Venture Capital

Venture debt may soon go mainstream in India: Q&A with Stride Ventures

Read more at kr-asia.com

Stride Ventures is not your typical venture debt financier. The New Delhi-based lender works with banks to fund growth-stage startups. Incorporated in July 2019, Stride marked its first close four months later, in November 2019. Since then, it has made 14 investments and may close two more soon. Some of its portfolio companies are cosmetic brand Sugar, dairy tech firm Stellapps, digital entertainment company Pocket Aces, logistics firm LetsTransport, interior design provider Home Lane, and robotics firm Miko.

While Stride prepares for the final close of its first fund, aptly called Fund 1, at about USD 48 million (INR 3.5 billion), the venture debt firm has plans to raise money for its second fund in mid-2021, eyeing a much larger corpus.

“The endeavor is to make sure that we become the go-to lender or debt player for a lot of growth-stage companies in India,” said Ishpreet Singh Gandhi, founder and managing partner of Stride Ventures, in an interview with KrASIA. At the moment, the firm is most excited about D2C companies, B2B SaaS, and fintech.

KrASIA (Kr): Why does Stride Ventures work with banks to fund startups?

Ishpreet Singh Gandhi (ISG): I come from a banking background, having worked with Indian and foreign banks for 13 years. In 2015, the Indian startup ecosystem started evolving with a lot of venture capital investors putting in money. Since then, I have been glued to this ecosystem to understand the possibilities of funding these companies.

As a banker, for three years, I led funding in startups like craft beer brand Bira, digital lending firm Lendingkart, and logistic startup Rivigo. I realized that there are opportunities for these companies to raise capital without diluting equity by partnering with banks. I also realized that there would be a bigger ecosystem if we can work with a lot of banks.

Kr: What is your investment and lending philosophy?

ISG: There is a perception that banks do not lend to loss-making companies, which is not entirely correct.

We educate banks on the kind of structures that they can do with a startup. Disruptive brands that are growing fast, expanding marketing operations and their teams, and manufacturing more products often incur losses. Inherently, their business makes sense and that is why they get valuations while raising equity capital. Many such companies block their equity money in working capital cycles, burn that money, and raise further amounts at a lower valuation.

We tell them: build your business by substituting some of the equity money with debt, and raise equity rounds at a higher valuation later when you achieve better revenues. We tell them to use equity capital to fund their corporate expenditure, marketing expenditure, or other growth parameters, but not the working capital. We also educate a lot of founders who need capital on how they can use debt structures rather than dilute equity.

We do not rely on equity rounds to fund startups, and we don’t set up a three-year structure like other venture debt firms. The credit structure of every company is different, depending on things like what kind of business it is and whether it is B2C or B2B.

We invest anywhere from USD 1 million to 4 million, and our average ticket size is USD 2 million. But with banks, we go much larger. Combined term sheets can range from USD 5 million to 7 million.

Kr: How does your partnership with banks work?

ISG: We do credit assessment for startups and share it with our partner banks, so they don’t have to do any due diligence. Banks go by our underwriting of a company, which is core to us. They rely on that and then we combine credit decisions. This reduces the average cost of financing for startups and they get more scalability with banks. Usually, banks start with a small exposure in a company and increase it if that company performs well. This way, we have more bandwidth to support companies. The banks build a client relationship with them and we look at some equity rights.

Kr: What are the sectors that you focus on? 

ISG: The beauty about this business is, as a lender, we can do anything, whatever we are comfortable with. We do not have a very focused or narrow approach. We do combinations of sectors like B2C, B2B, edtech, agritech, and logistics. Basically, there should be a use case and cash flows, which we can underwrite and lend against.

We do not do deep tech, hospitality, real estate, or any company that does not have paid customers or revenues, because these are very difficult to underwrite. We only back disruptive tech-oriented businesses.

Kr: Are there any new trends in the Indian VC ecosystem that have caught your eye of late?

ISG: The pandemic has significantly expedited digital adoption in tier-2 and tier-3 cities. This will greatly benefit internet-first companies by giving them a much larger addressable market. Additionally, greater digital adoption and remote work have also led to an increase in the adoption of B2B SaaS.

The recent budget by the government laid out proactive measures to create demand in India. An increase in per capita income will further drive consumption.

Kr: What is your outlook for the venture debt segment in India this year?

ISG: Venture debt currently stands at 2–3% of the Indian venture capital market, compared to 10–15% in developed markets. There is a great potential for growth, especially with incremental venture capital infusions. COVID-19 has greatly accelerated venture debt and the ecosystem is increasingly recognizing its complementary nature to equity capital.

Kr: Which are the areas that you expect will bounce back within the fintech sector? What’s your outlook for the segment?

ISG: Within fintech, payments solutions and lending to underpenetrated segments such as MSMEs (micro, small, and medium enterprises), retailers, farmers, and drivers will witness traction. Companies such as Arya Collateral and Progcap are driving this momentum by catering to these underserved segments across the country. Consequently, these companies are seeing huge investor interest.

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