Venture Debt Is a Useful Augmentation Tool Which Works Well Across Bullish and Bearish Times. This is Why We look for capable management teams hitting out at large, attractive markets which are similar to the typical VC thesis for investments as well

In the times when Venture Capital fund is drying up, the role of venture debt financing is extremely critical. Venture debt is a useful augmentation tool for founders which work well across bullish and bearish times.

InnoVen Capital India is all about that and more. The company started in 2008 as the first dedicated venture debt provider in India. The platform offers multiple sources of diverse debt capital including venture debt, acquisition financing, growth capital and capex financing.

Till date, InnoVen Capital India has provided over 100 loans to 70 companies across early to mid-growth stage that include Snapdeal, Freecharge, Myntra, Practo, Portea, PepperTap, Byju's, Faasos, Capillary Technologies and Manthan Systems.

In an interview to Entrepreneur Media, Vinod Murali, Managing Director, InnoVen Capital said the importance of venture debt during a lukewarm environment and how should entrepreneurs utilize this entity along with VC funds.

What is your criteria for providing venture debt to Indian startups? What do you look for in startups?

We typically provide venture debt to VC backed companies across sectors like technology, healthcare, consumer and education. We look for capable management teams hitting out at large, attractive markets which are similar to the typical VC thesis for investments as well.

In addition, we look for sufficient liquidity or cashflow runway to ensure the company has sufficient time to execute, learn and if necessary recover from mistakes and still improve on enterprise value to get to the next round of equity funding.

Innoven, formerly known as SVB India Finance Private Limited ("SVBIF") is a subsidiary of Temasek, an investment company based in Singapore. The company was first established by Nasdaq-listed SVB Financial Group in 2007, as a wholly owned subsidiary headquartered in Mumbai. SVBIF obtained a license to operate as a Non-Bank Finance Company in 2008.

Despite the slowdown in funds Innoven has consistently signed deals for early-stage startups, what made you keep your faith in the startup ecosystem?

The lukewarm equity environment has resulted in a recalibration of sorts which is quite useful in my view. This allows for founders to focus on real business issues and craft strategies to ensure they are developing a genuine, long term sustainable winner. Another shift has been in the perception of cash burn wherein last year we witnessed high levels of expenditure especially for consumer internet companies which have changed to a focus on improving unit economics and margins through cost controls. The overall quality of founders is definitely attractive and gives us the confidence to deploy more capital into the Indian startup ecosystem.

When VC money is drying up, how critical is venture debt financing during this stage?

Venture debt is a useful augmentation tool for founders which work well across bullish and bearish times. In a situation where VC money is not easily available, venture debt helps increase runway and also allows the companies to have more time to experiment with strategies or build out their plans. Venture debt always works in concert with equity and it helps to have strong relationships across VC firms as well as the founder community.

Is Innoven's strategy in India different from that in other parts of Asia?

InnoVen has recently started operations in Singapore which will address the broader South East Asia market. There is a lot of similarity between Malaysia, Indonesia and India with respect to consumption behaviour and size, infrastructure challenges and lack of a strong IP environment. Singapore is a regional hub with a very entrepreneur friendly regulatory environment which makes it a very attractive base for companies in the region. Our strategy has been quite similar in these markets and we continue to work with top tier Venture Capital firms and their portfolio companies.

When should a startup opt for venture debt over raising VC funds?

Startups don't choose venture debt over raising VC funds. It's typically a choice of venture debt along with VC funding. Our intention is to never cannibalise on equity appetite but more to provide an alternative which works well in partnership with founders as well as VC investors. When founders are constructing their equity round, it is ideal for them to preserve dilution to the extent possible while still accessing the capital required to build the business in the short to medium term. Investors have an option to retain some of their equity for later rounds which also gives them more time to judge the company's performance and in most cases improve their IRR as well.

The filter for venture debt is quite high even within the VC funded subset of companies – last year we funded one in seven VC funded companies where we had a dialogue. This is because some situations are best suited for equity as the risk is very high as well as the returns and hence not ideal for a venture debt proposition. The best mix for a startup is 10-20% of venture debt as part of the round to ensure obligations can be managed while still providing the company with an efficient overall cost of capital.