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Venture debt has been one of the buzzwords at the latest edition of the IVCA Conclave (organized by the Indian Private Equity and Venture Capital Association) in Mumbai. Amidst the giant equity rounds raised by Indian start-ups over the last few years, especially in 2021 where VC funding hit a record high, venture debt has slowly and steadily become a $0.85-1 billion market in the country.
Rahul Khanna, Co-Founder and Managing Partner of Trifecta Capital (one of the pioneering venture debt funds in India), calls it a “sleeper success story”. While speaking at the IVCA Conclave 2023 on Wednesday, Khanna said, “The Sequoia of India is Sequoia. The Accel of India is Accel. The Lightspeed of India is Lightspeed. But there are no global venture debt brands in India. This is a totally homegrown asset class. It’s largely been built with rupee capital.”
Venture debt investments in India have grown 22 per cent since 2019, and are currently nearing $1 billion in annual deployment. In CY 2022, over 100 venture debt deals were closed, with an average ticket size of over $7 million, per a joint report by Trifecta Capital and BCG. “The equity slowdown from Q2 of CY22 onwards led to higher adoption of alternative financing options,” states the report.
About 70 per cent of the capital raised through debt was by growth and expansion-stage companies. Additionally, 80 per cent of the founders who believe that venture debt deals close faster than other VC deals, claims the report. Prominent start-ups like Rebel Foods, Zepto, Stashfin, and others raised significant debt rounds in 2022.
Concurrent with the growth of venture debt deployment, the use cases have also evolved.
Khanna shares, “In 2015, when we started, the common theme from founders was that they needed growth capital that was not as expensive as equity. Now, debt has become a part of their capital structure, and there are some dominant use cases, from adding inventory to funding acquisitions to topping up equity rounds, etc. Founders are starting to see the difference between debt and equity through [multiple] cycles.”
Echoing him, Anuj Srivastava, Founder of Livspace, says, “One of our most important financial decisions, that we took early, was to optimize our capital structure with venture debt. At first, it served as an additional buffer to meet unexpected contingencies like demonetization, while later we found specific use cases which were structurally best financed with debt.”
While the growth has been phenomenal, with large banks, insurance companies, development finance institutions, family offices, and even some big corporates backing venture debt funds, there is still enormous headroom to grow.
BCG estimates that venture debt investments in the Indian market will grow to $6-7 Bn by CY 2030. “The last two years have been a 2X journey for venture debt. We have a unicorn in this asset class. Hopefully, we will soon have a decacorn. And as the equity base expands, venture debt will also grow on the back of that,” says Yashraj Erande, MD and Partner at BCG.
For Trifecta Capital, meanwhile, close to 30 per cent of its portfolio companies are unicorns. And this covers sectors including agri, healthcare, financial services, retail, foodtech, and so on. “We serve the large corporations of tomorrow. 10 years on, these companies won’t be the ‘new economy’. They will be the economy,” says Khanna.
He adds, “Venture debt is an asset class whose time has come.”
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