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Understanding Private Credit, AIFs & Startup Financing | Vinod Murali (Alteria Capital)
0 Playsin 5 hours
"Venture debt is like an umbrella - you buy it before it starts raining, because once it starts raining, everything becomes expensive."
This analogy perfectly captures the strategic timing required for startup capital - smart founders raise debt when they don't need it, not when they're desperate.
Vinod Murali is the Co-founder and Managing Partner of Alteria Capital, India's largest venture debt fund managing ₹4,500 crores across multiple funds. Widely recognized as the pioneer of venture debt in India, he has over 17 years of experience in the space and has personally backed more than 220 startups including unicorns like Spinny, Rebel Foods, Country Delight, and OneCard. His firm has deployed over ₹7,500 crores to date, making him one of the most influential figures in Indian startup financing. Before founding Alteria, Vinod spent nearly a decade building India's first venture debt business at Silicon Valley Bank and later InnoVen Capital.
Key Insights:
👉Private Credit Evolution: Venture debt sits within the ₹2 trillion private credit ecosystem, filling the gap between traditional banking and equity financing
👉Indian Market Adaptation: India required a complete rewrite of the Silicon Valley venture debt model due to its execution-heavy versus IP-heavy nature
👉Risk Framework: Successful venture debt relies on evaluating four key risks - selection, performance, payment, and resolution
👉Capital Timing Strategy: The best time to raise debt is when you don't need it, not during crisis situations
👉Portfolio Performance: Alteria has achieved less than 0.5% losses across their ₹7,500 crore deployment
👉Regulatory Arbitrage: The shift from NBFC to AIF structure unlocked better capital access and tax efficiency for venture debt funds
#VentureDebt #StartupFunding #IndianStartups #PrivateCredit #StartupCapital #VentureCapital #AlteriaCapital #StartupAdvice #Entrepreneurship #StartupStrategy #VinodMurali #FounderThesis #AkshayDatt #StartupFinance #VentureFinancing #StartupEcosystem #BusinessStrategy #StartupGrowth #FinancialStrategy #startuppodcast
Disclaimer: The views expressed are those of the speaker, not necessarily the channel.
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Transcript
Introduction to Venture Debt
00:00:00
Speaker
The minute you talk to any risk officer in any bank, the first thought is startups will all die. They're meant to Historically, credit is you know it's a function of just two things. right Do I trust you?
00:00:11
Speaker
And do I believe that you'd pay me back? Should I take debt? First question. How much debt should I take? Second question. ah Who do I take it from? Third question. Founders think that the only way to raise money is by diluting equity. But venture debt might be a better answer for your startup.
00:00:26
Speaker
Does venture debt deserve exist in India? Does it work? If you enjoy such deep dive conversations with real builders and founders, then like, share and subscribe to the Founder Thesis Podcast.
Meet Vinod: Venture Debt Pioneer
00:00:48
Speaker
Vinod, welcome to the Founder Thesis Podcast. ah You are the man who has pioneered venture debt in India. ah Give me like two-line introduction of yourself. um Essentially, why should a listener want to hear what you have to say about the space of venture debt? That's the question I want you to answer.
00:01:12
Speaker
Thanks for having me here, actually. Great to be on the podcast. Pioneer sounds like a very large word. I don't think I'm one. I think it's been series of accidental discoveries in some sense.
00:01:24
Speaker
Been fortunate to be in the venture debt space for more than 17 years. And the start off in Silicon Valley Bank set up shop in India way back in 2008. It's been a great journey. I would say it comes down to the one thing for me, solving difficult puzzles.
00:01:38
Speaker
It seemed like a difficult puzzle to solve 17 years ago. How do you give money to startups and get it back? It's as simple as that and as difficult as that, I would say. So it was a series of discoveries beyond that, ah some serendipitous events which shaped the course of my journey.
00:01:56
Speaker
And hence, Altyria happened about seven or eight years ago. ago And here we are. How big is Altyria? Some numbers. Yeah, so we managed about 4,500 crore. This is across now the fourth fund, which will happen this year, but we've managed three venture funds and our third fund, we put in two parts where we have venture fund as well as a shorter duration scheme.
00:02:18
Speaker
So we've had the fortune to back more than 220 startups in India. And we've deployed about 7,500 crores, some big numbers or small numbers, depending on now who you compare with.
00:02:30
Speaker
But ah we we've had a pretty good run, I would say. And overall, all it's been fantastic to be part of the ecosystem. And having partnered with more than 200 startups, it's been a great journey.
00:02:43
Speaker
Okay. So let's dive in first to understand the industry and we will weave in your own experiences through the conversation. um so venture debt is a part of but a sector which is known as private credit.
00:02:58
Speaker
um Let's start by defining what is credit, what the most people understand credit as a loan, and for most people, but means you go to a bank and you take a loan. How is private credit any different? ah And how, but what was it when you started off, you know, like like just take me through the evolution as well.
00:03:18
Speaker
Sure. And even before started off, I think it's a let's go. and I love trivia. I love history. So let's go back a little bit in time. And by the way, i when I studied, I studied only marketing and I started my career as a brand manager.
00:03:33
Speaker
my idea was also to reorganize a lot of these things. And I would say I got into finances because I want to not be ignorant about finance. And I still don't think have to finance. I think I try and read people and describe properties to the situation. So I love math and people. And that's the whole combination which works.
00:03:52
Speaker
So historically, credit is you know it's a function of just two things. right Do I trust you? And do I believe that you'll pay me back? Right? And do I trust you as a question was traditionally over centuries answered by do I know you?
00:04:07
Speaker
And do I think that you are from a good family, to a good community, and is there social pressure and know for you to repay or honor your obligations and so on?
00:04:17
Speaker
So that's the trust part of it, which you call intent, trust, integrity. All of that comes into that bucket. The second bucket is, can you repay your obligations, right? And that simply breaks down to, okay, do you have assets that you can sell monetize?
00:04:35
Speaker
ah So it could be a vehicle, it could be a house, it could be jewelry, it could be anything. Something that I can touch and feel and sell it, right? Or I understand Or do you have a business which generates cash flows? You know, you're throwing up enough money every year to repay. That's it. It's as simple as that.
00:04:53
Speaker
If you want to repay all of your obligations, one box is ticked. If you have the ability to repay your obligations, the other box is ticked. Between these two, it covers the gamut of credit, right?
00:05:04
Speaker
Hence, you it came down to who gives ah loans or credit or any of these words that we use. And there have been different purposes. right When you go back in history, you talk about different kingdoms which used to have these arrangements.
00:05:18
Speaker
Of course, there's a story of the Knights Templar where there used to be an informal bank across the world. So have several of these exotic situations. And then you have the real underlying or the underbelly of credit that was all pervasive because people needed access to capital and they needed folks or institutions they could trust.
00:05:39
Speaker
So that essentially kicked off the whole banking infrastructure across the world. right And this happened over centuries.
The Evolution of Credit Markets
00:05:47
Speaker
And for centuries, actually, it was a very basic thing. I'm traveling from one place to another, can have access to capital?
00:05:53
Speaker
And it was a very simplistic form of arrangement. But over the last couple of hundred years, it kind of changed ah you know in terms of the behavior and the use cases.
00:06:04
Speaker
So you needed investments to happen. ah The industrial revolution happened. You needed a lot of capital to go in. You know, you were setting up, you know, ah railroad companies, infrastructure companies, and all across the world, there was a boom of investments.
00:06:20
Speaker
So we look at the period between, say, 1850, 60 to about 1950, 60, you had a boom in terms of investments. A lot of infrastructure work happening across the world, especially the developed economies and wars as well in the middle. I know I'm going to history lesson.
00:06:37
Speaker
Maybe that's not what... No, no, I love it. yeah I completely love it. Yeah, essentially, credit boomed. You had large banks getting set up across the world.
00:06:48
Speaker
You had regulators getting set up because of this. ah you know You needed somebody who could ensure that you don't have crises that develop. Suddenly, ah big institution collapses. You had the Great Depression, which happened in the US and North America, and that had a lot of learnings for people at institutions around that.
00:07:06
Speaker
So as you came along the decade, ah There was equity capital markets that was evolving as well. But you had the credit markets going a little bit beyond banks.
00:07:18
Speaker
And it was historically informal networks became formal, became banks, became regulated. And then there was a need saying, okay, can we go beyond banks now?
00:07:29
Speaker
Which leads us to this question, which is what is this animal called private credit? Now to spend a couple of minutes on this aspect, If you go to the, so say about 60s when venture capital kicked off, I'm trying to combine both journeys, right?
00:07:45
Speaker
Of course, one of the oldest firms is Bessemer, which takes its name from the Bessemer converter, you know, from the steel manufacturing or steel industry. Actually, my steel industry, right?
00:07:57
Speaker
So there was a lot of innovation that happened. And some of the folks behind that innovation realized they have to contribute more and hence set up pools of capital to just further research. And ah you know you had the semiconductor wave and you had the industrial wave just preceding that and also accompanying that.
00:08:16
Speaker
So the 50s and 60s were the hotbed of innovation, right? It led to a bunch of firms. I mean, I'm talking about the Sequoias and in all the storied names, which kicked off right after that. And it was largely in California and literally in a small neighborhood, right?
00:08:34
Speaker
So when this happened, you had ah you had access to capital, which was supporting in a way ambitious innovation, I would say. And a lot of this innovation did not have past data.
00:08:46
Speaker
And that is an important segue to what we're going to cover soon after. So this was essentially you know on a lark. Somebody said, I want to build a desktop computer. It was an impossible concept. right Or thinking of an operating system.
00:09:00
Speaker
ah These are all things that in the 70s were not ah you know um easy concepts or digestible concepts. So there was one wave of venture capital that was emerging.
00:09:13
Speaker
and And into the 80s, especially in the US, which has, I think, been the forefront of financial innovation, you suddenly had mushrooming of other pockets of capital where you had certain established large equity pools for conventional businesses.
00:09:32
Speaker
But you still had only banks that they could go to and you had a bond industry that was developing. So what a bond? Essentially, when companies say, you know what, I need access to capital, but banks aren't giving me money.
00:09:45
Speaker
right And they're not either understanding the use case or they're not convinced that I could repay them. Now, whatever be the reason, and the U.S. has about 5,000, 6,000 banks to the last count that I remember, but ah that probably be less them.
00:09:59
Speaker
But they were not enough. And that resulted in kind of the mushrooming of the bond industry. And you had different subcuts under the bond industry.
00:10:11
Speaker
And couple of key factors. One key factor was the fact that The US of a market is a highly or a high contract enforceability market where, you know, if you have a problem, you could find resolution, right?
00:10:26
Speaker
Which meant that if you have a document which said something in the code of law, it will mean the same thing, right? So covenanting became, ah you know, just having covenants where holding companies responsible and accountable had some value.
00:10:43
Speaker
So slowly... What does word covenant mean? So essentially, if you're a company and I tell you, no what, you have to be profitable. If you're not profitable, I can do these things, right? Or I have access to certain things. Even for security, you know, you have, like I said, goes back to the assets you have.
00:10:58
Speaker
How do I know that I can access those assets? You may have a car, but how do I know I can purchase the car if you don't pay me back, right? That's one of the issues that India faced and faces, which is, you know, your confidence in a jurisdiction where contract and enforceability is, you know, seen poorly often means that sophistication takes more time in terms of products.
00:11:20
Speaker
So sophisticated products can come in only when everybody knows that, okay, for this risk, this is return. But if I'm not able to say, what is this risk? Then how can I save return to that?
