Inside Trifecta Capital's evolution from venture debt to startup equity funding

As a venture debt firm, Trifecta Capital believes the Indian startup ecosystem is now ready for the next stage, read IPOs, M&As. Through its newly launched equity fund, the pioneering venture debt firm is eyeing the late-stage space.
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Change is the only constant. As hackneyed as this sounds, it seems very apt for the vibrant Indian startup ecosystem, where the stage is set for Initial Public Offerings (IPOs) and large scale Mergers and Acquisitions (M&As).

And looking to tap this huge investment opportunity in India’s high growth startups, is Trifecta Capital, a company that pioneered the venture debt firm model in the country.

In April this year, the firm launched its first equity fund, Trifecta Leaders Fund-I, to invest in new economy companies that are likely to pursue an IPO in the next one to three years.

While traditionally, Trifecta Capital’s forte has been in providing venture debt to startups, its foray into equity funding is not surprising, given late-stage and pre-IPO investment opportunity in India’s high growth startups.

“Trifecta Capital sees itself as a partner of growth at every path of the journey for a startup,” says Rahul Khanna, co-founder, Trifecta Capital, in an interview with YourStory.

Next stage

Rahul believes a significant number of startups in India is poised to move to the next stage, where they can access finance beyond venture capital firms.

This would mean garnering a bigger pool of capital as part of their growth plans, but not necessarily with the right expertise.

This is the gap that Trifecta Capital wants to fill, being a bridge for those high growth startups that are keen to gain capital from large private equity players, look at an IPO or even a significant M&A.

Trifecta Capital launched in 2015 with a Rs 500-crore fund. It counts unicorns such as Pharmeasy, BigBasket, Cars24, Vedantu, ShareChat and Infra.Market as portfolio companies.

Undoubtedly, being a leading and keen participant in the Indian startup ecosystem in the last six years has lent Trifecta an edge when it comes to transitioning from venture debt to equity funding.

Founded in 2014 by Rahul Khanna and Nilesh Kothari, with offices now in Gurugram, Mumbai and Bengaluru, the company has closed two funds so far, raising around Rs 2,000 crore and providing venture debt to about 75 startups.

Experience of venture debt

Rahul, who has been part of the venture investing world for the last 16 years, describes this time as an exciting journey.

Being involved with startups in their early and growth stages means Trifecta has had a front-row seat in their growth journey, and witnessed first-hand their entry into the unicorn club.

“We started Trifecta Capital when other ways of venture funding in India was underdeveloped. We have been a companion to many high quality businesses that are well known today,” says Rahul.

What this means is that Trifecta Capital expanded into areas that were corollary to venture debt financing. One of those was providing sophisticated financial advice to startups by adding an advisory vertical to the business.

“Managing all the money does not mean having fixed deposits or steady income instruments. Startups need guidance in managing their finance,” says Rahul.

And towards this, Trifecta also added other financial advisory services like dynamic discounting, account payables or receivables, expense management etc. This meant that startups could look at more efficient ways of managing their capital earned through raising funds, or revenue from their operations.

Rahul is confident these services not only reduced the burden for CFOs but also opened up credit opportunities.

Similarly, the company now senses strong opportunity in late-stage equity investing as many of the startups have started to mature as companies.

“They (startups) have been telling us about challenges of a complicated captable, managing ESOPs or providing liquidity to the early-stage investors,” confirms Rahul.

Equity funding plans

The co-founder is certain that the accumulated knowledge over the years, relationships nurtured, and a keen understanding of the high growth startups has given them greater conviction in late-stage equity funding.

Lavanya Ashok, Partner – Equities at Trifecta Capital, is heading equity funding for the firm. A former Managing Director at Goldman Sachs, she brings with her extensive experience of nearly a decade in managing private equity.

Lavanya Ashok, partner - equities, Trifecta Capital

Lavanya says her experience over the years has been littered with examples where entrepreneurs are looking at $20 million to $30 million in funding, but partners at the firm are talking about a $100 million cheque.

“We need to bridge that gap to private equity, and we can provide that specialised service through late stage equity funding,” says Lavanya.

The Indian startup ecosystem has various types of capital pool starting from angel investors, seed stage, early funding and growth capital. Although the lacunae have largely been seen in stages beyond C, as participants in this category have been sparse.

“In late-stage funding, the risk profile is different and one needs a specialised skill set,” offers Rahul.

Scale is the name

This, however, does not necessarily mean startups that have grown a reasonably large size in India are only looking at IPOs or exit. They could also be eyeing a different kind of capital that looks at scale from a completely different level.

“We are starting to see that critical scale. There are at least a dozen companies in our portfolio that is going to go public in the next 12 to 36 months. The real opportunity is to double down and support them on their last leg of their journey,” says Rahul.

The seasoned investor believes the Indian startup sector could be at a tipping point, with $150 billion in private valuation of companies from the new or digital economy, waiting to be unlocked in the next five years.

Today, there are many category-defining startups that have become market leaders in their respective fields like Swiggy, Zomato, BYJU’S, Urban Company, BigBasket, and Paytm to name a few.

Need for new skillsets

This high growth environment calls for new and different skill sets and functions. The skills gap in startups can threaten growth potential, so aligning teams’ skills and capabilities should be part of a startup’s growth strategy. These include teams around corporate development, investor relations, to name a few.

“Private equity and public investors look at a company with a completely different lens, unlike a VC. Our ability to create that linkage will be very critical for these startups,” says Rahul.

Future

On how Trifecta plans to leverage the equity funds, Rahul affirms that the focus will be on existing companies in their portfolio, as familiarity lends them an advantage.

More firms have raised venture debt funding in the wake of the COVID-19 pandemic. Rahul attributes this to digital businesses and startups themselves becoming more disciplined about how they invest or spend their capital.

“The demand for venture debt continues to grow, and it has accelerated our activity to launch our third fund,” says Rahul.

He adds that startups being more judicious about capital has also resulted in stronger balance sheets with healthy margins. This, in turn, has actually led to more equity funding coming into the ecosystem.

The very nature of venture debt is such that it is built on longstanding relationships between lenders and venture capitalists. “We work closely with a dozen VCs, and have a good sense of the trends while allocating capital,” says Rahul.

On the venture debt scenario in the country, Rahul believes it is only just beginning to dive deep into the startup ecosystem, what with different financial instruments evolving. One expects many more players to enter the segment.

As for the future, Trifecta Capital is clear about its vision — building a financial institution that is centred around the new economy.

The goal is to support the needs of startups either through debt, equity or advisory. This would mean growth evolution from a startup to an established corporate.

“The best companies see Trifecta as partners of growth, and we want to serve the large corporates of tomorrow,” signs off Rahul.

Edited by Anju Narayanan