Ishpreet Singh Gandhi, Rahul Chowdhury discuss importance of debt in startup ecosystem at TechSparks 2021
Venture debt and revenue based financing are increasingly getting popular among entrepreneurs. At TechSparks 2021, Ishpreet Singh Gandhi (Stride Ventures) and Rahul Chowdhury (N+1 Capital), discuss alternative financial routes in the startup ecosystem.
The word debt has a slightly uneasy ring in India as people are hesitant to take this route of financing but things are changing in the startup ecosystem for the better, with entrepreneurs standing to gain a lot from debt financing.
A panel discussion on the topic — The future of alternative financing for startups in India — at TechSparks 2021, the flagship event of YourStory, saw Ishpreet Singh Gandhi, Founder & Managing Partner, Stride Ventures and Rahul Chowdhury - Founding Managing Partner, N+1 Capital share their perspectives.
Ishpreet says that entrepreneurs or startup founders need to be very clear about why they are looking at debt.
He felt if founders are looking at debt as an alternate source of capital to equity then it would be a bad decision. However, if the debt is used to protect ownership, then it is the correct route.
“There are strong cases of debt as every business has its own set of requirements,” says Ishpreet.
The Indian startup ecosystem has also evolved over the years bringing maturity to the ecosystem and this has given rise to alternative forms of financing such as debt. Also, venture debt always follows venture equity funding.
This also raises the question of what venture debt providers look for when they decide to finance startup founders.
Rahul says “Debt sometimes incentivises good behaviour.”
Panellists also discussed another alternative financing route, revenue-based financing (RBF). N+1 Capital is a revenue-based growth capital firm that primarily looks at the cash flow of the startups, net margins, debt: equity, and gross margins.
“An entrepreneur takes our capital to grow their business and we look at the quality of their cash flow and how sustainable it is," Rahul says.
Given the growing maturity of venture debt in the country it is only natural that the quantum of funds flowing into the ecosystem is also rising, the panellists say.
Ishpreet says Stride Ventures has started to disburse a larger quantity of funds now as the ecosystem is able to ready for this kind of capital. This venture debt fund firm is also sector agnostic as it has found use cases across segments such as D2C, agritech, healthcare to name a few.
According to Ishpreet, startup founders are now more aware of the value of venture debt as this financing option is valuable to protect equity ownership.
Both panellists believe this category of funding will not only grow over the years but will attract more stakeholders.
“Overall we are very excited as it is also a period of learning,” says Rahul.
Today, the startup ecosystem is also worried about the capital inflow bubble and the potential outcome of an eventual slowdown in the system.
Ishpreet says, “We are very particular about being founder-centric as even if there is a slowdown it will be the founder that will pull us through.”
The consensus is that it is the quality of the founders that matters regardless of the mode of financing whether venture equity or debt.
Rahul believes that the market is exploding but the firm will not chase any founder who is burning a very high degree of capital. “We will always look for steady cash flow businesses,” he remarks.
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