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India’s venture debt funds are attracting growing interest as investors seek to hedge themselves against riskier pure equity bets on startups. The total amount raised by venture debt funds through private equity and venture capital debt funds jumped from $62 million in FY2019-20 to $85 million in FY2020-21, data from private company tracker Venture Intelligence showed.

Venture debt fund Trifecta Capital on Friday closed its Fund 2, which was launched in March 2019, with an oversubscription. Against a target of 1,000 crore, including a greenshoe option of 250 crore, it received investor commitments of 1,025 crore. The fund has invested 900 crore in 38 startups so far.

The total amount raised by venture debt funds through private equity and venture capital debt funds jumped from $62 million in 2019-20 to $85million in 2020-21
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The total amount raised by venture debt funds through private equity and venture capital debt funds jumped from $62 million in 2019-20 to $85million in 2020-21

Meanwhile, Alteria Capital is planning to raise 1,000 crore with a greenshoe option of 750 crore for its second debt fund, and has also received regulatory approvals. Trifecta is also planning to launch a third fund of 1,200-1,500 crore some time in the third quarter of 2021.

Unlike equity investors, venture debt firms provide loans over a three to four-year period, without diluting founders’ stake in their startup.

“As an ecosystem, it is important that companies have a range of financing solutions available to them, besides equity financing. I think this is an industry that is going to grow significantly from here," said Rahul Khanna, managing partner, Trifecta Capital.

During the covid-19 pandemic, several startups in edtech, pharma, social media, gaming and e-commerce reported a phenomenal growth in business, traffic and revenue, leading to growing investor interest in them.

“I don’t think covid-19 had any particular bearing on venture debt. But it had a bearing on investment activity. So, between March and June, things were relatively quiet. But once people realized that there are positive tailwinds for certain segments of the market, investment activity came back very quickly," said Khanna.

Khanna pointed out that compared to 2019, where $10 billion worth of investment came, in 2020 the venture debt fund was able to raise $9 billion despite the pandemic.

Compared to other markets such as the US, venture debt penetration in India accounts for 4-5% of the overall venture capital industry. Though investors’ interest in them has grown, industry experts feel will not be a substitute to pure equity funds.

Khanna explains that venture debt is not a substitute to venture equity. It is a smaller market, because the ability for companies to absorb debt when they are loss-making is obviously lower than a profitable company. So, not all venture-backed companies will be able to avail of venture debt.

This means the number of companies offering debt funds is not going to expand anytime soon.

“Debt fund doesn’t need as many players as there are in venture capital. If the venture market is served by 20 key players, maybe the venture debt market will be served by five to seven players," adds Khanna.

According to Khanna, collectively, the four to five firms in debt funds are investing approximately 1,500-2,000 crore a year. Trifecta Capital accounts for one-third of it.

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