00:11:32
Speaker
And part of the risk is... you know There's selection risk, there's performance risk, there's payment risk, and then there's finally resolution risk in some sense. right So what happens when companies the kind of go under or they're not able to fulfill their obligations?
00:11:48
Speaker
It's a slope. It doesn't happen in one day. What action do you have in terms of a lender to solutions through that period reduces the risk a lot. Right?
00:11:59
Speaker
right So essentially the US saw regulatory changes which allowed for non-bank capital to grow. The second thing was you had a lot of ambition in terms of capital where you had private equity growing, the private equity investors are making large investments and they realized that, you know what, I can use leverage and I can make this a much better return for my investors.
00:12:25
Speaker
i mean, one of the nice examples which you I studied in business school all then twenty five years or to almost 25 years ago was Bar Builds at the Gate, where we talked while they talked about you know the KKR transaction with RJ and Nabisco, which was one of the storied transactions of leveraged buyouts.
00:12:41
Speaker
It was a big term. It was a very fancy term. LBO, what does it mean? And it sounded very exotic. but But the transaction ultimately was you have somebody who's putting in equity money, or you know an investment in terms of equity. Can they supercharge the investment using some debt?
00:12:56
Speaker
right And can they structure it in a smart way where they use the target to pay off the debt?
Understanding Leverage and Financial Instruments
00:13:02
Speaker
Imagine if you're buying any, if it's unthinkable. If you buy a house, the house pays for itself.
00:13:09
Speaker
You know, sounds like a weird concept. But what if you buy a house, put it on rent, the rent pays for the EMI, right? and In some sense, right? The rent is what you're stripping out of the house. In a company's side, if you take leverage and the company's cash flow is based for its leverage, and the leverage is used to buy the company in the first place, it sounds chicken and egg, but it's actually a very simplistic concept where I'm putting in some equity capital,
00:13:31
Speaker
And I'm getting some debt. I'm using both of these to buy out a business. And the business is profitable. And can it pay for its acquisition or partial? i That improves the return on the original equity investment.
00:13:44
Speaker
That is how kind of leverage buyout started happening. And that is not a space that banks would play a big role. And hence, you started having private credit funds. um The labels kept changing.
00:13:55
Speaker
And they started evolving over the eighty s and 90s. And it kind of picked up. Then you have the financial crisis. And that may know put a kind of a cramp on the ground.
00:14:08
Speaker
I would say the banking system went through a lot of pain. And temporarily, all source of capital went through a lot of pain then. But then the recovery, as always, it booms faster.
00:14:20
Speaker
And you had larger scale transactions happening. And now if you look at it, I think private credit across all cuts is maybe $2 trillion. dollars it's It's become a very, very large asset class.
00:14:33
Speaker
and there are several subcuts to it you can have. Performing credit, special situations, distressed assets, venture debt, all having different roles to play. But all of these ads so this to this beast, which is non-bank, non-traditional source of capital, non-equity, everything else you put into this bucket called private credit.
00:14:54
Speaker
but Okay. I'm going to do a couple of recaps based on what I understood. um So, for all ah somebody who needs capital to invest in a project, a startup, whatever, um one way of capital is equity. And equity...
00:15:10
Speaker
can be in two ways. You can go and list on the stock exchange, which is like a public issue, um or you can raise equity from a VC fund or a private equity fund.
00:15:21
Speaker
ah Similarly, ah the other approach ah for raising capital is a loan or debt, ah which you can either go to a bank, and ah take a loan from a bank or you can issue bonds or the third option is private credit. So, which which is the the VC, PE equivalent of private equity equityy and is private credit, basically.
00:15:47
Speaker
um Bonds and bank loans, is there a term to encompass that? kit ah it's It's two sides essentially. So, a loan because it's a bank providing that facility.
00:16:01
Speaker
Hence, you know, as it's being termed a loan. The concept is the same, right? You're accessing, you have access to capital and you're basically saying, you know what, I'm giving it back to you over a period of time and there is a fixed payout I'm making on this largely.
00:16:16
Speaker
Now, whether it is a ah bond, a debenture, a loan, I think it's form or substance, right? It depends on who is issuing the instrument, who is subscribing to the instrument. But if you leave the form aside and you look at what the substance is,
00:16:31
Speaker
In equity, essentially, the payoff the simple. i um i need capital, but i as ah as a company, I don't know what the outcome could be. It could be fantastic, but highly risky, which is venture capital.
00:16:44
Speaker
It could be reasonably good. ah So moderate risk and return with private equity. And it's fairly predictable. It is something that I can reasonably dimension on how it play as listed markets. right That's the traditional kind of landscape for equity.
00:16:59
Speaker
Similarly, if you're very safe and if you're, suppose you've been doing the same business, you you know you run a cement plant for 25 years and you've been producing cement and you're selling cement, then there's not a lot that can go wrong.
00:17:11
Speaker
Which means a bank is ready to give you money and a bank gives loans because that's the way the product is described. They can give you 3-year, 5-year, 7-year, 10-year payback period, but that's a clear arrangement.
00:17:23
Speaker
Now, tomorrow, if you're If you want to access a different… And bonds and banks have the same risk appetite. Like, for stable, no risk. Yeah. um Yeah. So, well, risk and return go hand in hand, right? So, when, say, the mutual fund industry got established or funds got established, then you need a nomenclature for that entity.
00:17:45
Speaker
and Like in India, banks and NBFCs regulated by the Reserve Bank of India. They provide loans, right? Because loans are under the purview of Reserve Bank of India. Now, SEBI is the entity which regulates mutual funds and AIFs, right?
00:18:00
Speaker
Apart from other areas other entities. So from a debt perspective for SEBI, debentures and bonds roll up to SEBI, right? So a non-convertible debenture, NCD, essentially...
00:18:13
Speaker
rolling up to CIDI and can be an instrument that is in the purview of AIS and mutual funds, whereas a loan is in the purview of and know banks largely.
00:18:25
Speaker
NBFCs can buy, there's no restriction on this side. So an NBFC can also do an NCD or a bank can also subscribe if they choose to. But there's a broad distinction.
00:18:37
Speaker
The idea is that when you have a one-on-one transaction, It's easier to you know structure that as a loan because a bilateral transaction. When you want to go to a broad audience and maybe you want to create a security which can be traded, that is the whole reason it's under CIDI or it's under the equity regulator, which is it's a security at the end of the day, not security to confused with the asset that you give under the transaction, a security more in the sense of, okay, if I have a bond that is issued,
00:19:07
Speaker
the person who's subscribing to it, they can either hold till the end, which is hold to maturity, or do they want to sell it to somebody else. And then another variable comes in, which is what's happening interest rates, right?
00:19:18
Speaker
And essentially, ah if there is a bond that is issued today, which has a particular coupon, say 10%, but interest rates have suffered. Coupon another word for interest. Interest rate, right? So basically, 100 rupees, and i you know what, I'll pay 10 rupees a year, and it's for three years, right? Just very simply.
00:19:33
Speaker
And today, the risk-free rate is, say, 6%. But tomorrow the risk-free rate goes to 5%. Suddenly this bond has become more valuable and because this is yielding higher in a situation where the market has come off on rates.
00:19:47
Speaker
So a bond can be traded. A bond can be can exchange hands. A loan is not expected to be traded. A loan is given by a bank, you know intended to be held by the bank unless they choose to sell down or syndicate and so on.
00:20:00
Speaker
But those are exceptions and those are a smaller part of their business. so It feels like the same, but there are some nuances to this. From a company's side, who do I want to get as a source of capital?
00:20:13
Speaker
A bank has a different signal, right? It shows little bit more stability. It's like listed versus unlisted in some sense, right? ah Banks mean, you know they are guardians of public deposits.
00:20:24
Speaker
So if I have a bank providing me five-year money, that means I'm pretty safe, right? So that's that's the recognition. Better the bank, better the quality of this conversation, right?
00:20:36
Speaker
It doesn't mean that issuing a bond is negative. It means that you're trying to access other sets of investors and you have different payoffs on that. You may want to you know what, this the instrument. um It's a template I'm setting up today. yeah It's three years da in terms of the payoffs.
00:20:53
Speaker
And can I go to a wide range of investors? and So bond would be useful if you are a reasonably well-known brand, like say a ah Reliance would do bonds because people know Reliance and Like these kind of companies would have... They can do both. They can do both.
00:21:09
Speaker
They can do both. And they do both. So the larger companies have bond issuances and have bank relationships because they're two different pools of capital tap into. So you have a large... ah ah India traditionally been a shallow bond market. It's been a largely bank market.
00:21:25
Speaker
And so if you look at the US, you know, the ah non-bank market is also growing pretty sharply. But India has been traditionally a bank market, which means if somebody wanted... loans or debt they have to go to banks while you have a number of nbfcs the total value or aum or the size is not that big and they're usually more retail oriented and so on so the indian company need for debt has largely been met by banks all sizes and ski stages got it got okay
00:21:58
Speaker
Okay. So, ah coming back to the broad umbrella of private credit, you said there are four ah sub-cuts in it.
Venture Debt and Private Credit
00:22:08
Speaker
ah Can we go into those? You said performing, special situation, distress, and venture debt. Yeah, and then of course, real estate and non-real estate fundamentally. So, I think there are good many ways to slice and dice this, but there are some labels which have stuck, right?
00:22:24
Speaker
So, distress is easy. I mean, these are complete turnaround situations where there's a higher risk return payoff. That's where, again, jurisdiction matters, your know contract strength matters, everybody to go and get something enforced makes a big difference.
00:22:41
Speaker
So, this a higher payoff in terms of the risk return. And this a very eclectic, um I think this a growing segment in India. um But yeah, it's ah it's a tough segment and it needs special expertise. yeah all of these Give me an example of distress. so You have various ARCs and, you know, asset reconstruction companies. And, you know, there are multiple entities which have been set up.
00:23:07
Speaker
And there are deals which happen, which are of the distress phase. You know, there's... properties that sometimes get auctioned or facilities or factories that get sold. And so these are all within that gamut.
00:23:19
Speaker
Now there are companies which go into NCLT and through NCLT, there's a process. That means there is a loan which has gone bad and you can have somebody else ascribing a 20 cents to the dollar price tag to it and taking over the obligation.
00:23:34
Speaker
So if I am the original lender, And I've given a company 100 floor and the company has gone south, but there's some assets and it's a seven-year process, two or five-year process or a three-year process. It could be both as function of contract enforceability and CLT process and so on and operations of the company coming back.
00:23:52
Speaker
I may not have the i interest or motivation to go seven years, right? So somebody says, know what, I'll give you 22 cents to the dollar and you've already provided for this. So do you want the deal?
00:24:04
Speaker
Now for that person, from 22, if it goes to 25, it's a significant uptick, right? So the base changes for the player, right? That's the stressed assets category in some sense.
00:24:18
Speaker
ah Special tips, again, it's a term where you know you're looking at situations or companies where the yield is like in India, for example, 20% plus or 18% plus is what comes in a special situation the but category.
00:24:33
Speaker
So you're looking at difficult situation, but not necessarily stressed is where I think the issues have happened and played out. Here, the issues are still playing out in some sense. And you're not getting interest at all from the conventional segment.
00:24:45
Speaker
But it is higher risk, higher return still. So it's the borderline of you know stress sometimes or high risk transactions. and Then you have performing credit, which is more mid-teens kind of returns where you have, say, promoters need financing and they want to inject capital into the company's or of a good company which has got profitability, ah needs capital for acquisitions.
