The coronavirus outbreak and resulting restrictions have brought business activity to a grinding halt globally. Against that backdrop, traditional financial institutions, peer-to-peer lenders, and venture debt firms are getting requests from cash-strapped firms in need of a lifeline to keep operations up and running.
For startups, venture debt, in particular, sounds like a quick fix.
The financing is extended to startups that may not have tangible assets and operating profits that are requirements for traditional financial institutions, but possess technology with high growth trajectories, explained Vinod Murali, managing partner of India-focused venture debt firm Alteria Capital. “The underwriting of credit is built on a deep understanding of the VC ecosystem,” he said.
Venture debt also does not dilute a shareholder base the way an equity fundraising does, and it can also be disbursed quickly.
But its interest rates are also higher than that of traditional lenders. And, venture debt firms such as Alteria Capital and InnoVen Capital collect warrants each time they do a financing round in a startup.
“Venture debt firms take a different approach to lending to startups. We understand the higher perceived risks involved and evaluate a separate set of factors to get comfortable,” said Chin Chao, Southeast Asia CEO at InnoVen Capital. “We look at the quality of the team, the business model and the company’s competitive advantage. We then look at the existing cash runway, the quality of the equity base and the financial projections.”
This would mean that not all startups would meet venture debt providers’ requirements. Nevertheless, demand is picking up, Murali said, particularly from more mature Indian companies in the market for growth capital.
“There is going to be a strong need for growth capital post-June, especially for companies beyond Series B, which are recovering fast or are in sectors having some tailwinds. This could be an opportunity for founders to augment their equity raises with slugs of venture debt and preserve dilution,” said Murali.
Murali and Chao were speakers at DealStreetAsia’s webinar “Is venture debt a lifeline in a pandemic-afflicted world?” on 16 April. Also on the panel was Chris Wilson, a partner at law firm Simmonds Stewart. Below are the panellists’ responses to questions submitted by attendees during the webinar.
