Not long ago, I met the founder of a growth stage startup, whose business is growing at a stellar rate of 15% month on month. Telling me about her journey from just an idea to a thriving business, she expressed great confidence in how her business was shaping and the direction in which it was headed. With a business which is growing rapidly and opportunities knocking at the door, she was finding ways of tapping into capital, while also preserving her equity stake in her own business.
In my experience, this is a problem faced by many entrepreneurs today, who are building scalable business models for which they require additional capital, but are unable to look beyond equity. This capital usually comes in the form of equity financing and therefore, dilution of their equity.
Traditional Venture Debt
Early stage startups, rearing to grow, often times hit a snag while raising money for their business requirements. This forces most entrepreneurs into selling a part of their stake to investors. Take Flipkart for example, India’s most funded technology venture, which has exhibited enviable growth and success. But before it was acquired by Walmart, the founders owned just 5% each in the company. In recent times, therefore, more and more founders are gravitating towards Venture Debt in addition to traditional equity financing.
Venture Debt, a popular tool in the west, is gaining popularity in India, as manifested by the rising number of deals in this space. Now, venture debt is generally viewed as a complementary tool to equity financing which serves to protect equity dilution and extend runway between rounds. This is obviously great news for entrepreneurs who wish to retain their equity stake in the businesses and are often deemed not creditworthy by banks.
While this is exciting for the venture capital space, traditional venture debt relies all too much on the flow of equity financing and this leads to an inherent dependency on equity. In challengingly times, a sustained slowdown in the Venture Capital space would adversely impact the effectiveness of Venture Debt. We, at Stride Ventures, view the emerging asset class differently, and are transforming the way venture debt is being used by startups.
Venture Debt 2.0
While the above mentioned benefits of venture debt are widely known, we truly believe that Venture Debt could revolutionise the working capital needs of a business. To finance these needs, startups generally resort to equity financing. These requirements could be in the form of bank guarantees, payables and receivables mismatch, unlocking the value of their assets and transforming revenue into actual cash flows, etc. However, these requirements also block the capital for long periods, constricting the business in terms of liquidity.
Equity can prove to be an expensive source of financing for a business, and the opportunity cost of allocating this capital is extremely high. We, at Stride Ventures, view this as an opportunity to replace the traditional equity financing with Venture Debt for working capital needs. What makes our proposition unique? You may ask.
We aim to bridge the working capital discrepancy by extending credit to startups for a shorter tenure, enabling entrepreneurs to allocate debt and equity more strategically. We look at a period of 12–18 months, as opposed to 36 months in the case of traditional venture debt, which gives the business more elbow room in a constantly changing environment. We are strictly against the ‘One Size Fits All’ approach. Every unique business has unique requirements, and our products are tailor made specifically to cater to these requirements.
Furthermore, being erstwhile bankers ourselves, we understand the importance of traditional financial institutions for businesses. We look at ourselves as strategic partners, bringing our underwriting experience and expertise to their businesses, and not merely debt providers. Our fund aids in activating the financial ecosystem for its portfolio companies and hence, enables them to procure and structure debt through an extensive network of financial institutions. This opens up opportunities to co-lend with financial institutions, and bring a whole new degree of innovation, synergies and personalisation into the products. Our aim is to bridge the gap between banks and startups, providing a gateway for banks and making credit much more accessible for startups. This is firmly rooted in our philosophy of becoming long term partners of portfolio companies and providing more than just venture debt. The involvement of the Banking ecosystem could be a real catalyst for change not only for Debt but for young businesses as well.
The Venture Capital ecosystem has been a catalyst for the development of innovative ideas and a growing culture of entrepreneurship. Going into the next decade, we truly believe that the financial landscape is poised to evolve and Venture Debt, as an asset class, would play a pivotal role. We will continue to contribute to this ever growing ecosystem and partner with entrepreneurs who wish to make a difference.
— Ishpreet Singh Gandhi, Managing Partner, Stride Ventures