Year Ender 2021: The rise of venture debt as a true growth partner for start-ups

Last month, Delhi-based Trifecta Capital announced the first close of its third venture debt fund at Rs 750 crore within just two months of its launch. Earlier in the year, it had made the final close of its second fund, oversubscribed at Rs 1,025 crore, and raised over Rs 1,000 crore as part of the first close of its late-stage venture capital fund.

A few years ago, it would have appeared to be an unusual level of activity for a venture debt fund in India, but the demand for this asset class has reached such a degree of maturity in the start-up ecosystem that it’s not an anomaly any longer.

“Venture debt and venture equity are companion asset classes. The equity financing in the ecosystem has grown substantially, as has the need for debt. When we started Trifecta Capital back in 2015, we were probably doing Rs 100-150 crore of venture debt an year. This calendar year, we will do somewhere between Rs 800-Rs 900 crore, next year we could easily do over Rs 1,000 crore. That is an indication of how the market has grown and how the demand has grown,” Rahul Khanna, co-founder and Managing Partner at Trifecta Capital, told BussinesToday.In during a recent interaction.

As equity investors are flocking to pandemic-induced tailwind segments, the surge in demand for venture debt is even more pronounced now. Almost all leading venture debt houses have raised new funds this year.

InnoVen Capital, one of the first venture debt providers in India, made the first close of its new fund in September at approximately Rs 740 crore. Its portfolio includes a handful of top tier start-ups like Byju’s, Swiggy, Oyo, PharmEasy, BharatPe, DailyHunt, Rebel Foods and Eruditus.

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Alteria Capita, launched by former InnoVen Capital senior executives Vinod Murali and Ajay Hattangdi, announced the final close of its second fund at Rs 1,800 crore in October this year. It is one of the largest venture debt funds to be raised in India. Alteria has backed start-ups across verticals, including Lendingkart, Dunzo, Cropin, Cityflo, Rebel Foods, Toppr, and Onco.

In August, Stride Ventures said it has secured commitments of Rs 550 crore out of its target corpus of Rs 1,000 crore for its second fund. Founded in 2019, the company marked the 40th investment early this month with its funding in sustainable footwear brand Neeman’s. 

The demand is increasingly driven by growth stage start-ups that are now beginning to appreciate the leverage that venture debt brings to their business models. The capital hungry start-ups are increasingly turning to venture debt not just to reduce the cost of capital but also to raise funds quicker. As deal values expand, debt capital is also helping growth-stage start-ups to extend the time needed to become cash flow positive or to raise the next equity round, and most importantly, make quick opportunistic acquisitions.

“The use cases of debt funding have become quite significant, so we are finding that the demand of venture debt has also grown. Many are funding capex, deposits, first loss default guarantee (FLDG), and also using it to do consolidation including acquisitions,” Khanna of Trifecta Capital said.

As the appetite for venture equity is predicted to grow significantly through 2022, more and more start-ups will turn to venture debt for growth.

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