SUMMARY
Startups are expected to raise between INR 1500-1800 Cr of venture debt in 2019
There’ll be opportunities for more off-shore venture debt deals
The risk-return profile of this asset class may deteriorate
The Indian Startup Ecosystem had a strong 2018, highlighted by the blockbuster Walmart-Flipkart deal and robust late-stage funding activity in category leaders like Paytm, OYO, Byjus & Swiggy. While many big-ticket deals were signed and champagne flowed, early-stage start-ups had a tougher time to raise capital, due to slower angel and pre-series A funding activity, compared to prior years.
On the back of the strong equity funding environment, venture debt market also saw impressive growth, as more & more startups use venture debt, as an alternate source of capital. Introduced by SVB (now InnoVen Capital) in 2008 to the Indian market, venture debt is a smart way for startups to raise some additional capital to drive growth while optimising their capital structure & dilution for founders and early-stage investors.
The venture debt market has grown rapidly and many well-known companies like Swiggy, Byju’s, OYO Rooms, Myntra, Big Basket & Yatra have benefited from it. The market has grown multi-fold with more capital deployed in the last two years than the preceding eight years.
Trends That Will Dominate The Venture Debt Market In 2019
Growth in Venture Debt Market: Startups are expected to raise between INR 1500-1800 Cr of venture debt in 2019, which will be a healthy 25-30% growth over 2018. This will be driven by an increase in the number of transactions as well as higher ticket size. We’ll also see an emergence of more venture debt players as new debt funds are raised by experienced industry professionals, as well as the entry of some first-time venture debt players.
Increase in follow-on transactions: While equity investors routinely do follow-on transactions in their portfolio companies, this is a trend that has picked up in the venture debt industry, particularly in the last couple of years. Existing venture debt players will look to do more in their portfolio companies that are performing well. Start-ups which have already benefited from venture debt will also be keen to add more venture debt, as they grow and raise more equity capital.
More Differentiation: As the standard product gets commoditised, venture debt players will focus on differentiating their offerings. Startups will continue to prefer partners that bring in more than just money and are trusted by founders and investors alike. To differentiate, venture debt players will need to focus on thought leadership, access to global/local networks, product innovation and more structured credit solutions. Venture debt players will also make small direct equity investments by selectively participating in subsequent funding rounds within their portfolio companies.
Global Capability: As more Indian startups seek global expansion, there’ll be opportunities for more off-shore venture debt deals. Global venture debt players will have the unique capability to cater to this market and can also help startups to tap into their global network.
Higher Risk in Venture Debt: With more players and capital chasing promising startups, there is a potential that the risk-return profile of this asset class may deteriorate. While the asset class is perceived as a moderate risk, it requires strong underwriting discipline to generate good returns in the long term and has a small margin of error.
While the venture debt market has come a long way, it’s still early days and we are still way behind the venture debt usage that we see in mature ecosystems like Silicon Valley & China. As the ecosystem matures, we will see more capital, both equity and venture debt available for great founders and promising startups.