00:25:13
Speaker
um So these are, or say a tech services company, which needs to capital for expansion, but doesn't have assets. So these are all situations where, if I put it simply, any situation where past data is sufficient for the capital you're raising, then you're likely to get that money from banks.
00:25:33
Speaker
When say banks, I'm talking about the conventional world of capital, right? Wherever you're raising money for what you're doing in the future, where there's not a lot of data, that's where all of these buckets kick in, right?
00:25:48
Speaker
And each of these buckets getting for a different reason. The performing credit is closer to the bank court, right? Stress assets is the other extreme, right? And because the bank has already played a role possibly and, you know, it's gone south, right?
00:26:01
Speaker
And the special assets is closer to the right in some sense. Venture debt is... the a different Venture and real estate are two sectoral cuts as well. So real estate, of course, plays its own role in terms of you know the developers, the financing that the developers seek. And then you have, of course, newer products.
00:26:19
Speaker
I don't want to get into details on that, yeah know in widths and reach and so on. So that's a different ah construct altogether. Venture debt is ah essentially capital for the innovation economy.
00:26:30
Speaker
and If you go back to the point of making, you had venture capital investors say in the 50s, 60s, 70s who kicked off the venture capital universe, especially in the US. s And the same way about, say,
00:26:43
Speaker
20 years ago is maybe 2000s is when late 2000s is when venture equity started off in India in a meaningful sense. ah In India, venture and venture equity started nearly the same time. I've been doing this since 2008, which is around the time that venture equity kicked off.
00:26:58
Speaker
And the idea is startups have access to equity capital. Can they also get access to debt capital? And the debt may not be sufficiently compensated through just the interest that they pay. So can there be a little bit of warrants because they are really young, they have higher volatility, there is a perception risk.
00:27:15
Speaker
So then that needs to be taken care of through the returns. There are broad cuts of capital in the private trade universe. Okay. So, you had spoken about leverage buyouts. That would be in a performing credit market. Like you spoke of KKR, the private equity fund, doing a leverage buyout of RZR. Actually, that was dangerous, right? Yeah. So, accruciating finance, ah so it again depends on... na the risk involved in the transaction.
00:27:41
Speaker
So all of these ah depend on the transaction risk return profile, right? So for example, if you're an extremely profitable company and you're buying a small asset and you want to just take access to or get access to credit for that, different from if you're doing a transaction which largely resides on the leverage that that comes in.
00:28:01
Speaker
So the higher the risk, it moves up the curve starting from um If I look at returns, every 200 basis or 2%, there's a different our definition for the asset class. right So with a 14% return transaction today, 14, 15, 13, that range, that sits in the performing credit bucket. So a very large company still doing a risky transaction may still fit there.
00:28:26
Speaker
A medium-sized company doing a medium-risk transaction may also sit there. So it depends on the company and the use case. And then as the company's profile is slightly worse or the transaction risk profile is slightly t high, it moves up the scale and goes into special states and so on. Okay. Okay. Got it. Got it. Okay.
00:28:47
Speaker
And this, ah I wanted to just spend a minute on the concept of leverage.
Vinod's Career Path to Venture Debt
00:28:52
Speaker
um Maybe with an example, like say, if you put 100 rupees to buy something which gives you 10 rupees every year as a cash flow and you do some ah return on investment calculation and you will get, let's say, 10% or something like that return on investment.
00:29:10
Speaker
So instead of putting in 100 rupees to get 10 rupees, you put in 10 rupees and you take a loan for the remaining 90 rupees. Which you shouldn't. Okay.
00:29:21
Speaker
I'll give a little math. Maybe 20 rupees. Yeah, yeah, yeah. That should be useful. That's why the leverage amount matters a lot here. Like an example you gave, you can have 80 rupees of your own money, 20 rupees of debt or flip the other way around.
00:29:38
Speaker
So, The amount of leverage a company takes, I think often determinant of long-term success or failure in some sense. right so And one of the ways to think about it is your balance sheet strength and your P&L strength.
00:29:57
Speaker
So in my view, balance sheet strength is ah is about whether you live or die. right P&L strength, I think, is how you're valued in some sense.
00:30:09
Speaker
So the profit that you generate, the multiples around that, you know that's what determines your enterprise value in some sense or the market cap. But if your balance sheet is badly structured, then the company can die.
00:30:23
Speaker
And especially there are some sectors and segments where balance sheet is very important. So a good P&L with a bad balance sheet, you will die. right an okay P&L with a great balance sheet, you get more time to be more successful.
00:30:38
Speaker
and So that's the kind of trade-off ah on this front. So the larger a business gets, they need to focus on the balance sheet. And Maybe when I started my career, I didn't know what balance sheet was.
00:30:51
Speaker
Like I said, I wanted to be a brand manager. I started off at ICSA Bank as the brand manager and absolutely learned that didn't know what a balance sheet was, learned along the way. But that's why for me, it's very basic, which is ah you know Your balance sheet talks about yeah what are your assets i mean and what are your liabilities. Liabilities, eventually the piper comes calling. right So you have to return that back to whoever you owe that to. You strip around the labels.
00:31:20
Speaker
The shorter the time period to return something, then you have two issues. If you're not performing well enough, you're not able to meet that. Or if you perform well, but you're not able to collect fast enough, then you have a mismatch on your asset liability side.
00:31:35
Speaker
So quite simply, if you generate 100 rupees, if you're not collecting it as cash, you have a problem, short-term problem. As long as collecting a period of time, then hopefully you're okay. But if you have to pay 100 rupees in the same time period before you get the cash, that's again called an asset title reliability mismatch, right?
00:31:53
Speaker
That's very simplistic. So if your balance sheet is not structured well and you have this mismatch in your short-term ALM or ALM is that, then that could wreck the company.
00:32:06
Speaker
Because what do you do if you need to honor an obligation? So to your example, Now look at the payoffs. That's where it gets interesting. You reverse 100 rupees through equity and suppose you make a 10 rupees return just to put all the labels over a year, right?
00:32:25
Speaker
You make 10%, right? That's a nice return for you, right? Now suppose you've taken just for example, 50 rupees to leverage, right? And if you get... I think some of these examples often play out better over time.
00:32:40
Speaker
And if the cost of leverage in that case, yeah you know so if you invest at 50 rupees of equity, right, and you've taken 50 rupees to leverage, but the return on the equity is different from return on debt, right?
00:32:52
Speaker
So, fall and it should be a fairly safe asset if your expectation return on equity is only 10 rupees. but So, if the cost on leverage is say 4 rupees against the 50, then you made 6 rupees on your 50, but it's 6 against 50 against 10 on 100.
00:33:13
Speaker
And that's where the math starts diverging. So if you do that scale and you're able to attract a decent chunk of leverage at a lower cost, then the improvement in your returns of the equity investor, the base is very different.
00:33:29
Speaker
Because the comparison then becomes on 10 rupees, you're making 10 rupees, but on five, you're making six. and yeah So the 20% improvement on your expected return with lesser capital deployed to the transaction. So you can do two transactions.
00:33:44
Speaker
and So can you make 12 rupees? ah So you made 20% on the 10 if you get the math right and the situation right. that's a very broad way of looking at how leverage can useful.
00:33:56
Speaker
Now then, the devil is in the details. How much leverage? What form of leverage? What tenor? What can go wrong? Will the cash flows actually come the way you're thinking? Can you use the cash flows to pay down the debt?
00:34:09
Speaker
So all of these factors is why it's not simple math.
00:34:15
Speaker
Okay. Interesting. I guess leverage would be like a drug, right? You get that high, but then there's also a risk of... It is addictive. I mean, it works well.
00:34:28
Speaker
It can create highs and it can wreck you as well. So, I think that's a tricky but interesting comparison. ah they all i mean, see, capital because capital can help you grow fast. It can give you the highs, right? it helps you gallop.
00:34:44
Speaker
So one needs to determine what is the pacing that makes sense, that is appropriate for the individual or the company. doesn't change, right? If you go out buy a house, um do you overstretch? Do you buy within your means? You know, it's the same question, ah same question for a company, right? How much do you want to stretch in terms of your capacity?
00:35:04
Speaker
And how are you willing to bet the shop? If it goes wrong, then you lose the company potentially. And that's a range. but So when you say good balance sheet versus bad balance sheet, it's not purely a simple math of how much is the debt to equity ratio, ah but it's also about when is the debt up for repayment and do you have enough cash flows to meet?
00:35:29
Speaker
It's more about the timing rather than purely debt to equity ratio. quality, quantum, all of these. And it's not just debt and equity. For your short term, you could have inventory, you could have receivables, you could have payables, could have tax obligations.
00:35:43
Speaker
I mean, GST is an important variable in India as well. So there's many things that come into the picture. Some of them are short-term variables and some of them are long-term variables. right So you have to manage it in a way that your short-term obligations are met through you know whatever you can generate in the short-term, but can you have some buffer from long-term? That's the basics of it.
00:36:06
Speaker
So what is your longest um source of capital is equity, longest term is equity. So some part of equity, so but for example, why do banks say, I will fund 74% of your um working capital?
00:36:20
Speaker
So what the logic for that? And it's an unwritten rule, the current ratio, and know that's the same across the world. ah And the reason for that is what they're essentially telling you as a founder or a promoter is, I want you to use your equity to fund 24% of your working capital.
00:36:34
Speaker
Equity is the longest term liability. right Please use that to fund 24% of your short term ah requirements. And I will give you 70% of your short term requirements.
00:36:46
Speaker
So if you strip out the jargon in this, essentially, as a lender, the bank is saying, please backstop part of your short-term obligations through something that is not expected to be repaid in that period, which is equity, right?
00:37:03
Speaker
That's it. It's as simple as that. Now, then you bring in term debt, which is, you know, two, three, four, five-year money, right? Now, usually that's against the purpose. Okay, you're setting up a factory.
00:37:14
Speaker
You need two years to set up the factory, and then you start generating money, and you another four years to repay the debt. So it needs to be six years. Maybe you make it seven years at some buffer. So there's a math behind that if the situation is understood.
00:37:28
Speaker
I know you're setting up a factory. It's a cement plant. I know it takes two years. I know it'll take three years after that, or four years after that, so I can do this. Now, what if you're starting an AI company today?
00:37:40
Speaker
You're setting up a company that's going to drive an agent-to-care solution, First, I don't know how many people you need. What is the product development cost that it entails? I don't know how long you'll take to go to market and start selling.
00:37:53
Speaker
I don't know how long you'll need to invest into the product and the business to start repaying obligations. allow Those two extremism spectrum, a cement plant on one side and an AI company on the other side.
00:38:05
Speaker
One which is very well understood, one which is not understood at all. h So there's a range of situations for a lender and a founder ah promoter. ah So, promoter and banker, founder and venture provider in some sense.
00:38:20
Speaker
So, I think those the extremes in this equation. And then you marry the two. Okay. ah So, you were at ICICI Bank as a brand manager. ah How did that lead to you becoming a lender?
00:38:38
Speaker
Interesting knowing that. So actually, moved from marketing to the rural business group within ICACI. There was a time when the bank was trying to figure out its rural retail strategy using technology, I think at least a decade ahead of its time, which was, you know, literally, i was in villages trying to set up internet kiosks in villages to see if that can be a surrogate for, um you know, allowing for banking transactions. This is 22 years ago, almost.
00:39:04
Speaker
hey So, yeah, feel slightly old. But at the end of it, so the initiative was, I think, ahead of its time ah in terms of using technology when there were no rays i mean there was no real infrastructure from a digital and payments perspective to do some of these things.
