Indian start-ups warm up to venture debt
Non-banking financial companies, angel investors and working capital providers are queuing up to offer loans
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Mumbai: Indian start-ups, which typically raise equity from venture capital funds, are increasingly attracting non-banking financial companies (NBFCs), angel investors and even companies that provide working capital loans.
Take the case of Silicon Valley Bank India Finance Pvt. Ltd (SVB India Finance), a NBFC, which has lent money to 75 Indian start-ups since its inception in 2009. Its clients include e-commerce platform Snapdeal.com, owned by Jasper Infotech Pvt. Ltd, Loylty Rewardz Management Pvt. Ltd and Freecharge.com.
SVB India Finance, which has a loan book of around $100 million, was acquired last week by the Singapore government’s investment arm Temasek Holdings Pvt. Ltd that focuses on lending to start-ups.
SVB India Finance is “seeing the best pipeline to date as we have already funded three companies in January and are talking to 14-15 companies for investments,” said Vinod Murali, its managing director.
“This will be the best year for us,” he said.
In an email response, Temasek declined to provide details of the acquisition and its future plans because the Rs.280 crore deal is yet to receive regulatory approvals. Murali, too, declined comment on the deal.
Freecharge.com, an online mobile phone recharging and bill payment platform, raised a little under $5 million in two separate rounds from SVB India Finance last year as venture debt.
“It does not cost a company too much to raise debt. It comes without any collateral, without diluting more equity and adds padding to the equity funding you have raised. Instead of going for another round of fund raising you add a lifeline to your company,” said Kunal Shah, founder and chief executive officer of Freecharge.com.
Venture capital debt providers lend to start-ups and small and medium enterprises (SMEs) in the range of Rs.5-25 crore per transaction at an interest rate of 15-17%.
They usually invest in companies that have already raised series A (initial) funding or they come along with an equity investor while lending to these firms. In some cases, the lenders have the option to convert a portion of their warrants into equity.
According to Murali, in mature markets such as the US, venture debt is almost 10% of the venture equity ecosystem. In 2013, in India venture debt was about 3-3.5% of the venture equity market—roughly around $30 million.
Similarly, IntelleGrow started on an experimental basis with Shell Foundation to cater to companies that provide clean energy solutions.
“Most of the companies that we were working with were struggling on the financing side. Most of them were still unbankable because either they were too new or untested business models. In the first three years of operations they were struggling with cash flow demand and that’s where we saw the need for venture debt—an unmet need,” said Aparajita Agrawal, director at Sankalp Forum, a social enterprise platform.
Sankalp is an iniative of Intellecap, which runs Intellegrow Finance.
Apart from NBFCs like SVB India Finance and IntelleGrow, angel investors and working capital providers, too, such as Capital Float and Lendingkart.com are queuing up to offer loans to start-ups.
Capital Float, which has raised funding from SAIF Partners and Aspada Investment Co., provides short-term working capital loans to business-to-business service providers, small manufacturers and e-commerce merchants on online marketplaces.
“We serve customers who have an operating income of more than one year. Banks do not consider firms that are so young. So we get a lot of interest from companies in the 1-5 year bracket, which are growing rapidly,” said Sashank Rishyasringa, co-founder at Capital Float.
Lendingkart.com, which started operations nine months ago, has completed 100 transactions and it lends between Rs.6-8 lakh to companies engaged in e-commerce market places such as Flipkart and Snapdeal.
“E-commerce vendors market is huge at almost half-a-billion dollars and the market will expand significantly going forward,” said Harshvardhan Lunia, co-founder and chief executive officer at Lendingkart. The online lending company provides renewable line of credit for a duration of one-four months.
“We have been approached by a few new fund managers and people relocating to India to structure venture debt funds. If the promoters are not keen to dilute their stake right away, then this debt helps them to build value in the company till the time they are ready to dilute. Structured debt is also a good option to consider between two rounds of equity funding,” said Shefali Goradia, partner with BMR and Associates Llp.
Prompted by the interest shown by start-ups in taking loans, Rahul Khanna, managing director at Canaan Partners, who had announced plans in September to raise a Rs.300 crore venture capital debt fund called Trifecta Capital Partners, has now added a greenshoe option of another Rs.100 crore, taking the total fund size to Rs.400 crore to lend to start-ups.
A greenshoe option is the additional amount that a fund can raise over and above the initial fund raising plan.
“We have been interacting with banks, insurance companies and large family offices regarding the product and with the feedback that we received, we decided to increase the fund size,” said Rahul Khanna, managing partner at Trifecta Capital.
Apart from venture debt, some firms are even lending working capital loans to start-ups who are unable to raise bank funding.
“Early-stage companies, and especially those which do not have fully baked product/business models may find raising debt more attractive as it can help protect shareholder value which can be then be diluted at better valuations during later stages of funding need and company lifecycle” said Mayank Rastogi, partner for private equity and transaction advisory services at EY.
“Most entrepreneurs are unaware of availability of venture debt. It is something that is underserved and even if people know about it, most still do not fully understand it,” said Shah of Freecharge.com.
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