We will invest in 12-18 startups a year: Rahul Khanna, founder of venture debt fund Trifecta

Rahul Khanna, managing director of India- and US-based VC firm Canaan Partners, recently launched a Rs 300 crore (around $50 million) venture debt fund, which will seek to back early-stage and established technology ventures in India. Christened Trifecta Capital Partners, the fund will back companies operating in the technology, IT and consumer businesses. The fund has already identified a few potential targets for investments and looks to make 12-18 deals per year. spoke to Khanna to know more about the fund, its investment philosophy, opportunities in the market and more. Here are the edited excerpts:

While your peers are floating equity funds in India, what prompted you to take a different route and launch a venture debt fund?

Well, there is a great quote by Peter Thiel (PayPal founder), 'the greatest business is the one which nobody is building' (laughing). We think debt fund is a great business to focus on since everybody is looking at other kinds of funds.

On a serious note, I think there is a tremendous opportunity in India. While there are many equity-based VC funds available in the market, not many are actually providing non-equity or debt funding.

When we launch a new fund, the most important question arising is how we are different from other funds. The point to note is that it is a large space in the market where nobody is servicing, and we are the only debt venture fund in India that is focused on the domestic market and businesses.

Debt funding is relatively less explored in India. How are you approaching the market?

Typically, venture debt has lagged VC industry by 15 years. If you look at the US, VC started in the 70s, but venture debt came only in the 90s. However, the good news is that our target audience is really VC funded companies. We have been active in the ecosystem for the past several months on educating on venture debt fund.

We have been assessing and understanding the dynamics. Just look at the pace of investing activity. India is already looking like a market. The needs of entrepreneurs are also growing. However, many of them don't want to dilute to their full extent to raise money. Typically, we aim to fill that gap.

What is your investment philosophy? How many companies will you back with the fund?

Trifecta is a completely India-focused fund. We will also look at ventures that are catering to global markets.

With this fund, we will mainly look at VC-backed businesses in the technology, IT and consumer internet industries. Typically, we will look at ventures that are looking to raise Series A round of funding. We will not necessarily look at very early-stage startups.

Mostly the investment will be in the range of Rs 5-15 crore. It represents the 20 per cent of the round of equity financing. We hope to make 50-60 investments over the life of the fund. We will be doing around 12-18 deals a year.

Typically, the investments will be done in the form of a debenture. Those debentures will be based on interest rate and it will be market driven. We will charge around 16-18 per cent interest for 2-3 years. And if a company needs continued round of financing, then we may provide additional capital.

We are not going to take board seats in these companies and that is the role of VC investors. Obviously, we will be providing and helping them in scaling their businesses. However, it will not be as deep an involvement as a VC fund.

How does Trifecta compare to traditional VC funds?

Indeed, Trifecta is a complement to VC funds. Many a time, companies look for working capital, financing deposits, receivable financing, one-time expenses, etc.. They are required to provide equity in return for VC money and dilute the ownership. However, Trifecta will not pick equity stakes in the investee companies; rather we will provide debentures to them.

The key benefits that Trifecta offers are that it minimises equity dilution and helps companies extend their runway.

For instance, if a company needs $5 million funding it could take $4 million from a VC fund and $1 million from us. Since we are largely providing investment in the form of a debenture, we are not diluting the company at that point. Additionally, rather than having two years to achieve their milestone, they get two and half years to achieve it. That is a huge advantage.

Which key tech sub-verticals are you looking to invest in?

We categorise tech businesses into three buckets. There are businesses in the bucket of communication which includes chats and messaging apps. The second bucket is in the information access such as classifieds and listing companies. The third is in the transaction space. This could be actually building consumer facing business and also providing infrastructure for scale to B2B businesses.

What is the status of your engagement with Canaan? Have you quit?

This is a staged process and I am in the process of exiting Canaan at a pre-agreed date. However, I will continue to support the companies that I was involved with.

For full version of the interview click here.

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