt firm is moving towards a final close of its Rs 500 crore fund, of which Rs 300 crore has already been received.
As of December 22, Trifecta had backed 17 companies. However, in comparison, InnoVen since inception has provided over Rs 1,260 crore in venture debt across 140 deals from diverse sectors.
But when asked as to how the companies were performing especially with the onslaught of demonetisation and a slowdown, Vinod says,
“It is quite mixed, actually. While some companies like Chillr and MobiKwik seem to be on steroids, the others seem to be recovering. Businesses like jewellery and pharma are seeing a recovery.”
However, Vinod accepts that the industry is cautious around certain business models which involve channel participation.