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As the risk of a global economic downturn rises, Indian startups are facing a “funding winter" with a squeeze in equity funding. However, debt financing is stepping in to provide liquidity to young companies. In an interview, Ankit Agarwal, ​​managing partner at venture debt firm Alteria Capital, outlines the key trends and opportunities for venture debt funds in the current situation. Edited excerpts of an interview:

With equity investors likely to go slow on further rounds in startups, will venture debt play an increasingly prominent role in the startup ecosystem?

For more than a decade of doing venture debt in India, our team at Alteria has seen multiple cycles of correction within the startup funding space, but the venture debt market has grown every single year, and we expect that to continue. In a market with an excess supply of equity capital, venture debt is used by founders to accelerate growth further, both organic and inorganic, to keep attracting capital at improved valuations. And in a year like 2022, where equity rounds were hard to come by, venture debt provides a buffer to the existing capital base to extend the runway substantially to get closer to profitability.

What, according to you, is causing the likely pause on foreign capital inflows and do you feel domestic capital will step in to fill the gap?

As a country, we have witnessed unprecedented growth and investments pouring into the private tech investment space over the last decade. Venture Capital investments are no longer restricted to a few US-based firms taking early-stage bets, which was the case a decade back. Over the last 4-5 years, Indian startups attracted a significant amount of capital allocation from early to very late-stage global investment firms, thereby capital inflows into startups becoming increasingly correlated to macro-economic and global public market performance. The good news is that we are seeing a sharp increase in domestic capital getting invested into homegrown venture capital and debt firms. We expect private investment space to go through the same journey as we witnessed in public markets, where domestic capital flows reduced dependence on the dependence on FIIs.

As a venture debt fund, how are you approaching credit underwriting where there is talk of potential moderation in startup valuations? Is unit economics now more important than ever as companies look to reduce cash burn?

We are leading investments in the venture debt asset class in India since its inception days, and experience has taught us not to get carried away in a bull market, nor do we get too anxious around funding winters. We continue to back fundamentally strong business models with credible founders backed by strong VC partners. Long-lasting businesses are built when there is a scarcity of capital available, and we have been very impressed with the resilience exhibited by most founders in our portfolio.

How do you see the consolidation trend playing out as equity funding dries and valuation compresses?

The increasing number of consolidations is more a factor of the size and maturity of our startup ecosystem than just abundance or lack of equity funding. Typically, startups had been targets for large conglomerates and have now become acquirers of smaller startups and, in some cases, traditional profitable companies. In fact, acquisition financing has been a key use case for many of our venture deals over the last few years with companies like Mensa Brands, Rebel foods, Exotel, Medibuddy, Agrostar, and Lead School. Use cases of acquisitions have varied from expanding revenues, adding capabilities, entering new segments etc.

Alteria recently announced the first close of its third fund. Are you looking at writing bigger cheques?

We have always been a stage and sector agonistic venture debt firm and have backed startups across sectors ranging from early Series A to Series E+. With an increasingly wider and larger universe of growth-stage startups in India, a larger capital base definitely allows us to expand our capacity to back growth-stage startups in a more meaningful way. We currently manage Rs.3800+ crores across three funds, all raised in the last five years and have funded 120+ unique startups across sectors and stages. We continue to generate late teen returns to our LPs and have not recorded any credit losses so far, despite multiple waves of Covid and macro uncertainty. Alteria has generated predictable, consistent returns for our Investors through a combination of fixed income and equity upside from our diversified portfolio, which has helped our investors get 4-5% higher returns compared to traditional fixed-income products available in the market. Venture debt has been embraced well by domestic investors, and our LPs constitute large institutions, family offices and HNIs, including a large number of founders from the startup ecosystem.

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