00:39:24
Speaker
So it didn't really work to plan. Then I actually, so I wanted to do something on my own. I mean, at the heart of it, wanted to be an entrepreneur. didn't know. was a traditional question. What do you do? You don't have an idea.
00:39:35
Speaker
You have this itch to do something on your own. and Also, I realized that I can't be ignorant about the world of finance. I can't be scared of the world of finance. And I was both. but I did an MBA from one of the good institutions in the country, but I did focus only on your marketing.
00:39:54
Speaker
So um for me, it was more about kind of breaking down a barrier and not being at the mercy of somebody else. And it tells us all my founders as well. You need to have great CFOs because that's very important for an institution.
00:40:07
Speaker
But you have to know... what is under the hood. ah You have to be comfortable you know talking about your product as well as your balance sheet. That's the best founder. It's ambition as well as the nuts and bolts. So both matter.
00:40:20
Speaker
And then throwing people around that. I think that's the best cocktail of all. So for me, it was more to get over my ignorance and fear of finance. And hence, I moved to the corporate banking team and I say, say,
00:40:31
Speaker
Again, literally, I had had great teachers, especially a great teacher around me. And I learned on the job. um You know, i pretty much learned on the job and took me a few months to come the curve.
00:40:48
Speaker
And I think that period helped me a lot because it was not theoretical. um It was actually on the job. I was handling a stress situation in the industrial space. And we were sitting in the factory office looking at the, um you know, receipts and invoices that was where the material getting shipped out. You get a real feel for the business, right? What is the excise situation which is happening?
00:41:10
Speaker
And all of these, you need to understand to know what real India works like. You know, what what really happens in a factory and so on. So think that stint really gave me a real world view. Then I moved to Citibank, again in the world of corporate banking, and I was covering healthcare and auto and consumer, okay different sectors. So yeah me so across commodities, industries. You were the lending side, which in making a lot of assets, right? Yeah.
00:41:39
Speaker
Copper banking, yeah. So essentially, i was the catering to large companies in India. These are billion-dollar-plus market cap companies. um So in healthcare and auto and all the large names you can think of from Bombay. So I was there copper banking, RM, as one would call it. And this was pre-GFC. So the city was a great place to be.
00:41:59
Speaker
ah Very innovative. GFC? Sorry. Oh. The financial crisis in 2008. Okay. Again, no jargons. So, the final is 2008.
00:42:10
Speaker
And see, before the meltdown happened hi keep in 2008, before Lehman crashed and so on, there was a period where It was the ah good time to be in banking because the transaction quality was very interesting. There was a lot of risk taking um that was in play.
00:42:30
Speaker
it allowed for lot of learning as well. And summer of 2008 is when Silicon Valley Bank got its license. And that's when Ajay, my partner in Triumph in some sense, so he reached out and he was basically setting up a SUV shop in India.
00:42:48
Speaker
And he was also ex-City. We knew each other through some common friends. And that's when essentially, i mean, I took the decision to, and literally for me to those, again, some of these things are serendipitous. I was ready to move to Chennai in city.
00:43:04
Speaker
so my which is my home town. grew up in Chennai, studied, spent half my life in Chennai. My heart still beats for the Chennai silver kings. So for me, it was either move to Chennai or take up this role. And actually happened I had not heard of SVB at that point.
00:43:20
Speaker
I just called up three of my friends from my engineering days, and they were all in startups in the US. And all three of them, their firms were working with SVB. And I thought that was pretty cool.
00:43:30
Speaker
Three on three, I realized that Silicon Valley Bank was kind of the 800-pound gorilla in the venture lending space in the US. So, took that point and it was a tricky decision, you know, going from Citibank to SVB I had never heard of.
00:43:46
Speaker
But three months later, it turned to be the best decision of my life, you know, and all the conventional banks were going through a lot of pain. SVB invested $50 million. They were like a well-funded startup. So, it became a great journey. Why did SVB not get affected by the financial crisis?
00:44:01
Speaker
Yeah, an interesting question. and And eventually we'll also talk a little bit about why it ended up ah the way it did. So SVB, so the original crisis when it happened ah was in the realm of everything we discussed so far, which is large companies, large transactions, you know, it was in the conventional world. So it was infrastructure, everything but kind in the conventional world of banking and largely in the mortgage finance world.
00:44:25
Speaker
So it was largely driven by the crisis in the mortgage for finance space, but Mortgage finance is basically like real estate loans, but like housing. right So against housing and then creating strips against that. And and I'm not an expert in that world. So um essentially, there was a set of securities which were built around the housing finance space. And then it didn't pay off the way it did, very simply put.
00:44:48
Speaker
Now, when that happened, almost all the institutions were exposed to mortgage finance had a problem. Now guess what SVB the exposure to this world was? Almost zero. So SVB was conventionally doing something that seemed to be high risk, which is funding startups, but did nothing in the mortgage finance space.
00:45:06
Speaker
So, essentially, is that we didn't get... but In fact, ah in 2009, I remember it was rated as four of the safest banks in the US. s Yes, wow. Irony strikes in different ways, right? yeah yeah I love the brand. Most listeners may not be aware of what eventually happened to SVB. We'll come to that as well. come yeah a bit if If there's a place that I really felt being great part of, I think that is Silicon Valley Bank. There are a few places. You know what? I love to be part of that institution.
00:45:34
Speaker
For me, that is Silicon Valley Bank. i learned a lot fantastic people um they were obsessed about you know improving the probability of success of startups I think it was a very strong DNA very singular focus you know how do we ensure that yeah the innovation economy thrives and thrives globally which is why they set up shop in India as well as few other markets right So that is a startup and spent a little bit of time in the Bay to figure out, you know, how do you do this thing venture debt? right How do you give money to startups and come back and collect it and so on? ah What's a startup? What's a good startup?
00:46:08
Speaker
How do you know, you know, between the 100 founders what to look for? how do you build bridges with investors? Some of that also timing helped. If you look at the Indian venture capital industry, know,
00:46:21
Speaker
folks who had gone through the, ah whether we like it or not, I think that wave, the first wave of folks in the venture capital industry, it was very templatized, right? So where you study, you know, your engineering, and MBA, a few years, consulting, banking, late 2000s, you're selected, um and I know it continues as well.
00:46:41
Speaker
But now it's changing because you have founders, operators, or moving into investing world. But another time, but is like there's no other filter to figure out who should be selected. So a lot of people like me, friends, my classmates, everybody moved to different funds and debt equity, more equity than debt.
00:47:04
Speaker
And we all knew nothing. So we were all figuring out how to play this game and how to go through this journey. So the next few years were... One, sorry, one minor question.
00:47:15
Speaker
ah When someone thinks of a bank entering India, they think of like say a Standard Chattery or a Citibank, which comes, opens branches and opens ATMs and all of that. But that's not what Silicon Valley Bank did, right?
Silicon Valley Bank's Model in India
00:47:27
Speaker
And yeah, that's a great question because ah SVB did not have any retail banking, even in the US. It had one branch. So it was only meant to fund startups.
00:47:39
Speaker
Okay. But where was it? Typically a bank funds by taking deposits, right? But they had deposits from startups. So the whole ecosystem will lead to the craft eventually, but we'll come to that a bit. But the base of depositors was startups.
00:47:56
Speaker
the base of borrowers was all the startups. And was only these two, largely. So I think at its peak, it had about 40,000 startups as the clients. In India, the problem was it was NBSC, which could not take deposits.
00:48:09
Speaker
Eventually, wanted to be a bank, but couldn't make the transition, which was advised to be exited 2014. And then got rebranded got rebranded as Innoven. So then as MD, ran the India deals for Innoven for the next few years after that happened.
00:48:23
Speaker
And 2017 is when and I came out and started Ulterior. And the partnership expanded with Ankit and Puneet and they joined us as partners in 2020. And Ajay since and i idea since retired and Ankit, Puneet and myself, we now run Alteria as the three managing partners for the firm.
00:48:44
Speaker
And all four of us were together from the SVB days. And that is something that is very important Journey for us as a firm, for us as people, because we saw this play out over almost, you know, 15-17 years and we were together ah during this evolution for India.
00:49:02
Speaker
And this is essentially when Indian venture capital born. And I would say now we are in our teenage years in some sense. it What kind of deals was SVB doing when it came to India?
00:49:16
Speaker
So the trade, trade-powered venture transactions, which kind of the template was what was laid down in those days by our team, ah you know, two to three of money where a founder in our first deal was, and that actually says a lot about the Indian ecosystem. Let me give you context on the first deal here.
00:49:35
Speaker
So you would think that if it's venture-dip, then you need like five guys, five kids in a garage building a product, and you know it goes on to become massively successful. and know They raise $50, $100 million, dollars sell the company for a billion dollars.
00:49:47
Speaker
you know Everybody goes home happy, right? Flipkart, sorry. Yeah, and the other 20-somethings, right? So that is the traditional mold of this industry. The first deal that we did as part of SVB in 2008 was was a company Prism Payments, where the founders were in their 40s, late for mid-late 40s, like you know Loni and Sharm. They were folks who knew ATMs.
00:50:13
Speaker
So it was an ATM management, maintenance, you know a ATM company. And it was the cusp of when Indian banks were deciding to privatize ATM estates. So...
00:50:25
Speaker
They were not 20-somethings. They were not five kids in a garage building a product. But they knew their space extremely well. They were the experts when it was anything to do with ATMs.
00:50:37
Speaker
hey That company got bought by Hitachi for $250 million in about seven years after that. It was a good outcome. um Sequoia then became peak. Sequoia invested in the company.
00:50:48
Speaker
It was a good outcome for them as well. so If you look at the Indian, the the story for Indian Venture Day actually is that, you know, it is a lot more about the people.
00:50:59
Speaker
It is a lot more about execution jobs. It's a lot more about industries that are looking for efficiency. You know, if you look at Indian retail, so much of it was broken. Can you create better access? Can you create a better experience? Can you create better quality?
00:51:13
Speaker
Can you... And that's why Indian e-commerce grew. ah We backed Mintra way back in 2012. right And that was when the question was, will anybody buy a T-shirt online? Will anybody buy a pair of shoes online?
00:51:25
Speaker
That was my diligence during the transaction. So buy, return, see the process, see if it works, you know all of that. And I think Oked is a fantastic founder. And, you know, he kind of laid the groundwork saying, yes, this happens and this will happen. But it's an ambitious leap of faith.
00:51:40
Speaker
You know, a fashion, tough business. Fashion online, incredibly tough business. And he of made it work. And, you know, the plays out. Everybody knows that. So in India, it was ah different form of venture, right, where it was more about real-world problems,
00:52:00
Speaker
Just basically problems getting slight improvements and improving the quality of life using technology as an enabler. And folks who know what they're doing in these segments, right?
00:52:13
Speaker
That is the first wave, I would say, for the first five, six, seven years. ah Between 14 and 17, we had a good run, backed some good companies. we ah yeah All these companies were you know taking off, and that gave us the confidence to launch an independent entrepreneurial fund called Alteria.
00:52:30
Speaker
Like i said, going back 15 years, that keyed out to be an entrepreneur finally be manifested. You were running, you know, and essentially, right? Like you were the the CEO, MD, whatever. No, I was the CEO for the India business. I was the MD running the deal.
00:52:47
Speaker
So all the deals I was responsible for, for the India business. hey And so in in that space, had a small team. We were 10 of us.
00:52:58
Speaker
And Adi was also setting up the Singapore and China offices at that time. So it was a great phase of learning, but it kind of gave us the confidence to kind of come out and do our own.
