 "We're working as insurers in today's capital-short market: Vinod Murali")
As the taps run dry in India’s start-up investment market, more entrepreneurs are taking on venture debt as a way to extend the time before returning to the market to raise more capital. Start-ups are looking at ways to make their reserves last up to 24 months, in which they have to figure out their path to profitability, if not become profitable, says Vinod Murali, managing director at Innoven Capital, the country's largest venture debt fund, affiliated to Silicon Valley Bank. Edited excerpts of a talk with Alnoor Peermohamed:
In deal flow, how has the venture debt market fared through this funding slowdown?
From a deal flow perspective, for the sought-after companies, the cheque sizes are mushrooming —everybody wants to fund a really good company. There’s also a chasm where nobody wants to fund, unlike last year when companies were getting some dollars even when they were not deserving that. Today, it becomes easier for us to differentiate, and there’s a growing realisation that you must take as much capital as possible, as quickly as possible, and ensure you’re good for 24 months. It’s no longer 12 months or 15 months or 18 months. In these 24 months, they’ve got to figure out a path to profitability and make a sensible business.
Beyond that, too. If you look at a 24-month period, it’s not sufficient to only get the unit economics to work. You need to get down to Ebitda (operating earnings), unless it’s a tremendously large market where you’re waiting to scale. Even if there’s a lot of competition in a narrow market, you still have to show that your business is sensible. If it’s a large market such as health care deliveries, where you’re hitting out on a very, very massive business opportunity, then you need to show that the unit economics is sensible and, with a period of time, your scale will help you get your advantages. So, scrutiny for a Series-B or a Series-C round is far higher in terms of what the company is able to deliver. For a Series-C, a company needs to be near-profitable, if not already profitable.
What does all this mean for Innoven?
This is music to our ears, since the founders are more judicious and expectations of valuations have come off. There’s still enough dry powder, so there’s money which will go in but there’s a very high level of scrutiny. The upside to that the founders and investors have enough time to go over a transaction.
Last year, there were several instances of there being only one meeting and entrepreneurs getting funded; you didn’t even know the person. That’s when you were asking for trouble. Rounds take four to six months now, which means enough time for both sides to get to know each other.
Has the drop in venture capital funding led to a drop in venture debt funding?
The environment dictates the use. So, last year, a lot of companies took our money because they said, regardless of the money we have, we are going to be raising money in another four to six months. So, Practo raised $27 million in equity and another $3 million from us, and their thought process was, whatever I do in the next three months will dictate my next fund raising, $90 million in their case. A pound-the-ground-harder mentality. Today, the viewpoint is slightly different. Entrepreneurs are saying I have 18 months of cash but I want to extend that to 24 months. I want a runway extension, I want to play it safe, I don’t want to go out to the market for another 12 months, since the company might not be ready or the market might not be. So, here we work as insurers and, therefore, venture debt works in a bearish environment as well. Now that we’ve done over 100 deals, we’re established, the founders have taken our money, we’ve become reference points for others. We’ve had good traction — in the past 12 months, we’ve done over Rs 300 crore in transactions.
How robust is the venture debt market in India?
It’s worked very well in Silicon Valley because it allows founders to protect dilution. It’s an instrument for founders to preserve their ownership and still get enough money into their company to fulfill whatever their strategic goals are. The only option all along was equity but you now have another option. In the US, venture debt accounts for 10 per cent, so it’s a multi-billion dollar market. I think, in India it’s two-three per cent of the overall venture capital market right now. Our expectation is this will grow to five-six per cent in the short term and to eight to 10 per cent in the medium term.
In deal flow, how has the venture debt market fared through this funding slowdown?
From a deal flow perspective, for the sought-after companies, the cheque sizes are mushrooming —everybody wants to fund a really good company. There’s also a chasm where nobody wants to fund, unlike last year when companies were getting some dollars even when they were not deserving that. Today, it becomes easier for us to differentiate, and there’s a growing realisation that you must take as much capital as possible, as quickly as possible, and ensure you’re good for 24 months. It’s no longer 12 months or 15 months or 18 months. In these 24 months, they’ve got to figure out a path to profitability and make a sensible business.
More From This Section
From at least a unit economics perspective?
Beyond that, too. If you look at a 24-month period, it’s not sufficient to only get the unit economics to work. You need to get down to Ebitda (operating earnings), unless it’s a tremendously large market where you’re waiting to scale. Even if there’s a lot of competition in a narrow market, you still have to show that your business is sensible. If it’s a large market such as health care deliveries, where you’re hitting out on a very, very massive business opportunity, then you need to show that the unit economics is sensible and, with a period of time, your scale will help you get your advantages. So, scrutiny for a Series-B or a Series-C round is far higher in terms of what the company is able to deliver. For a Series-C, a company needs to be near-profitable, if not already profitable.
What does all this mean for Innoven?
This is music to our ears, since the founders are more judicious and expectations of valuations have come off. There’s still enough dry powder, so there’s money which will go in but there’s a very high level of scrutiny. The upside to that the founders and investors have enough time to go over a transaction.
Last year, there were several instances of there being only one meeting and entrepreneurs getting funded; you didn’t even know the person. That’s when you were asking for trouble. Rounds take four to six months now, which means enough time for both sides to get to know each other.
Has the drop in venture capital funding led to a drop in venture debt funding?
The environment dictates the use. So, last year, a lot of companies took our money because they said, regardless of the money we have, we are going to be raising money in another four to six months. So, Practo raised $27 million in equity and another $3 million from us, and their thought process was, whatever I do in the next three months will dictate my next fund raising, $90 million in their case. A pound-the-ground-harder mentality. Today, the viewpoint is slightly different. Entrepreneurs are saying I have 18 months of cash but I want to extend that to 24 months. I want a runway extension, I want to play it safe, I don’t want to go out to the market for another 12 months, since the company might not be ready or the market might not be. So, here we work as insurers and, therefore, venture debt works in a bearish environment as well. Now that we’ve done over 100 deals, we’re established, the founders have taken our money, we’ve become reference points for others. We’ve had good traction — in the past 12 months, we’ve done over Rs 300 crore in transactions.
How robust is the venture debt market in India?
It’s worked very well in Silicon Valley because it allows founders to protect dilution. It’s an instrument for founders to preserve their ownership and still get enough money into their company to fulfill whatever their strategic goals are. The only option all along was equity but you now have another option. In the US, venture debt accounts for 10 per cent, so it’s a multi-billion dollar market. I think, in India it’s two-three per cent of the overall venture capital market right now. Our expectation is this will grow to five-six per cent in the short term and to eight to 10 per cent in the medium term.