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As PE, venture fund taps shut, startups turn to debt financing

In the second half of 2015, many start-ups witnessed closures, retrenchments

Even as raising private equity and venture capital fund gets difficult, several start-ups are resorting to debt as an option to continue with their growth story.

In 2015, over ₹1,000 crore of debt finance was disbursed to about 160 start-ups. This year, venture debt is expected to increase as PE investors tighten their purse strings.

A data by VCCEdge said the number of venture capital deals in a week has fallen sharply in the past 4-6 weeks.

According to Grant Thornton, while, the first half of 2015 witnessed the maximum traction, with over 600 companies getting funding worth more than $2 billion, slight pessimism had started setting in over the second half of 2015, with start-ups shutting down and retrenching employees.

Abhishek Goyal, founder of research firm Tracxn, told BusinessLine: “Debt finance will help start-ups to provide enough cushion of at least 6-7 months before they raise the next round.” The market has witnessed emergence of about 4-5 debt financing firms such as Innoven Capital, Trifecta and IntelleGrow.

Lighter process

“Unlike equity transactions, venture debt entails a lighter process with relatively less diligence, and this ensures that bandwidth of founders is efficiently managed,” said Vinod Murali, Managing Director, Innoven Capital.

In 2015, Innoven provided collateral debt to the tune of ₹275 crore to over 25 emerging companies, including Portea, Practo, Peppertap, Toppr and Travel Triangle. Its typical range of funding is ₹3 to ₹25 crore to start-ups that has already raised a Series A or B. In 2016, Innoven plans to make 35-45 transactions aggregating worth to $65-75 million at an interest rate of 15 per cent a year.

Venture debt provides entrepreneurs a convenient way to add to their capital base without diluting their ownership. It comes as a relief as start-ups do not have access to bank funding and use equity cash to meet all their requirements, including regular burn, working capital and expansion.

India’s venture debt market is pegged around $300-500 million a year, according to players in this segment.

Rahul Khanna, Managing Partner, Trifecta Capital, said, “Debt gives them (start-ups) an additional runaway to raise additional capital. For example, if they raise ₹80 lakh in equity, they can raise ₹20 lakh in debt, which will give them a runway of additional six months. Therefore, it helps give them some leeway and not be under pressure to rush in for fundraising.”

Trifecta Capital, with a fund size of ₹500 crore, is backed by institutional investors including banks, insurance companies, development finance organisations and large business houses. It plans to deploy the funds over the next three years.

Meanwhile, Naveen Singh, founder of PepperTap, that recently raised a debt from Innoven, said the most businesses these days opt for a blend of equity and debt financing. The two forms of financing can work well to reduce the downsides of each other. The right ratio depends on the type of business, its maturity, cash position and goals to scale up.

This article appeared in The Hindu Business Line on 17th January, 2016.