00:53:10
Speaker
At, you know, when you were a small team running the business, 10 people running the business, ah it would have felt like entrepreneurship but unless you felt restricted. ah i mean, I've seen typically people start a business because they feel it there is something, there is an itch to scratch. but Like I need to do this.
00:53:33
Speaker
It's not as much about, I want more equity ownership per se, but it's more about something that they see which needs to be solved. So I'm trying to figure out what was it that you saw. it is yeah It's a very important question in terms of my life, right? I think you hit the nail on the head.
00:53:55
Speaker
See, actually, the thing was, I always knew wanted to be an entrepreneur. So when I... had my first conversation Adrian in 2008. I think I told him five times that, you know, you're asking me to be in the midst of founders.
00:54:11
Speaker
understand ideas, interact with other investors, be in the ecosystem, and still get paid to do this. Because I want to do my own thing. i want to do, maybe I'll be here a couple of years. And he's after, the year let's see, we'll give couple of years. And then we figure out.
00:54:27
Speaker
So literally, my original objective was to be in this e in that frame of venture debt for a few years and start something on my own. But in some sense, I would say actually that I like that problem-solving aspect.
00:54:41
Speaker
Initially, the problem was, does venture it deserve to exist in India? Does it work? It took us a few years to answer that problem. And it was a very difficult few years. It was testing at different levels.
00:54:54
Speaker
ah You had to understand situations, capital movements, how investors think and work. You know, the same brands in the US were there in India, but there were different people in India. And there were different companies they were backing, there were different journeys.
00:55:07
Speaker
You know, Series A's were looking different. Series C's were looking different. You didn't have a public markets at all at that time for startups, right? So effectively, the ah question around, you know, what is the problem kept changing.
00:55:23
Speaker
So in 2013, 2014, when SPB did that exit, the problem was, can we go through to the next, you know, iteration where is out, but can this exist, right? So that took a couple of years.
00:55:35
Speaker
When it came to 16, 17, I think the other aspect which changed the regulation, and that's an important one, there was no way to do this in 2008, except
00:55:46
Speaker
if you're in BFC or bank. So there was no AI regime at that time, which came later. But in 2017, you had an AIF regime, which at that time was a few years old, which allowed for a fund to exist. You can pool capital, provide debt to startups in the form of NCDs with some equity kickers, which actually was housed better in a fund and not him not under an NBFC.
00:56:11
Speaker
So because our product is a little bit of debt with some equity upside, and we will cover that as well in some some time, it made more sense for it to be in a fund, which allowed us to access capital from investors who are more diverse.
00:56:25
Speaker
hey So that was one that, regularly, we had the ability to actually have a fund, coupled with the fact that this the only thing I knew to do. So my skill set was limited at that point because I had earned experience, but it was doing one thing, largely.
00:56:43
Speaker
And the third or the zeroth thing was wanted to be on my own. And hence, I would say Altyria was born in 2017. And looking back, I think we were quite naive about a lot of things. I think we expected that, hey, you know, we've done some good work. We've backed 100 startups.
00:56:58
Speaker
We've got some great names. And, you know, people come flocking and giving us money. It doesn't work that way. We learned it the hard way. ah We did get off a good start. We had a couple of anchor investors come in. And that was nice.
00:57:10
Speaker
ah But it took us some time. took us a year and a bit to raise our first fund. And that is other learning. you know You have to pitch to investors.
00:57:21
Speaker
It's a very important conversation. They're trusting you with the money. It could be institutions, Government of India fund the funds. We've been a big recipient of capital from the Government of India fund funds and our family offices across all sizes.
00:57:35
Speaker
And... It was a process, right? But we came out of it understanding, you know, one is the rigor was there, but also the dividends are there. You have your own fund.
00:57:46
Speaker
And in some sense, you can put your own destiny. And I think that was the but driving factor, which is, can we raise our own fund? It's a question that I wanted to answer.
00:57:58
Speaker
Can we be successful entrepreneurs? Can I be a successful entrepreneur? Yeah. And how does this journey unfold from here? What is the scale? what is What are the kind of companies that I'd like to build?
00:58:10
Speaker
And that was what I want to answer at that stage in my life. um I would say knew of what we needed to know at that time in terms of the only the deals part of it.
00:58:22
Speaker
Then there's a fundraise part of it. and Then there's fund administration part of it. And all three have to come together to be a successful fund.
Regulations and Venture Debt in India
00:58:29
Speaker
We're still learning. i would say it's been almost eight years now and we're still learning. the ah The big trigger was the AIF regulation. ah How was that a game changer? How was it different from doing venture debt within and NBFC versus doing venture debt within an AIF? AIF, for people who don't know, is Alternate Investment Fund, which is a SEBI-regulated entity. so So what was the difference in doing venture debt within an AIF?
00:58:58
Speaker
Yeah, that's a great question actually. So fund, first the regulators are different. So AIF, like you said, is under Sibi. And as a fund, it allows you to do NCDs. It allows you to do, NCDs are non-convertible debenture.
00:59:14
Speaker
Essentially, it's a debt instrument, but it can have equity as well with the instrument. So it allows for a construct where you can have debt with an equity upside linked to it, sit comfortably in a form that is understood well by the regulator.
00:59:30
Speaker
That is one. So the instrument itself, because an NBFC is supposed to do debt or loans, and NBFC is not meant to be an equity investor fundamentally. So there was a little bit of friction on that front.
00:59:42
Speaker
The second thing is an NDFC typically has one or two or few investors until it gets listed. You you raise capital from institutional investors. An AIF, you can raise capital from everybody um as long as they meet the basic you know norms and the initial minimum investment is a crore.
01:00:00
Speaker
right But still high net worth, but it can be an institution. It can be a bank. It can be an NBFC. It can be the Government of India funder Fund of Funds. It can be foundations. It can be other fund of funds, private front of fund of funds.
01:00:13
Speaker
It can be family offices. people like you and me, individuals, senior professionals, VCs, founders, Indians, non-Indians. Our fund has all of the above, right?
01:00:24
Speaker
So at Altevia, we have every single constituency that I just mentioned, right? So the nature of LPs or limited partners, so essentially your fund has limited partners and general partners. In India, what general partners typically refer to is the folks who run the fund.
01:00:40
Speaker
And limited partners, those invest in the fund. It's more a Western concept, but the limited partners concept continues. ah So those are the investors who are putting money into the fund and they expect returns.
01:00:51
Speaker
And these can be any of these categories. And the fund is a finite vehicle, especially a category two AIF. They're not talking at loss on the argument, but a category, there's three categories. Category three is typically hedge funds.
01:01:04
Speaker
categories one Category one is more venture capital funds, more adventurous, more, um you know, as the regulator fee is capital, which has a tag of higher risk to it in some sense.
01:01:16
Speaker
And category two is relatively lower risk. So we have more private equity, debt, infrastructure, sitting in category two, right? And we sit as a category two fund and all our funds are licensed as category two.
01:01:30
Speaker
A third aspect is taxation. As a cat two AI, we don't pay tax. the It's only withholding tax and the tax is in the hands of the investors and NBFC pays full tax. The fourth is NBFCs can access leverage so they can take loans. Same concept we spoke about earlier. As an institution, we talked about the improvement in economics for the equity investor. For NBFC, they can take leverage and improve their own return on equity.
01:01:54
Speaker
As an AI, we can't access leverage for investments. You can do short-term, very marginal, 30 days and so on, but that's not really leverage in the truest sense. So, the and and the fifth thing I would say is an NBFC creates enterprise value at NBFC 11, where for all the folks running the NBFC, you know, your owners, you have shares in NBFC, you have ESOPs, and that has its own value.
01:02:16
Speaker
As a fund, the incentivization is more like there's a fee and there's performance, like carry, the carried interest. And there's an interesting, you know, anecdote on that going back to history.
01:02:28
Speaker
And that's sometimes how, you know, we go through a lot of time and some things don't change, which is,
01:02:35
Speaker
400 years ago, when shipping used to happen and, you know, captains used to go out and do trade and they used to come back to port, they used retain a part of the proceeds that they used to carry as their own income, which is why it's called carried interest, right?
01:02:49
Speaker
And they kept 20% of the ship's goods as their own income. That was how it was carried interest. It was 20% in 1650, right? And it's still 20% for a lot of people and drink twenty five So sometimes it's so funny how some of these things start in a different context and they continue a different context. So that's the origin of carried interest in some sense.
01:03:11
Speaker
So for funds, the incentivization is hence different. So there's leverage, there's taxation, there's incentivization, there's core ah entity. All of these are different for AIS and NBFC.
01:03:23
Speaker
So Venture Today sits better in AIS than in NBFC in our view, which is why in 2017 when we came out, We a choice to do either. We chose to do an AIF, right? Which was, in hindsight, a good move. And the regulation has gotten better. yeah what and You didn't answer why VentureNet is better in AIF. Because NBFC has the advantage of leverage, right? so Again, NBFCs have advantage of leverage.
01:03:49
Speaker
But if your underlying product is not well understood by the providers of leverage, then you don't get access to leverage, right? So like I said earlier, all conventional sources look at the past data, right?
01:03:59
Speaker
And, for example, we had a bank was a lender to us ah in in that entity, came in as an anchor investor, an indecent bank, came in as an anchor investor for Ulterior because they saw the performance of the NBFC.
01:04:15
Speaker
But they were in the NBFC and they saw the NBFC performance. Otherwise, very difficult because the minute you talk to any risk officer in any bank, their first thought is startups will all die.
01:04:26
Speaker
they're meant to die. High mortality, right? Which is true, by the way, which is absolutely true. So if you're running a venture-led business, it is very difficult to get access to commercial leverage. And the reason is you can't get yourself rated.
01:04:39
Speaker
It is very difficult because rating needs 10, 15 years of data. Today, As a team, we have 15, 17 years of experience. As Algeria, we have close to seven or eight years of exp experience.
01:04:52
Speaker
It is not enough. If you look at commercial vehicle finance, if you look at gold loans, if you look at any new category which emerged, you need multiple cycles of experience before you can attract large-scale capital.
01:05:04
Speaker
hey We still don't have that in my view for venture debt. It's starting and it'll take time. So, if you're an NBF doing venture debt, you're unlikely to get access to commercial leverage because your rating is not seen to be very... But having said that, if we've got our performance, and I think the truth for industry, we have totally deployed almost 7,500 crore of debt to more than 200 startups.
01:05:25
Speaker
We've lost less than half of a percent at this point of time. I don't want to be tooting our own horn in this. but and ah And it's true, by the way, not just for us, for other good players in the industry as well. right So the loss levels have been much lower for the industry compared to what people thought it would be.
01:05:40
Speaker
And that is an important factor as well. Like VentureEd can be a safer asset class compared to what people think it is. And that arbitrage is value-creating. and So that arbitrage, you need some arbitrage.
01:05:52
Speaker
It's like ah going to a casino otherwise. right So if you go and you know the house always wins because the probabilities are always stacked in the favor of the house for a long term. So you can flip a coin 10 times. You're likely to get five heads and five tails. But if you if it goes against you the first three times, you don't have the currency to play.
01:06:09
Speaker
right So similarly, you can't play risk-return at the same level. hey So if risk is here, return has to be here. This arbitrage is needed for you to you know have long-term success. could be anything, information, relationships, expertise, sector understanding, time, all of these, but you need some arbitrage.
01:06:31
Speaker
So venture debt, hence, it makes more sense to sit in an AIF, given that it allows for better... co-mingling of the fixed income plus equity upside. Now I'll tell you the product itself, right?
