The size of InnoVen Capital's investments jumped 25% in the last calendar year and the country's largest player in the venture debt space expects to maintain double-digit growth this year as well.
Backed by Singaporean state investment firm Temasek, InnoVen invested 70% of its capital in business-to-consumer (B2C) companies in 2017, including significant follow-on investments in the likes of Yatra, Swiggy, Capillary Technologies, Rentomojo and Belong.
The rest went to business-to-business (B2B) ventures, with InnoVen Capital India's chief executive officer Ashish Sharma saying that the share of such investments had gone up over the last 12-18 months.
In a wide-ranging interview with TechCircle, Sharma also discussed the rise in average ticket size, bets on fintech firms, and the exit scenario in the Indian startup ecosystem.
What was the philosophy behind last year's follow-on investments? Will InnoVen make more such bets this year?
Follow-on funding is an integral part of our model and we expect to do more repeat business with our portfolio companies. Our philosophy is that we’ll grow as you grow.
We may have started a relationship at an early-stage and as companies grow, they raise more equity and their balance sheets have more capacity to add venture debt to optimise the capital structure.
What about new deals? Is there a specific number and stage of investment in mind?
We are always on the lookout to add new relationships. We added 22 new relationships in 2017 and hopefully there will be more this year.
We don’t have a top-down target on the number of new deals as this is a function of several factors such as vibrancy of the startup ecosystem, number of companies raising equity financing rounds, number of new startups coming to the market etc.
We work with companies across different stages of growth and always try to keep enriching our portfolio with a wide distribution of companies ranging from early-stage to growth-stage to large category leaders.
How much are you looking to invest this year?
We deployed $75 million (Rs 487 crore) in 2017, which was a 25% increase over the previous year. Our pace of deployment doubled in the last four months of 2017 compared to the first eight months of the year. So we would like to maintain a double-digit growth this year.
I know that deployment amount gets more mileage but it is not the most important metric. What is more important is to find the right risk-return opportunities.
Which sectors are attractive for venture debt investments in India?
We are sector-agnostic and our portfolio covers all key categories - B2C horizontals, B2C verticals, enterprise tech, fintech, travel and lodging, logistics, health tech, agri-tech, food-tech and ed-tech.
There are some sectors which are more attractive than others and we’ll do more there but we do come across some great startups in all sectors.
You invested more in B2C firms as compared to B2B companies last year. Do you see this mix changing and what is your outlook for B2B e-commerce platforms?
It’s tough to forecast the mix between B2B versus B2C. B2C will continue to get more capital than B2B and that is just a function of the B2C business model.
Building a scale B2C business is an expensive proposition and one needs capital to build a brand and for distribution, supply chain , customer service and customer acquisition cost.
All this leads to high cash burn in early to mid-stages of growth. Having said that, we do see the share of B2B going up over the last 12-18 months.
There is a lot of interest in enterprise tech, SaaS (Software-as-a-Service), big data, artificial intelligence, security, robotics, among other sectors and there is some really interesting work happening.
Do you think that fintech continues to be the flavour of the season? Are there opportunities for VC investments in this segment?
Fintech continues to attract a high level of interest from investors. It is a fairly broad category covering payments, wallets, aggregator platforms (loans, insurance, mutual funds), balance sheet lenders (non-banking financial companies), etc.
A large part of capital initially went into payments followed by loan/insurance aggregators. But recently, we are seeing a lot of interest in the balance sheet lender category as well. Most of them are focusing on segments that are under-served such as small and medium enterprises, micro and payday-type loans, new to credit or niche segments such as student loans, gold loans etc.
Financial services is the largest sector of the economy but among the more difficult to disrupt. Fintech startups that can build a differentiated business model targeting under-served segments better than mainstream banks and NBFCs can create a lot of value.
InnoVen's average ticket size shot up to Rs 20 crore ($3.5 million) in the second half of last year. Will that trend continue?
Our average transaction size has indeed doubled though it’s just an output metric. If we see a lot of interesting opportunities in the early-stage space, we will pursue them aggressively even if the average ticket size comes down.
For us, increase in ticket sizes is a function of two things. One is the natural evolution of the startup ecosystem and as companies become larger, they are well-capitalised and have the ability to absorb more debt in their capital structure.
Secondly, we are also seeing some opportunities with growth-stage companies, which may not have taken venture debt in the past but are now warming up as they see a use-case around reducing dilution, increasing their runway or even supporting some growth plans or acquisition activity.
We also expect to see some pre-IPO (initial public offering) type of equity financing rounds which will give us the opportunity to do some large venture debt transactions.
What does InnoVen’s exit pipeline look like? What is your overall outlook on exits for PE/VC players in India?
Historically, there have been limited exits in India and these, too, have largely been driven by strategic buyouts or more recently secondaries versus exits through public markets (IPO), which is what we see in mature markets like US and China.
Last year was, however, a decent year for exits courtesy large primary-secondary combo rounds in companies such as Flipkart, Paytm and Ola by deep-pocketed investors like SoftBank and Alibaba, which gave healthy returns to some early-stage investors.
My sense is that this trend will continue in the next year or two and we’ll see exits largely through secondaries and buyouts. There are some companies that have built scale and have a credible path to profitability over the next three to four years. I hope that we’ll see some of these companies going public.
As far as InnoVen is concerned, we have seen some exits such as Prism Payments, Myntra, FreeCharge and these have largely been driven by buyouts.
One has to be patient in this market for exits and we can play out the waiting game as we do have some great companies in our portfolio and expect to get some exits in the future.
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.