At a time when entrepreneurs are having a tough time to raise follow-on venture capital funding, venture debt is coming to the rescue of VC-backed startups, providing them longer cash flow runway. Panellists at the TechCircle Startup 2016 – Delhi Edition said entrepreneurs should take advantage of venture debt, albeit at an early stage, to meet their working capital requirements.
Participating in a discussion on ‘Venture debt coming to the rescue of startups’, moderated by Mukul Singhal, co-founder of Pravega Venture, panellists tried to decode how the prevailing funding crunch is opening doors for an alternative source of funding.
Venture debt firms like Trifecta Capital and InnoVen Capital lend to startups and usually invest in early-stage firms that have already raised a Series A round of funding and are asset light. They typically provide around $1-5 million as a venture debt to startups.
Vinod Murali, managing director at Temasek-owned InnoVen Capital said the firm has done 125 transactions in India so far. InnoVen has lent close to $150 million since starting operations in 2009.
“Venture debt gives you more fuel to try and figure out answers and improves the probability of survival. We look for firms with established enterprise value,” Murali said.
The notional cost of equity is 30% as venture capitalists have certain expectations from such investment, said Nilesh Kothari, co-founder and managing partner at Trifecta Capital. Venture debt firms charge interest raging between 15% and 17%, he said.
“If you have the mix of the two, the overall cost of capital comes down. Thus if a company can raise venture debt then it should,” Kothari said.
Panellists said entrepreneurs are increasingly opening up to venture debt that provides them a cash flow runway of three to five months.
On the other side, startups fear taking venture debt as, unlike equity, debt is always a liability and they have to return it after a period. However, Kothari said venture debt gives startup founders a breather in situations where they are already out of cash.
“Many companies that we fund actually turn cash flow positive in six to 18 months after raising debt,” he said.
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