Mumbai: The local arm of California, US-based SVB Financial Group, SVB India Finance Pvt. Ltd, obtained regulatory licence to begin the country’s first venture lending operation in August last year. Venture lending, a new concept in India, refers to debt given to young companies based on factors more common to venture capital, or VC, investing than hard collateral that banks ask for.
As valuations dip and venture capitalists turn cautious, SVB says venture debt can help extend a start-up’s runway. Managing director Ajay Hattangdi spoke in an interview about the venture debt model in India, how it differs from regular bank loans and SVB’s plans in the downturn. Edited excerpts:
Have you begun venture lending in India?
We have started lending and things are going as planned for us. Our first loan was to a company called Prizm Payment Services. We are focused on quality of deals and our ability to add value to our clients through our specialized debt product. This will continue to dictate the pace at which we grow in India.
Start-up support: SVB India Finance managing director Hattangdi.
How does the current economic downturn impact the venture lending model?
In the current environment, venture lending can be used effectively to extend cash runway when a company knows that it will need to raise another funding round in 12 months, but would like to extend that time frame to 18-24 months. However, it is important to note that a venture loan while cheaper than equity, does not try to replace equity.
The debt can be used to finance the company’s growth and capital expenditure requirements enabling venture capital “equity” to be reserved for funding business critical activities such as accelerating product development or making key hires.
How does venture debt differ from regular bank loans to small and medium enterprises?
Traditional bank loans are rarely available to start-ups or young companies and in today’s economic environment they are even more difficult to obtain. When available, bank loans are either insignificant in size, involve severe limitations on the use of funds, or are painfully over-collateralized with promoter guarantees and personal pledges.
Our venture debt financing is structured specifically to support start-up and early stage entrepreneurial companies with greater flexibility in loan amounts and structures as well as a more reasoned approach to the manner in which loans are secured and monitored.
How is the loan structured differently for start-ups?
Compared to traditional forms of lending aimed at profitable, established corporations, venture lenders deal with early stage (companies), which often have inadequate hard collateral or cash flow. Given the variability in the business models of early stage companies, an inappropriate loan structure may itself affect the financial viability of the company.
What makes a venture loan structure different is that it is more closely tailored to the company’s ability and potential to generate positive cash flow, whether through current operations or additional fund-raising efforts.
What are the metrics SVB uses to assess risks?
All deals will be subject to a detailed credit review and due diligence process that SVB has developed based on its extensive experience with venture debt in the US and other global markets. SVB’s approach to risk assessment is similar to that of a VC approach when investing equity into a new venture. However, a key difference is that the primary risk assessment completed by SVB is the determination of the company’s ability to meet its obligations under terms of the loan. Our credit underwriting focuses not only on our client’s key financial metrics, but the strength of the investors and sponsors of our clients, as well as the past and projected cycles of our client’s industries.
What is the size of loans SVB is looking at?
SVB believes that early-stage, high-growth companies primarily need risk capital in the form of equity for funding the early part of their build out. Adding some debt is certainly a good idea to help add a little financial cushion or help fund asset purchases. Accordingly, SVB would prefer to limit the size of its loans to a percentage of the VC equity raised by the company, (which is) determined on a case-by-case basis.
Would you look at offering the debt product to companies without the backing of a venture fund?
We believe that venture debt works best when the borrower has also raised equity from a venture fund that we have worked with in the past.