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Venture debt firms experienced a robust 2019 in India, thanks to an increase in deal volume and their size though they are preparing for a bleaker 2020 as investor sentiment turns grim.

The venture debt market is dominated by three firms—InnoVen Capital, Alteria Capital and Trifecta Capital—which collectively deployed about $300 million (or 2,100-2,200 crore) in startups this year ranging from cloud kitchen company Rebel Foods to infrastructure material aggregator Infra.market and co-living firm Zolostays.

Graphic: Sarvesh Kumar Sharma/Mint
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Graphic: Sarvesh Kumar Sharma/Mint

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“Overall, the deal flow this year has been strong on the back of record equity funding as well as more supply on the venture debt side. B2C companies constitute 70% of our deal flow while B2B form the remaining 30%. The mix is consistent with last year and we expect a similar trend next year," said Ashish Sharma, CEO, InnoVen Capital India.

With a venture capital slowdown expected after a three-year funding boom, debt investors are also revisiting their strategies despite a general mood of optimism so far.

“Since venture debt derives from the venture equity market, our model will generally follow the sectoral trends set by VCs. We also make an assessment of trends that we expect to continue to play out in the near future as we can’t afford to invest in deals that may not find favour with equity investors next year as startups need to raise their next round," said Ajay Hattangdi, managing partner, Alteria Capital.

Mint reported on Friday that the collapse of WeWork’s IPO and the disappointing listings of Uber and Lyft in the US are prompting late-stage investors to reconsider the metrics of investing in Indian startups, with investors changing tack and seeking profitability over growth.

“While we have generally been picky on deal selection, we would have to exercise even greater caution in the coming year, given the expected slowdown in VC funding," Hattangdi said.

Agreeing with Hattangdi, Nilesh Kothari, managing partner at Trifecta Capital said “With talks of a slowdown, we are watching funding situation very closely but we haven’t seen any impact in our portfolio yet." “However, companies are being encouraged to focus more on operating metrics and show a path to profitability," he said.

Unlike some VC funds, venture debt funds are also sector-agnostic, with each fund deploying in sectors they feel they are underexposed in. Alteria is, therefore, starting to invest more in business-to-business (B2B) than earlier, while Trifecta wants to invest more in fintech and in lending models which have worked at scale.

To be sure, the expected caution from venture debt funds does not necessarily mean a potential decline in their lending. In fact, Trifecta, which has been looking to raise a 750 crore second fund for more than a year, has increased the fund size. “We are oversubscribed and have increased fund size to 1,000 crore," Kothari said.

“A tougher funding environment impacts us both ways. On one hand, there are fewer companies getting funded but on the other hand, we see higher demand from companies that had not taken venture debt in the past but are now more open to create additional liquidity buffers," said InnoVen’s Sharma.

Alteria’s Hattangdi also agreed, saying that “a growing number of startups that are hitting stride and therefore raising larger equity rounds. Therefore, while we may make fewer investments, we may deploy the same amount or even possibly more as deal sizes get larger."

Mint reported on June 19 that venture debt funds have doubled down on existing portfolio companies this year, with over 25 deals in existing firms this year alone.

Venture debt funds, unlike their equity counterparts, don’t allocate a portion of their fund for follow-ons, but the sheer pace and interest from companies to raise more debt indicates the maturity in the ecosystem.

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