Bengaluru: Venture debt firm InnoVen Capital more than doubled its investments in home-grown start-ups in the March quarter from the previous one on the back of larger ticket sizes and a growing appetite for debt, triggered by a slowdown in funding, a senior company executive said.
InnoVen Capital pumped in about $37 million across 17 companies in the March quarter, as against $16 million in 13 companies in the three months to December, taking its total investment in the last fiscal to $85 million in 45 companies, including 31 new ones.
Backed by Singapore’s state-run investment arm Temasek Holdings Pte Ltd, InnoVen Capital aims to deploy $80-100 million in FY18, said Vinod Murali, managing director at InnoVen Capital India.
The firm has so far invested about $225 million in more than a hundred start-ups.
“Last year was even better than what we had thought of. During the start of the previous financial year, we had indicated that we will invest about $65 million. We more than doubled investments in the March quarter as against the December quarter. This took us to more than Rs500 crore in the financial year,” Murali said in an interview.
The surge in investments by InnoVen comes after investments by venture capital firms in Indian start-ups significantly dropped during 2016 as against the heydays of 2014 and 2015, when investors made a beeline to fund start-ups at frothy valuations.
According to a report by KPMG and CB Insights, Indian start-ups raised $3.3 billion in 2016 across 859 deals, as against $8.2 billion across 890 deals in the previous year.
The slowdown in funding has prompted not only early- stage start-ups, but also growth-stage ones to resort to venture debt. For instance, InnoVen has invested in early- stage companies such as Flyrobe, Unbxd, Bizongo, Hotelogix and Cloudcherry among others, but also the likes of Byju’s, Swiggy, Oyo Rooms, Practo and Pepperfry, which have raised anything between $75 million and $150 million in equity funding.
The number of deals clocked by InnoVen Capital last fiscal is comparable with investments made by venture capital firms such as Accel Partners, Sequoia Capital, Blume Ventures or SAIF Partners among others. While InnoVen claims to have invested in 45 companies between April 2016 and March 2017, Sequoia Capital backed 33 companies, Accel invested in 32 while Blume Ventures and SAIF Partners funded 27 and 19 start-ups respectively in 2016, according to Tracxn, a start-up tracker.
InnoVen has also increased ticket sizes to about $8 million (Rs55 crore) per transaction in start-ups such as Swiggy and Oyo. Venture capital debt providers lend Rs5-25 crore per transaction to start-ups at an interest rate of 15-17%. They make their entry only after start-ups have secured at least one round of funding from venture capital firms.
“Debt works in conjunction with equity. It is not meant to be a bridge before another round as the risk is too high. Debt is underwritten based on the capital the company has raised. For early stage companies, it helps in reducing dilution for the founders,” Murali said.
“The venture debt space is wide open because banks cannot enter the space,” said Rutvik Doshi, director at the India arm of Inventus Capital Partners.
“They cannot invest in loss-making companies. But venture debt providers come in at a time when companies have raised equity funding; hence, they are pretty sure of recovering at least a part of the investment. But, they won’t get the same upside as a venture capital investor. From a company’s point of view, it is very beneficial because it extends their runway. They get more time and money to achieve business targets or take additional risks. It is a win-win for everybody,” Doshi said.
According to Murali, start-ups are increasingly warming up to venture debt to not only meet working capital needs and partially fund acquisitions, but also to build a sound credit history before they approach banks for debt.
Trifecta Capital, another venture debt firm, with a target corpus of Rs500 crore, has invested in 18 companies including Urban Ladder, Paper Boat and UrbanClap while IntelleGrow raised about Rs134 crore from Developing World Markets and Omidyar Network.