01:06:43
Speaker
The product itself put simply is, if you're a founder, you you're starting a business which is a podcasting business and ah you know you've got a kick-ass product, you've got the who's who coming on your platform and you're able to build on the content and you create a venture
Venture Debt Strategies and Benefits
01:06:59
Speaker
business on that. So you raise a series A round of say $5 million, right?
01:07:02
Speaker
right Now, have to invest in product, in team, in everything that you do. That gives you maybe 15 months of runway. Now, can you use another million dollars to increase your runway?
01:07:15
Speaker
Or can you use another million dollars to maybe have three different products come out of the same time? So we're still 15 months of runway, but can you have three products instead of one? Can you do two of these sessions instead of 150?
01:07:27
Speaker
right Can you have a different way of going to market? So all of these can invest a little bit more in brand building. All of these improve your value 15 months later. So Venture a product is meant to achieve these outcomes where we give this million dollars to you saying, you know what, you have, say, three years to pay us down.
01:07:45
Speaker
We both of us have line of sight for the next, say, 15, 18 months. At that point, you have to raise money. But at that point, maybe I'll have $400,000 of risk because you're paying down some money.
01:07:57
Speaker
So I am taking a call that in the next 15 to 20 months, Akshay will do enough to be attractive enough for another round of capital. At whatever price, price doesn't matter to me.
01:08:10
Speaker
It matters to you. But raise some capital so that you're good for the next one to one and a years. So venture debt can either work as oxygen in a tough environment, like the last few years have been that, where it gives you extra time.
01:08:23
Speaker
Suppose you've done 200 sessions and you've got everything ready, but the market is not ready. You need six more months to raise around. It can provide that cushion or the blanket, the cushion you need for that extra six months.
01:08:36
Speaker
Or, know you've seen the fast and furious, can be like this NOS, where you just want to rev up and you want to do everything in next nine months and you need a little bit more investment in the brand. You want to be seen you know the right places and you want to invest in the right technology. You want to have your own ah you extensions in terms of the product.
01:08:57
Speaker
That may need a further investment. That can also be done through venture debt. Both of these improve the probability of success. One of them improves the probability of survival.
01:09:08
Speaker
right Both matter to you as a founder. So debt fundamentally is around the probability of survival. Equity around probability of growth. right For the founder, both probabilities matter.
01:09:21
Speaker
And that is how debt and equity sit together for a founder. Venture equity long-term, high-risk, high-return. Will you be a unicorn in 10 years? venture debt is, will you raise one more round?
01:09:32
Speaker
I'll give you money to get through that round, improve your chances of raising the next round. In return, give me ah fixed income, which in other words is there's a coupon, you know, it's in the 14s right now, and a little bit of some fees and some equity upside. So in the same example, if you're worth 20 million, you raise 5 million, you've delivered 25% of the company, right?
01:09:54
Speaker
If you had raised 4 million of equity, and you deliver 20%, and you raise a million dollars through debt. you've got 5 million of cash, but you only deliver 4.1, right?
01:10:06
Speaker
hey That saving, right, is what we're talking about from a venture perspective. So it's less diluted than an equity investment into the company.
01:10:17
Speaker
It can allow for a company to reach its capital objectives and improve the probability of survival and or success. but in the short term, short to medium term.
01:10:30
Speaker
That's the VentureNet product. Now, why it sits in the AIF? The AIF can invest in NCDs, which is the core product. It can also invest in equity in the form of partly paid shares, which is the instrument that we use.
01:10:44
Speaker
And that allows for construction of this product in a very neat way, which allows the founders to also have access to this product. And the final thing for the LPEs,
01:10:56
Speaker
For them, they're able to invest in a fund, which is not permanent capital. They get distributions quarterly. 28 quarters from April 2018, since when we've been in play from our first fund, we've been distributing to our investors.
01:11:14
Speaker
And that's what they like. they Why do investors invest in a product like Venture Day? They want to see predictable quarterly fixed income returns. And then equity upside is bonus. hey So for investors, they get fifth or sixth of the first month of every quarter.
01:11:30
Speaker
ah yeah you know i'll learn ah Credit goes to their account. You can hear the pings on their phones typically. And that is why they like this product. So if you look at all the constituencies, it allows the founders to access this capital in a neat way.
01:11:46
Speaker
It allows for investors to come in and participate in this asset class. And it allows the fund manager to bring all stakeholders together under a regulator in a format which is sensible, which is AIF-CAT2.
01:12:01
Speaker
but Okay, got it. um yeah So the way a venture debt fund earns a coupon, which is the interest rate, like say you said 14% is the rate of interest currently ah going in the market.
01:12:14
Speaker
ah And warrant and fees. What is warrant? but Very simply put, we're telling the founder that we are helping you grow. um So you if you're going from series A to series B, your equity takes you from series A to series B. Can the debt get you from A to B dash, right?
01:12:33
Speaker
Or in some cases, you may not even have gotten to B. Can we yeah help you get to B? Both are, like I said, extra time or or the ability to grow faster, right? So in this example that I gave earlier, you're worth 20 million, right?
01:12:47
Speaker
And you've raised, say, 5 million for ease of math. And give you another million. But I say, you know what? Give me $100,000 worth of warrants or shares in the company at the 20 million price. So you're giving me half percent worth of the company that need to pay $100,000, but the price is frozen.
01:13:05
Speaker
I'll give myself six, seven years to pay upon those shares, right? So from your perspective, your dilution has to account for another $100,000 of equity that you dilute in your cap table.
01:13:18
Speaker
So from five, it is 5.1. But you've got $6 million of cash. hey So that's the way that the founder has to approach it, that you've given 50 basis points of ownership to the venture lender ah instead of 5% of ownership in some sense.
01:13:34
Speaker
and So if you're taking another million dollars through equity, so you say, so can you do you look at it as... A glass is half empty, half full question. ah you know Is it 4.5% of saving or 50 basic points of dilution?
01:13:47
Speaker
Both are true. It depends on how well you use the million dollars. If the million dollars is useful, then it's a good outcome. right In the first example that I gave of Prism Payments, where we talked about the company giving the venture lender those warrants,
01:14:05
Speaker
when they actually sold the business to Hitachi, it helped the founders improve their own position by a substantial amount, right? ah they save that pun ownership Because they because they took some debt in the first cut, right?
01:14:18
Speaker
So that's what, call it whatever term, but we use partly paid share because it's ah more friendly from a tax perspective. But the idea is the same. A little bit of upside linked to your current price,
01:14:30
Speaker
Wherever you land, if you land, then we get an outcome over a five, seven-year period. if you So there are three outcomes. There are three doors for a startup. First door, get out of the park.
01:14:41
Speaker
and So... We had some massive success like Spinney or a Country Delight. These are all situations where we got in with the companies that are very, very young and the companies have become significantly valuable.
01:14:54
Speaker
And that created great outcomes for us across the fixed income as well as the warrants. But the founders still happy because it helped them go from strength to strength. So we've done multiple deals with the same company.
01:15:07
Speaker
Our largest transaction in India was with Country Delight last year where we funded 200 crore. This is something that is unimaginable the first time in front of the company in 2019 for us and for them. it's So for us, thinking of that size was impossible.
01:15:21
Speaker
So that is a return spectrum in terms of you know the coupon, the fees, and the equity upside. So again, three doors. One door, company does really well and goes on to become massively valuable. Second door, company does fine.
01:15:36
Speaker
We get our money back. We get our coupon. We get our fees. Nothing on the walls. Third door, company has trouble. We may not get all our money back, but it may take more time as well.
01:15:49
Speaker
So thankfully, the third door is a very small minority. told you some of the numbers as well. The second door is the significant majority, which is true for the venture asset, the 80-20 rule, where 80% of your returns will come from 20% of companies, which true.
01:16:06
Speaker
It holds good. The first door is the meaningful minority, where those companies trade out of the park and they return on the equity upside as well.
01:16:17
Speaker
So that's what we learned. So fund one, we had 49 companies. Fund two, we had both 150 companies. So we keep growing with the, and then there's intersections in that. hopefully we have about 220 companies, but we learned that you need to have 100 shots at goal for every fund because you don't know which companies will do well. Then you have to time the exit.
01:16:33
Speaker
You have to have liquidity when they grow well and so on. So those are three broad outcomes. The warrant exit is only the first outcome or warrant or the equity app upside in the first door, which would be for 5-10% say of the portfolio would be in that captain um If it's the second door, do you still exercise that warrant? So, warrant is essentially like a stock option.
01:17:00
Speaker
It's an option. Absolutely. Good question. So, it's like call option in some sense, right? So, we have the right to buy, but we have an obligation to buy. Price is frozen. if this So, for example, if we have the right to buy at 100 rupees a share, and suppose we have 1000 rupees of option.
01:17:15
Speaker
So, we have the right to buy 10 shares at 100 rupees.
Role of Warrants in Venture Debt
01:17:17
Speaker
That's it. That's all it is. The contract is that. If the price of the chair goes from $100 to $200, it makes sense to buy. If the price ends seven years later at $80, it doesn't make sense to buy.
01:17:28
Speaker
That's it. So for us, the middle door usually means we don't invest in that instrument. The company, and we make it clear, it is not meant to add equity to the company.
01:17:39
Speaker
It is purely a way, for the founder, what you're saying is, if we have to load all the return expectation on your P&L upfront, it will be a drag on the business. Since we're moving part of it to the balance sheet, going back to an earlier point, right? So can it improve your attractiveness from a P&L perspective? So if your burn is lower, your overall cost is lower, it will improve your valuations.
01:18:03
Speaker
And if it is a long-term obligation on the balance sheet, it doesn't hurt your short-term prospects. So we are trying to address, going back to first principles, can we improve P&L attractiveness by reducing cost on the leverage, but improve balance sheet strength by adding cash, putting an obligation which is for later, and that's not a necessary obligation.
01:18:23
Speaker
It comes above from the cap table. So that way for... Yeah, sorry. Sorry. No, you finish your thought, then I can ask. So i was saying that that way, for the founder, it is a way of splitting the return and making it more aligned with their path, which is they expect to have significant upside over a period of time.
01:18:47
Speaker
That's the ambition for every company. And we will be along the same journey. So we are aligned. We want you to be successful in the long term. Since we do multiple deals along the way, Series A, we do the same thing. Suppose you raise $25 million dollars in Series b and you're worth 100 million.
01:19:01
Speaker
We'll give you five, seven, $10 million dollars with that. You have to be successful. The only thing I'll caution is debt is not for everybody. Venture debt is definitely not for everybody.
01:19:13
Speaker
right The company needs to perform. The situation needs to be amenable. And only then venture makes sense. Otherwise, it can become a problem for the situation and the founders and the company.
01:19:25
Speaker
So my approach is, to pay and we've lost many transactions also because of this, first you solve for the right amount of leverage in the company. What are the total amount of debt you should take? Then you figure out who you want it from. hey If we can fulfill all of it, great. If we can't, then maybe two pieces of people have to come together. right But first question is, yeah I would say it's like a bell curve.
01:19:44
Speaker
Up to a point, debt is useful. Beyond that point, it hurts you. And beyond further, it will kill you. So I think that journey is important for founders to understand.
01:19:59
Speaker
Okay. Do warrants come with an expiry date that you have to exercise? yeah Typically five to seven years or if there's an event like a listing or a buyout, it will lapse if it's not exercised.
01:20:10
Speaker
And when you exercise it, do you pay long-term capital gains tax on it or do you pay like similar income tax? It depends on duration. it depends on how long it's been held and whatever the law needs you to follow, right?
