Venture debt has become an important funding tool for startups in India, though the market is still nascent and includes only a handful of players such as Temasek-backed InnoVen Capital India Pvt. Ltd, Trifecta Capital Advisors and Alteria Capital Advisors LLP. Alteria, founded by former InnoVen executives Ajay Hattangdi and Vinod Murali, marked the first close of its debut fund in March, and has invested in Sachin Tendulkar-backed celebrity fashion firm Universal Sportsbiz Pvt. Ltd and ready-to-cook food startup Fingerlix.
In an interview with TechCircle, Murali, managing partner at Alteria, talked about the venture debt market in India, the ideal time for startups to approach venture debt funding, and the firm's sectoral interests. Excerpts:
When should startups ideally look for venture debt funding?
Founders should first understand that they need different forms of capital and cash flows to fund their businesses at different stages. The cheapest form of capital is revenue and the most expensive form is equity. Debt and venture debt come somewhere in between.
Given the nature of risk for a startup, the highest risk and highest return go hand-in-hand. The highest risk starts with founders, then angel investors, next comes venture equity. Slowly, with every passing round, the existential risk reduces, so the return expectation also reduces. So, when you reach the private equity level, the risk gets lower compared to venture equity.
Venture debt always goes hand-in-hand with equity capital. It is not ideal for a company which is still binary in its outlook and which has not crossed the existential hump (where the product market fit is not established and fundamental questions have not been addressed). Only once the preliminary phase has been crossed and the startups have reached reasonable stability, both on the business model side and getting equity capital of say Rs 15-20 crore, then venture debt begins to make sense.
For founders, venture debt is a way to reduce their (stake) dilution but needs to be structured as part of a round or soon after for full impact.
It is very risky otherwise and conventional debt is not easy or appropriate for startups. Venture debt is clearly an augmenting tool. Unlike equity, where there is an expectation of return, in case of venture debt, there is an obligation to return.
According to a VCCircle survey, investors are most bullish on health-tech and fin-tech segments this year. What are your thoughts?
Healthcare in India is a significantly large market across different streams such as healthcare delivery, med-tech, life sciences, primary, secondary and tertiary care. People tend to spend more for their healthcare needs. It will be a consistently interesting market for many years to come and not just this year.
There are many sub-segments within fin-tech as well. Part of it looks interesting and part of it appears very crowded, so I wonder how and where money will be made. On the fin-tech side, we have seen a lot of focus on payments but the rules keep changing sharply so it is difficult to figure out which company has a lasting advantage. On the companies with marketplace models in fin-tech, there is a good opportunity. I think there is promise in startups trying to expand the offerings of conventional financial institutions.
Regulation will play a huge role in both the sectors. The problem is that the rules of the game keep changing too fast.
What about ed-tech? A VC investor recently said he was staying out of it because of increasing regulation in the space.
There is a lot of regulation in the school segment; there is little to no regulation in the non-school segment. There are many different sub-segments within education, too. To me, education and healthcare are deep markets where we will see a lot of successful companies come out of India in the next few years. Within education, there are business models operating without a lot of regulatory issues and there has been a lot of promise.
Alteria has struck two deals (Universal Sportsbiz and Fingerlix) so far in the consumer segment. Which sectors are attractive at the moment?
While these are the first two deals for Alteria, they were the 157th and 158th deals for me technically in terms of venture debt in the last 10 years.
Personally, I feel there is a lot of waxing and waning on sectoral interest at different points of time in the Indian market.
The consumer space is slowly getting a lot more attention. The domestic consumption story in India is strong. We see a lot of interest in consumer tech, food, education, healthcare delivery and services where the ultimate drive is a large consumption demographic. Then you have enablers which provide support to these companies. This could be in the form of logistics and payments to service the demand of the Indian demographic.
At the other end of the spectrum, we are seeing enterprise/SMB (small and medium-sized business) tech companies, from good quality software-as-a-service (SaaS) companies to B2B marketplaces. Again for marketplaces, there are transactions that are happening in an inefficient way across various segments and commodities, be it steel, rubber or polymers, which are perceived to be very boring areas but there is a lot of money flow there.
A few areas where there is a lot of chatter but which haven't really seen visible traction are artificial intelligence (AI), augmented reality (AR), machine learning or frontier tech. Very few young companies have stood out so far in these areas.
Will Alteria's focus be more towards non-tech startups?
Not really. Our third deal is a technology company. I think for many of these businesses, technology is a strong enabler. We need to understand where the technology is robust but the business model around it becomes important to define success.
Unlike in the US, where five people sit in a garage and build WhatsApp or Dropbox, it does not work out that way here in India. We need significant people on the street, deep understanding of customers, investments in marketing, and for B2B, there is usually need for international sales for global expansion.
India is not an easy place to build an enterprise tech or an SaaS company. Founders face a lot of different issues. Having said that, our sectoral focus is broad. We don’t do infrastructure and real estate but we are comfortable with anything to do with the domestic consumption story which is using technology, be it in healthcare delivery, offline brands, education, food or e-commerce. We are not constrained.
This interview is part of our InvestorSpeak series in which leading angel, seed or venture investors share their insights on the startup ecosystem in India.