Mumbai: A relatively new funding source, venture debt, is witnessing traction from some of India’s biggest startups, including Oyo, Swiggy, Byju’s and BigBasket. Going forward, the deal sizes are expected to grow bigger with start-ups crossing new valuation thresholds, according to investors.
“Ticket sizes will go up, but that is more of a demand side phenomenon. As we have more companies crossing $100 million in value and raising bigger rounds, debt deals automatically get bigger,” said Vinod Murali, managing partner, Alteria Capital, a venture debt fund.
Venture debt deals may grow in 2019, but investors cautious
However, while investors expect deal sizes to grow further due to increasing demand for venture debt, they are looking at bigger deals with caution.
“If we are writing a ₹75-100 crore cheque, we will be extremely careful given the risk, and it will depend on robust enterprise value and strong relationships we can leverage across both founders and venture capital investors,” said Murali.
For Alteria, 2019 will primarily be an investing year as it seeks to deploy about ₹400-600 crore. It plans to invest ₹1,500 crore over the next three years.
“There is a lot of dry powder in venture debt and capital, and a lot of good founders with exciting business models. 2019 should be a big year,” said Murali.
From a modest ticket size of ₹7-10 crore a few years ago, deal sizes have increased to ₹15-20 crore today, according to investors.
Although there is demand for bigger rounds, venture debt investors realize that debt is not like equity, which happens in funding cycles of boom and bust. Debt has to be repaid over time, no matter how well or badly the ecosystem is doing.
“In spite of demand for bigger cheques, we have very strict internal discipline mechanisms, and will be a little careful doing very big rounds. Risk management and compliance are very important,” said Rahul Khanna, managing partner of venture debt firm Trifecta Capital.
Trifecta is raising a ₹750-crore fund, its second, as it looks to go deeper into its objective of “building for Bharat”, which refers to products and services most required in Tier 2 and Tier 3 cities.
According to Ashish Sharma, managing director and CEO, InnoVen Capital, which is owned by Singapore’s Temasek, the total value of venture debt deals is likely to grow by 25-30% in 2019. This growth will come from more number of deals as well as bigger sizes, he added.
Venture debt, a more mainstream option for startups today, is seeing traction for both early-stage firms and late-stage unicorns. Unicorns are industry term for start-ups valued at over $1 billion.
Earlier this month, Mint reported that Alteria had invested ₹25 crore in healthcare provider Portea Medical, while InnoVen had invested ₹50 crore in online classifieds portal Quikr. Sharma says InnoVen has also invested in two unicorns this year, without disclosing the names. Investors feel that 2019 could also open up new avenues for venture debt, including structured credit deals and co-investing, or syndicated deals. While co-investing is common in venture capital, venture debt hasn’t seen such deals yet.
According to data from Tracxn, a private data tracker, venture deal value rose from $61.7 million in 2017 to $63.4 million in 2018, spanning a similar number of deals—33. Investors expect this figure to rise next year.