01:20:22
Speaker
But from a taxation perspective, you know, sometimes these laws keep changing as well. But yeah, it is prefer preferable to have it as long-term cap gains if more than two years have passed, which is the current duration.
01:20:35
Speaker
ah More than two years have passed since the exercise or since you received the warrant? No, you pay up initially a particular amount. So that's why we don't use a warrant per se. It's a partly paid share.
01:20:46
Speaker
And warrant is defined differently from a regulator's perspective. So partly paid shares have their own you know treatment by law. So whatever is needed, we do. We follow whatever the law says.
01:20:58
Speaker
Got it. Understood. Okay. And ah the third component, how you earn is fees. so What is fees? So fees are very minor. So it's like a percent upfront. and so So the idea is that we want a particular internal rate of return for our investors. right So that IRR is in the mid-15s for our venture transaction. So combination of the interest rate plus the fees.
01:21:20
Speaker
So that is what goes to our investors. So we want to distribute about 3% every quarter. So it's a reverse math on that. Got Okay.
Startup Valuation and Growth Metrics
01:21:29
Speaker
Understood. Okay.
01:21:31
Speaker
So, ah when should a company take venture debt? Is it when they are profitable? is profitability a factor to consider or ah is it just that they have the ability to raise the next round?
01:21:46
Speaker
Is that the only factor to consider? The ability to raise the next round he's ah is like a universal statement, which is the answer, right? But it includes everything.
01:21:57
Speaker
It includes founder ability, market, PMF, category leadership, cap table strength, approach towards profitability, you know path to profitability. It's very unlikely that startups be profitable earlier because they're investing into growth.
01:22:14
Speaker
If you're growing 2x, 3x annually, it's tough. to If your business grows 3x and is profitable, but it's the only great. mean, there's different parts of profitable. like You could be like, say, kind have the CM1, CM2. Yes. So let's talk about that right without using the label. Let's talk about what it means.
01:22:31
Speaker
If you're doing a sale and you make money on every sale, after this, the cost of goods is taken care of. That's the gross margin. That is the first cut. If you're losing money on every sale, you have a problem. Unless you massive scale where eventually you know you know that you can trade through.
01:22:48
Speaker
Otherwise, if a business is losing money at the gross margin level, it is usually unattractive. right Because yeah that means you are subsidizing your customer heavily. The next level is you know are you you need to ship out a product, the logistics around it, the warehousing.
01:23:04
Speaker
I think, but these are linked to your sale. Can you make money after that? This is typically what is the contribution margin of the first CM1, right? Then how much you spend on acquiring customer? I mean, are you spending a lot on performance marketing?
01:23:15
Speaker
So at a CM1 level, our attractive business needs to be positive. um from From a marketing perspective, it depends on what the company's line of business is. It depends on path to scale, performance marketing versus brand marketing.
01:23:29
Speaker
So all these measures also kick in. Then the overhead block that comes in. So you're right. At an EBITDA level, which is after all of these things, it's difficult for startups to be profitable from day one, and they don't need to be.
01:23:42
Speaker
But it's about how they're building the business. So the why matters. you know why is a proper you know Why is there a loss? right so And how are they doing their business? How are they taking care?
01:23:55
Speaker
ah How are they mitigating the situation? That matters as well. hey So it is not profitability in itself. It is the path to profitability.
01:24:06
Speaker
It is the value or the quality. i would say the profit pools vary on quality, vary on scale. That matters. The category matters.
01:24:17
Speaker
ah The expectation on the target market matters. So all of these things play a role in determining, you if it's a large market and you have invest heavily to, you know, for example, you know, our Zepto is in our portfolio and it is a deep market, but need massive investment, you know that has its own journey, right? Versus a Country Delight or a Spinney or a Rebel Forge, which have had different journeys, right?
01:24:42
Speaker
And Spinny, when it started off, took a difficult problem, which is, know, you had classifieds, you had other companies selling to dealers, but you had nobody who was, if you were but selling a car and I'm buying a car, there was nobody who was coming between two of us, right? And actually buying from you and selling to me.
01:24:58
Speaker
which needed access to the seller, access to the buyer, ability to manage the working capital for six weeks, and ability to refurbish the car and sell within six weeks. So it's a lot of issues, right?
01:25:11
Speaker
So that needed investment. So give the company a little more time to because the market's deep enough and, you know, need a... killed it, right? So he just did so well at that. And he's a very resilient and strong founder that he was able to show that, you know, this model works and it works better than many other models, right?
01:25:29
Speaker
So like that, each of the stories, each of the companies, ah if you see a successful one, there is a reason why they've got more time. So it's not just one answer. The probability of the next one happening is the most important question.
01:25:43
Speaker
But the answer to that question can depend on several variants. then Okay. But CM1 would be the bare minimum you would look at, like like cia one post so
01:25:54
Speaker
Usually, yes. So I would really struggle with a same or negative question, say a negative situation to say, why is the company attractive? Unless it's a category with massive scale and you have platforms which are catering towards that.
01:26:09
Speaker
And do they have a real shot of becoming significantly large? And then how long do you run? it Because they usually tend to be guzzlers as well. Then what is access to capital and so on?
01:26:21
Speaker
Or you could have... them OEMs sometimes where they may need some time to show you know material margin of positivity, ah GM profitability, because they're investing into products which may have a lead time towards becoming profitable.
01:26:37
Speaker
And if you know the product works, the price point works, then it's a matter of time before you're getting economies of scale, because that's when the costs kind of make sense. So some of these situations you know give more time, right? But you need to be convinced about why you're giving more time.
01:26:52
Speaker
The Oye means someone like say a boat. No, no. OEM, for example, we have an Euler, which is into commercial trucks, or we have Ather or an Ola Electric. So all these are portfolio companies of ours, right?
01:27:06
Speaker
And some of them will need time to become GM positive because they're going through their own trajectory of, you know your cost of goods as you scale will get more and more efficient because, know, it's economies of scale, right?
01:27:21
Speaker
And sometimes, you know, you may change or your battery technology changes. and you're getting access to ah lower cost input, then that improves your GM. But it may take some time to go through that path when you're doing fundamentally something innovative.
01:27:36
Speaker
But once you get it right, then you know you you have a significantly large market position. So that's the bet. So that that's why I said if it's a large market and you can corner a meaningful share of that market, you get you get more time to prove yourself.
01:27:52
Speaker
Okay. Both Ola and Ether have gone public. So, what happened with your warrants? Do you hold the listed equity now? Some of these deals, we also do different transactions where we may just choose to have back-end fees instead of warrants.
01:28:08
Speaker
And at listing, typically, in anyways, all everything lapses or just before that. And you have to, that's it's listing or if there is a buyout or if there's even a large secondary transaction, then there are several ways in which we monetize these equity positions.
01:28:24
Speaker
And we've done some of that in the past, right? Or we tend to have a fee. You would not hold post IPO, like you would get out pre IPO. Yeah. Okay. The pre-IPO, that pipe, that pre-IPO investment just happened. That or even well before that. So, we've done secondaries, like I said, in Spinney or Country Delight.
01:28:44
Speaker
For example, we had a position in Happi, which got bought by CRED, which got done when the CRED transaction happened. So, in a couple of other transactions, it large investors ah kind of picked up our position.
01:28:56
Speaker
And you know so it depends on the situation. But our positions are very small. So, it's relatively easier to sell those. us It's not chunky like venture capital investors, venture equity investors.
01:29:08
Speaker
These are very, very minuscule. And that's the reason ah both the founders, you it doesn't hurt. And for an exit, it's not so difficult to find equity.
01:29:20
Speaker
So, if you, over the lifetime of this 7,500 dispersal that you've done, if you had, say, 500 crore worth of warrants, how much did you recover out of it? Did you recover 400 or did you recover 800? Good question.
01:29:36
Speaker
So, a lot of it is in play, right? So, we still have time in our funds. And so, I think we've done a few… Based on historical data, what do you estimate?
01:29:47
Speaker
Yeah, so we we've had a few good exits. So some of the names I mentioned, you know, like Spinney was a fantastic exit for us where we had a 28X on the warrants.
01:30:00
Speaker
So, you know, so that was possibly the best thing Venture-ed return for any Indian transaction that I'm aware of, but um um I don't have all the data on that.
01:30:11
Speaker
So we have such episodic car wins, I would say. um I think it's a combination, right? So as a fund, when when we look at the fund manager, we look at overall what is the return to our interest. in our first fund, we raised about 960 crore.
01:30:26
Speaker
you know How much have we returned to our investors? We've returned almost 130%. of that. right And you know but that is what is called DPI, pardon the jargon there, but it's what are the distribution we made to the amount that we've well gotten paid in or the amount that has come into the fund.
01:30:43
Speaker
So that is a very important metric for investors because that actual money back, they don't care about is it warrant, is it fixed income, is it capital, give money back. So that's all they care about. So if your DPI is strong, then the fund is doing well. It translates to an IRR, which is how quickly you've been able to do this distribution.
01:31:01
Speaker
hey So some of these metrics are important and we take time to realize these warrants and we have time, thankfully, in our firms. um So but happy with the situation that we got them out of. But I would say the last two, three years have not been easy ah to get liquidity.
01:31:21
Speaker
I think we had a good run in 21-22, but even last year we did manage some exits. um But it's it's been relatively tougher. And our expectation is it will get easier over the next 6 to 18 months.
01:31:34
Speaker
As this year, it's looking like macros are improving a little bit better than the last two, three years. yeah You know, you totally dodged my question, right? Because it's not one fund and it's not one data point. That's why give you an actual answer.
01:31:51
Speaker
more More than 100% or less than 100%? It won't be because whatever we've accumulated over the last seven years, we have ah say another six, seven years for it to manifest.
01:32:01
Speaker
and So, it's across all our fronts. Right. ah So for example, our third fund, we are in the middle of our deployment period right now. hey So that's why i gave you examples in the first fund where you know that fund is pretty much fully played out on fixed income.
01:32:16
Speaker
We are sitting on maybe 20 warrant positions. We still have some more time on that one. Our second fund, we just finished four years, but we have another four years to go and we're sitting on 100 positions.
01:32:29
Speaker
So, it's time. I mean, ah the answer to that is event. I can tell you the answer you in a few years' time. Then we close the fund and, you know, then we say this what has happened. But thankfully, we have time.
01:32:40
Speaker
We have those questions. But right now, you don't want to hazard a guess also. No, I would love. I mean, I think... If i have to look at what we model, if we have 500 crore of warrants as a base, you'd expect to make about 600 to 700 crore of gains at least on that.
01:32:57
Speaker
and So that is the that is a good number to shoot for. and But it happens over 6 8 years for every instrument. hey So 600 to 700 of gains you're saying, so which means total you'll recover from the warrant would be like 1200.
01:33:13
Speaker
ah Roughly in that row. But you don't have to pay up $500 So, for example, when we did the transaction for Spinny, just pay up the cost and we get the exit in the same week.
01:33:29
Speaker
and So, literally, we get the, so we just count the returns on that, right? It's not meant to be invested, right? So, the 500 quote base is a notional number. It's a notional number.
01:33:40
Speaker
The 700 matters. But it's from the start of every instrument, right? So, that's where fund construction matters. do you have enough young companies, late-stage companies? So, I know I didn't answer your question fully on that. I don't have the answer to the question, is the reality.
01:33:56
Speaker
I have an answer, yeah. ah what So, tell me about fund construction. Is there a strategy behind that? Absolutely. So, there's different parameters.
01:34:08
Speaker
What is the stage allocation? What is the sectoral construction? What is the size construction? So all of these factors and the timing, right? So for example, we love domestic consumption as as as a team.
