Mumbai: Venture debt deals are rising as investors use the avenue to double down on existing portfolio companies and find new companies to invest in.
Two of India’s biggest venture debt providers—Temasek-owned InnoVen Capital and Alteria Capital—have together done follow-on rounds in about 10 companies this year alone.
InnoVen’s follow-on list includes two-wheeler rental startup Bounce, logistics firm Xpressbees and agri-tech firm Agrostar.
Alteria has re-invested in learning startup Toppr, Bounce rival Vogo and consumer lender Zest Money.
While Bounce has raised more than $90 million in equity, it uses debt to finance the purchase of scooters, its main asset.
“We don’t buy assets with equity money. It makes a lot of sense that more startups raise debt because you don’t dilute equity. Debt also helped us push our equity fundraise, help us grow and raise equity on our own terms because we had cash in the bank," said Vivekananda H.R., co-founder and chief executive officer (CEO) of Bounce.
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.
“We have been pleasantly surprised by the velocity of follow-on deals as it implies that our portfolio has been successful in raising follow-on rounds of equity faster than anticipated. Not only does this reduce the overall portfolio risk, it also offers an opportunity for a second slice of debt which is relatively frictionless," said Vinod Murali who is managing partner at Alteria Capital.
“Historically, a third of our deals have been follow-ons and this trend seems to continue. In terms of value, the follow-ons tend to be larger as companies grow and become more mature as equity rounds also swell up," he said.
“Given our ability to recycle capital, we have approximately ₹2000 crore of available capital to fund transactions for the first four years of the fund, including follow-on deals," Murali added.
Along with equity funding, startups are also beginning to raise a debt component. This is because the benefits of lesser dilution of stake and help in purchasing assets are becoming more clear to entrepreneurs.
“Follow-on investments have gone up, particularly over the last 15-18 months. As portfolio companies grow, they raise more capital and their balance sheets have the capacity to add more venture debt to optimise the capital structure. In several cases, we do see companies plan for some venture debt as part of the overall fund-raise, which helps them to close the funding concurrently," said Ashish Sharma, CEO, InnoVen Capital.
“Follow-on transactions also tend to close faster as there’s an ongoing relationship/comfort and companies already know the use case of venture debt. While we don’t have any top-down target, my sense is that the pace of follow-on investments will continue to remain strong during the second half of the year," Sharma added.
Since debt funds don’t have allocations for follow-on rounds, the increase also indicates the quality of companies and founders emerging, as these funds pump in further money only if the company is able to justify another infusion.