In 2018, venture debt providers cumulatively deployed Rs 1,300 crore.
This year, the market is expected to absorb venture debt of Rs 1,800 crore to Rs 2,000 crore.
So what makes this asset class so attractive?
Ranju Sarkar finds out
When Sachin Bansal, the co-founder of Flipkart who sold his stake for $ 1 billion while leaving the company, wrote a Rs 20 crore cheque to Delhi-based start-up Milkbasket recently, it was his fifth debt deal in less than a year.
Bansal has also extended $ 3 million each to scooter sharing start-up Vogo and Bounce.
He has also lent Rs 250 crore each to non-banking financial companies Altico Capital and IndoStar Capital.
Experts see these investments as traditional high yield debt deals and not as venture debt.
Like many HNIs, Bansal has been investing in the equity of start-ups.
While equity offers higher returns and is riskier -- typically, only one of 10 investments in a start-up gives bumper returns -- debt offers stable returns.
Venture debt firms, which invest in start-ups that have raised Series-A or Series-B capital, offer pre-tax net returns of 17% to 18%.
What's more, there's a consistent distribution of income: Investors earn monthly interest on their investments which is distributed quarterly.
So, they can see the cash flows.
There are other subtle differences that make this asset class attractive, such as:
Venture debt funds are of seven years versus venture capital funds or PE funds which have a 10 to 12 year cycle (investment + exits).
In AIFs, investors get back-ended returns while venture debt funds can offer returns from the very first quarter.
Besides, in venture debt, there's certainty of returns and exits as loans get repaid while equity carries an exit risk.
Sure, there could be defaults and NPAs in venture debt but they are less than one per cent and budgeted.
Venture debt is a relatively new asset class.
Earlier, few banks dabbled into it, including Silicon Valley Bank, a pioneer in this business.
Its India business was acquired by Temasek and renamed as Innoven Capital in 2015.
It is the market leader and deployed Rs 600 crore in 2018.
It is followed by Trifecta Capital, which lent Rs 300 crore last year and plans to deploy Rs 450 crore this year.
Trifecta is raising (and investing from) its second fund of Rs 750 crore after having deployed its maiden fund of Rs 500 crore it raised four years back.
Other players include Alteria Capital, a spinoff from Innoven, and Blacksoil.
Besides Sachin Bansal, there are a couple of other individual/family offices which do a few venture debt deals as part of their asset allocation/treasury management strategy.
For instance, Infosys founder Kris Gopalakrishnan has done a few venture debt deals through an entity called Prathithi Investments.
In 2018, venture debt providers cumulatively deployed Rs 1,300 crore, estimates Innoven Capital.
This year, the market is expected to absorb venture debt of Rs 1,800 crore to Rs 2,000 crore, growing at 40% to 50%.
"Key drivers for growth are increasing awareness, more supply, and companies becoming bigger," says Ashish Sharma, CEO, Innoven Capital.
Start-ups are using venture debt to achieve better capital structure, says Rahul Khanna, founder, Trifecta Capital.
They can use venture debt for working capital, capex and inventory, he adds.
Firms like his also bring in relationships, knowledge and discipline to manage costs.
But venture debt is available only for start-ups that have raised Series-A or Series-B capital or have achieved certain maturity and scale.
- Venture debt funds promise pre-tax returns of 16% to 17%, net of expenses.
- Investors can start earning interest from first month, given quarterly.
- Venture debt funds have 7-year duration versus 10 years for PE/VC funds.
- No exit risk in venture debt; default and impairment low & budgeted for