 "Funding, lending")
The Indian startup sector's equity fund raise has nosedived for 2023, but venture debt which has been a recent phenomenon is slowly gaining acceptance. According to industry players venture debt crossed the $1 billion mark.
Though venture debt investment too has come down from 2022, the fall in investment is not as steep as equity funding. For instance, equity funding was down to $7 billion according to Tracxn, lowest in the last five years. On a year on year basis it was down 72 per cent. Compared to this venture debt was at $1.4 billion for CY2023, from $2.3 billion in CY2022.
One also has to remember that venture debt as a category is still small compared to the $7.5 billion of equity funding.
But a look at some of the prominent players in the debt category shows how their role is becoming crucial as startups struggling for funds look at this option.
Trifecta, one of the largest players in this segment has seen its portfolio increasing. For 2023 (Jan 1 to December 14, 2023) Trifecta has invested in 49 deals with a total disbursement of Rs 1,201 crore and would have ended the year at Rs 1,300 crore which is 10 per cent higher than 2022.
Mumbai-based alternative debt provider BlackSoil has seen its investment go up by 44 per cent in 2023. BlackSoil’s total invested capital for 2023 (Jan-Nov) was Rs 1,075 crore. This was at Rs 745 crore for the same period last year. These investments were done in over 40 new companies. Taking its total portfolio to over 75.
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The growth in the acceptance of venture debt as an alternative source of funding is also evident in the increasing disbursements that players have done. Trifecta, which launched its first fund in 2015 has seen its investment grow multifold. From a hundred crore investment in 2016, the fund will end the year with Rs 1,300 crore.
However Rahul Khanna, managing partner, Trifecta, believes that though the funding winter did make startups look at alternative funding sources, but venture debt is not rescue finance or distressed financing.
“Accordingly access to venture debt in 2023 was largely available to companies that had adapted to the changing market dynamics by reducing burn, raising additional equity and generally being more conservative on growth,” he shares.
The dry spell in equity markets have meant entrepreneurs knocking on the venture debt players. Ankur Bansal, co-founder, BlackSoil in an earlier interaction with Business Standard shared that their lead generation has gone up by 20-25 per cent compared to last year. But he cautions that conversion rate for BlackSoil has gone down to 8 from the earlier 10-12, as scrutiny of deals have become stringent.
Apoorva Sharma, managing partner, Stride Ventures agrees. “Even the debt players are very conservative in this kind of a market. They are eyeing only the category leaders; they don’t want to jeopardize their credit quality. There is robust demand but not all of it is serviceable. Our guards are high and we are taking calculated calls,” said Apoorva.
Venture debt players are rather more focused on the firm's strategy to reach profitability, and that is a huge factor for many while investing. Ravi Vukkadala, CEO, Northern Arc Investments shares, “For us, if unit economics are positive and looks like that the company can turn EBITDA positive very quickly, then that is something we have looked at. We do not have a filter that we will not do an EBITDA negative company. We are not allocating much to consumer focused startups. We are not allocating much as it has high cash burn. A lot of B2B platforms are the ones where we are doing it.”
Though demand for venture debt is rising the players are getting cautious. Many hope that 2024 will have its share of good opportunities.
“Hopefully, the coldness of funding winter will start to wear off, and at least the good companies that have been building prudently for a long time not just because it's the flavor of the season will be able to access capital on more reasonable terms.
Opportunity for debt I think will be similar to what we have been doing now, FinTech and Consumer are the biggest categories we serve, and hopefully, we will continue to do so, and B2B services come a close third,” shares Khanna of Trifecta.
Northern Arc Investments has already allocated 40 percent.—which is about Rs 400 crores of its new fund. But Vukkadala says deployment is a little slower. “There are not as many names now because there are many which cannot attract further capital and these are the ones finding it difficult. A lot of the companies were afloat just because they had a lot of equity post covid. The ones which are growing are attracting capital. However, these are lesser in number and the rate of deployment is slower than what we had seen earlier,” he added.
Vukkadala says that 2024 will see good activity. “We are seeing that increase and we expect that next year there will be a lot more companies coming to the market for multiple needs--growth capital or some situation like acquisitions, buy outs, or trimming out equity promoters. Some unique cases are also coming through when they see a larger market coming through and they want to clean up the cap table.” He added.
