Trifecta looking to co-lend to tech startups with banks: Rahul Khanna

In a Q&A, the managing partner of the venture debt firm dwells on the returns generated by the company's earlier funds, among other things

Venture debt firm Trifecta Capital announced its third fund of Rs 750 crore ($100 million) on Wednesday. It has a target corpus of Rs 1,000 crore and a green shoe option of Rs 500 crore.

The firm counts 15 unicorn start-ups in its portfolio like Pharmeasy, BharatPe, Cars24, Sharechat, Curefit, Urban Company, among others. Trifecta’s Managing Partner Rahul Khanna tells Deepsekhar Choudhury in an interview about the returns generated by the firm’s earlier funds, bringing banks on board to lend to start-ups and more. Edited excerpts:

How did a second fundraise come about in a year?

By the middle of this year, we were significantly drawn down on the money we had raised in the beginning of the year. So, we went ahead and filed for approval with Sebi to raise our third fund and got a go-ahead in August.

Some of our limited partners (LPs) were ready to commit even larger amounts this time as they have seen our performance with two funds through the years--even when the economy hit rough patches due to demonetisation, GST and the pandemic.

What kind of returns have your first two funds generated?

We have returned the equivalent of all the capital in the first fund and we are still recycling the capital in the second fund. The strategy is that we typically call capital over the first two years, recycle for three years and return capital over the next two years. All along, whatever income is generated is distributed on a quarterly basis.

In terms of internal rates of return (IRR), the first fund is trending in the high teens (percentage) while the second fund is in the mid-20s.

Is there anything new that you are trying to do with the latest fund?

The idea is to keep innovating on structuring the debt -- one company may need growth financing, another could want asset financing or receivables financing while a third may seek money to fund acquisitions. We are also trying to bring on board NBFCs and banks who can underwrite certain deals better.

Does that mean banks are showing interest in lending to tech start-ups?

The fact that multiple banks have become our LPs signals the fact that they want to do more in the space. It is clear that the internet economy’s share of the GDP could rise from low single digits today to 10-15 per cent in a decade, and large financial institutions would not want to miss out on this opportunity.

We're not expecting them to necessarily change their business model. But if we can help them better understand these companies that they would have not been able to access, then everyone's a winner in the end.

As your fund sizes are getting bigger, are your cheque sizes also increasing?

We like to get involved with a company for the first time at the Series A or B stages when they can absorb $2-5 million of venture debt. We are not looking to write larger cheques upfront. But we want to build long-term relationships and raise the cheques as they grow. There are companies where we have been able to grow our commitments to several hundred crores between two funds.

Would you look at emerging themes like crypto and Thrasio models?

Venture debt rarely provides the first cheque in a company. We're typically the second or third money in a company and so the idea is not to be at the cutting edge of a new trend. The air around regulations in crypto is yet to clear and we will wait to see how things evolve.

On the other hand, fintech is undergoing a shift with things like neobanks and cards businesses. The B2B marketplace space is also abuzz and we are following the SaaS sector actively, too.

Venture debt also comes with an equity option which sometimes turns out to be lucrative. Have you had any surprise upsides on this front?

We have two instruments generally--non-convertible debentures which earn 14-15 per cent IRR and an equity part that yields 2-5 per cent IRR. The idea is to aim for 20 per cent IRR through both combined.  Now, the cost to the company is the cost of the debt instruments  which and the rest of it comes by way of the equity options in the form of partly paid preference shares.

There have been quite a few portfolio companies which have given us return multiples like 3x or 5x, but also note that our equity stake sizes are very low--from 0.25 per cent to half a per cent at most.