Mumbai: Getting money without having to part with a stake is the dream of every start-up founder. For Kunal Gandhi, it came true in September, when he managed to raise Rs1 crore to invest in his data management firm, Safehouse Information Management Solutions Pvt. Ltd, without letting go of any equity.
SVB India Managing director Ajay Hattangdi
But it didn’t happen overnight. Taking money from venture capital funds or other investors was not an option for the firm, as the promoters and directors had already infused equity funds. Gandhi did not want to dilute additional equity in the company, which manages the physical records of its clients and converts them into electronic form.
“When we approached banks, we could not get debt (funding) since we did not have any collateral, as ours is a service business,” he said.
The money finally came through a programme started by The Indus Enterprise (TiE), a global non-profit organization that promotes entrepreneurship, in a tie-up with the Small Industries Development Bank of India (Sidbi).
Under the initiative, which is in its pilot phase, a start-up mentored by TiE that is in need of funds can get up to Rs1 crore as debt from Sidbi.
Debt funding is increasingly finding favour with firms that have no equity to share. And new avenues of such funding are opening up for companies that also don’t have assets to offer as collateral.
“Their (Sidbi’s) objective of aligning with TiE is that we have a strong entrepreneurship programme,” said Manak Singh, executive director of TiE Mumbai. “So there would be a first-level validation along with some support and refining of the business model.”
Sidbi then supports them with early-stage debt funding, said Ravi Tyagi, deputy general manager of Sidbi. “We decided to give up to a crore and structure the product in a way to dispense it faster and to a larger number of people, thereby making it easy for them to raise equity in the future,” he added.
Sidbi does retain the option of converting some of the debt into equity at a future date if it wants to. But this is done without getting into valuation of any sorts or with the intention of taking a stake, Tyagi said.
Sidbi has similar debt funding schemes in a tie-up with incubators at the Indian Institutes of Management and Indian Institutes of Technology.
Even after raising money from venture capital funds, some start-ups opt for “venture debt”, which is provided by specialized banks and non-bank lenders to help firms make equipment purchases or meet their daily expenses.
“It is like a secondary funding strategy. It gives you flexibility when you need to buy more time to execute your plans. It bought us another three-four months,” said Beerud Sheth, founder of SMS GupShup, a social text messaging service.
SMS GupShup had already raised $37 million (Rs170 crore today) from venture capitalists before it opted for venture debt funding last year from SVB India Finance Pvt. Ltd.
SVB India is the only company that provides venture debt in the country. Since obtaining a non-bank finance company licence in late 2008, it has funded at least half a dozen companies—including Prizm Payment Services, a financial payments-related start-up; Getit Infoservices, a yellow pages search company; Carwale.com, an online automotive portal; and iYogi Tech Services, which offers technological support to a global customer base.
“We are engaged in close discussions with at least an equal number of other promising companies, including a few in the clean technology space, a new area of investment focus in India,” said Ajay Hattangdi, managing director of SVB India. SVB India has now applied for branch licences to expand its reach.
Joy Basu, chief financial officer of iYogi, said firms such as SVB India act faster than traditional banks. They don’t rely on a firm’s track record, but instead study their business plans and expected patterns of cash flow, he said, declining to specify the debt he has taken or the cost of borrowing.
Sandeep Singhal, co-founder of Nexus Venture Partners, points out the dangerous side of debt funding. “Debt is senior to equity, so tomorrow if something were to go wrong or if there was some trouble with the company, they (lenders) would have right over the assets first,” he said.
Other sources of debt that entrepreneurs access include the techno-entrepreneurship programme of the department of science and technology of India, and grants given by the ministry of micro, small and medium enterprises.