01:34:22
Speaker
So about 40, 45% of our entire deployment has been in consumer. We have more than 60, 65 consumer brands. um you know We have... Food and beverages, we have BPC apparels, all all inside.
01:34:36
Speaker
You know, Mokobara is an interesting investment for us. ah Only one we did in that luggage space. So like that, we have different parts of the consumption set. Then we like enablers of consumption. Financial services a big chunk for us. So another 25% would be in financial services.
01:34:51
Speaker
We like climate and EV. That's another segment ah which we like for about 10% of the portfolio. ah Then you have segments like ruler and agribusiness. You have logistics.
01:35:04
Speaker
You have B2B platforms. So these cater to the domestic consumption thesis. That's another 10-15%. So this would be about 90-odd percent. So then it would be enterprise tech, some SaaS, a few other areas, a and little bit of content.
01:35:19
Speaker
We don't do gaming. We don't do crypto. We don't do um real estate infra we don't do anyways so it'll be a competition sectoral cuts matter from a fund construction perspective then it's about staging you know how many companies you want in series A all the way to D's and E's as the first year of the fund you can do some younger companies fourth year of the fund when we're finishing up so it's a four year to four half year deployment period for us ah later stages of the fund deployment period You'd want to do more late stage companies because your time to get an outcome on the equity position also lesser.
01:35:52
Speaker
ah Typically, these are eight year plus minus fund tenors. So you'd want to balance the time that you have with the stage of the company that you're funding at any point of time.
01:36:03
Speaker
um The amount of capital you're giving to the company, how many large checks, small checks, you know the median matters. So all of these play a role in fund construction for us.
01:36:15
Speaker
ah So, a four-year deployment because by seventh year, you have to return the full money. No. So, the way the Venture Red product typically works is two years, we draw down the money, right? Two more years, we recycle the money.
01:36:26
Speaker
So, for example, if our second fund, we raised 1,800 crore, 1,815 crore to be precise. And till date, I think the largest fund in India. um We deployed more than 2x of that.
01:36:38
Speaker
So, we deployed about 3,700 crore. And that recycle because we get money back every month. right? And we distribute income to our investors, but we recycle the capital.
01:36:50
Speaker
So two years to draw down, another two years to recycle capital, the next two years to red return the capital. So by the end of six years, you're typically on the 100 rupees of the fund value. You're typically at about 125, 130, at which point you cross the hurdle.
01:37:06
Speaker
um It's a 10% hurdle for us. And that's when we start making carry. It's always good news for the team. And then you have the warrants and you all through time from say years five through eight, ah you have time to liquidate the warrants.
01:37:22
Speaker
And that's the typical fund construction and the fund journey. So what you're distributing in the early years is just the profit that you're generating. Only the income.
01:37:34
Speaker
So for us, it's coupon and fees. Since we are not a bank or an NDSC, it's not interest. It's coupon and fees. So we do NCDs, we get coupon and fees. but Okay. ah So, the the carry concept, I want to understand a bit better. So, hurdle rate of 10% means when the overall profit of the fund is 110, when 100 was invested. on excited So, if you've given us 100 rupees, I've taken it through the ease of calculation, 25 rupees every quarter of the first four quarters, right?
01:38:03
Speaker
So, it's simple Excel, put those numbers, put those dates, and we keep returning money to you every quarter. We're giving you percent on whatever is drawn. So, the 12th month when we've drawn down all 100 you should expect to get so about 3 rupees or 3 rupees and 20 pisa for that quarter right from then on we keep returning income and then at some point we start giving capital as well is this math on excel amounts which have come in, amounts which have gone out and the dates.
01:38:29
Speaker
When do we cross 10% XIRR on that? There's no jazz to that. It doesn't matter if it's come through fixed income, through equity gains, through capital. You don't care as an investor.
01:38:40
Speaker
say You say, know what? I've given you this money. Give me 10% XIRR. Then you start making money on your cash.
01:38:51
Speaker
In fact, it's interesting. I don't know. So, it's okay, the reason it's XIRR is it factors in the specific dates that are there. And IRR is an annualized term.
01:39:03
Speaker
ah because So, for example, if all the numbers are annual, then you can use IRR. But if it's 5th of April and 13th of June and 17th of December, then an XIRR captures the exact date and the weights for those exact dates.
01:39:18
Speaker
ah So, carry, which means your profit share of 20% is after 10% is crossed? ah so your carry which with which with your profit share of twenty percent is for the entire profit or for the profit after ten percent is crossed That's a very specific question.
01:39:37
Speaker
So typically on the equity gains, you make 20% on everything. It goes back to the ship captain role, right? And I think part of and benefit of history, it just continues. On fixed income, it depends. So, you know, it can vary from just above the hurdle.
01:39:54
Speaker
I think it's a triangulation. There's a management fee, there is a hurdle, and there's a carry. So you can have funds where you can have the management fees on commitment and your carry on fixed income can be above the hurdle.
01:40:07
Speaker
or you can have funds where your management fees can be on whatever is drawn down and you can have carry on the entire amount of fixed income made. So both are possible. and So we've also got both depending on the product, specific product that we have.
01:40:19
Speaker
ah For example, our most recent fund, which is a short-term duration scheme, which is intended to be for fintechs and for short-term working capital needs for ah young companies. um So we, in fact, did the latter, which is we moved our fees to the grand or ah you know the capital that is used for deals and the carry-hensins on all the gains that are made.
01:40:41
Speaker
So that's the fund that IFC came into recently.
Funding Young Companies and Market Gaps
01:40:45
Speaker
And the first time, interestingly, that IFC has participated ah in a product like this, where the underlying company is a startup,
01:40:53
Speaker
And it's debt to a startup which is seen to be below investment grade. And the reason I mentioned this is, goes back to one of your early questions on and how is this perceived and the leverageability and so on.
01:41:05
Speaker
The traditional forms of capital still have a struggle because there's not enough data. Like no institution has... No one institution may have 10 years of data it across cycles.
01:41:18
Speaker
So then we have to recreate that and try to you know work together and collaborate and bring them in. And this is what we're trying to do. Okay. ah ah What was the genesis of this fund, which is for fintechs? Essentially, fintechs, you mean like lending companies? Correct.
01:41:35
Speaker
Only lending companies. So, this is only lending company. So, ah part of it was we saw a need. And I would say actually that many of these things happen because you see a need in the ecosystem. And you say, how do you plug that?
01:41:49
Speaker
So, one of the things that we saw was...
01:41:53
Speaker
you know Now you have a lot of senior professionals who've been in banks or in BFCs. Many of them, again, are friends and classmates and so on, where they've got 20, 25 years of experience. So they know their category.
01:42:04
Speaker
So it could be credit cards. It could be personal loans. It could be um you know commercial vehicles. It could be gold loans. Whatever the product is. Your folks have been there, done that.
01:42:14
Speaker
Now when they come out and say you know they also have the rich, they want to be an entrepreneur, But they need capital because this business cannot thrive without capital. They get access to equity capital very quickly. So you have a lot of venture capital firms which love these situations and, in fact, incubate these situations. They work these professionals.
01:42:30
Speaker
They guide them, coach them, and they work with them to start the business. So they get 50 crore off the bat, right? we ah And especially for the team coming to together. But who gives your leverage?
01:42:42
Speaker
Then it goes to the same old boxes to be ticked. Do you have two years of data? No. do you Have you existed for two years? No. Do you have A, B, C, D, T? So you don't have any of that.
01:42:54
Speaker
Then it's very difficult to access conventional debt. Even if you have an NBFC license, even if you have got the experience, even if you're from an NBFC or a bank, you may not be able to access capital.
01:43:06
Speaker
So then we thought that as one need. Can we provide debt to some of these young NBFCs because they just need access to capital? Second was, and it's a very peculiar thing for India, March, June, September, and December, typically the conventional taps run dry.
01:43:21
Speaker
you know It's a quarter-end issue. Your call money rates go haywire and you know everybody is tightened in terms of yeah for those months. So we see an opportunistic timing play there.
01:43:32
Speaker
Even the larger NBFCs need access to capital. Third is if you're a well-constructed, well-good performing NBFC, but suppose you're at 2x leverage or 2.5x leverage, then the conventional source of capital, you know what, maybe we ease off, but you're still growing.
01:43:48
Speaker
Then how do you fund your growth? Can we be that 0.05 or 0.1x of leverage at that? So these three use cases, we thought we could take care of through this new offering.
01:44:00
Speaker
And the other piece was for short-term needs. for So if Mokabara is buying inventory, I have to pay for inventory, and it's a 60-day cycle for them to convert that to revenue, they don't need equity or long-term debt for that.
01:44:13
Speaker
hi So they need short-term capital to just play the cycle out. And every 60 days, they rinse repeat. So we want to solve for that. So these are the two use cases that we want to solve for.
01:44:25
Speaker
But this a lower risk, if you can think about the previous case that we talked about for Venture Debt. So hence, it has to be a lower price for the founders. And hence, it has be a lower return for investors, which is why we put it into a separate fund, which is the short-term inflation scheme.
01:44:41
Speaker
And what is the the number for it? You said 14% and 1% fees and for the... It's slightly lesser than that, but the warrants will be very, very low comparatively.
01:44:53
Speaker
So the difference is the equity upside. of So cost on equity is much lower for founders. Return on equity is much lower for investors. ah Second thing is you pay as you use. Suppose you have a line of 10 crore, but you use only 6, then you pay on 6 crore, right? So for the founder, it is far more efficient.
01:45:11
Speaker
For the investor, it's a shorter term product with lower risk and lower return. So, it's for investors who like that play. It's not for everybody. This Mokovara example you gave of funding the inventory, why are you getting into that? Why not just… There are specialized businesses which do that, right? The funding inventory. You'd be surprised. So, you would expect that… You'd have banks coming in and doing this, but it's still not happening. There are which do this, right? Like the BNPL.
01:45:39
Speaker
I mean, BNPL is what they call it at consumer level. Yeah, but that's on the consumer side, right? So this I'm saying for the company side. This is for the companies. So... RockCap, Viana, some of these guys do this, right? E-Pay Later...
01:45:52
Speaker
So again, I'm making a distinction. So you have companies which are providing credit for the consumer at point of purchase. right And then there are other lending companies which provide working capital as well.
01:46:04
Speaker
But the ticket size is varying. So... 50 lakhs, 1 crore, 2 crore, 3 crore, there are 4. At 5 crore, it thins out. At 10 crore, it becomes very less. At 15, 20 crore, there's pretty much nobody. but hit So that's the gradation. That's it meant even for NBFCs.
01:46:22
Speaker
If they need 20 crore of leverage for a Series A NBFC from one player, it's difficult to get at this point. So we're trying to solve for those needs. that That high ticket size is unaddressed.
01:46:34
Speaker
So venture debt, we go up to like 100, 150 crore. Sometimes, know, even when we do 200 crore, we split across funds, right? So you can have a $20 million venture debt transaction, which is large. But for these kind of use cases, even $2 million dollars may be very useful.
01:46:49
Speaker
But who's giving the $2 million? Right. Right. Okay. Understood. and Understood. ah You mentioned that Agri is one of your focus areas, but Agri hasn't had breakout success stories. In fact, Resha Mandi, I think, got shut down recently. I don't know if they took on venture debt or not. Not from us, but I think from some of the others.
01:47:12
Speaker
ah that So what would have happened to that venture debt? Those companies would have written it off. I'm not privy to that situation. But see, any of these, I'm not getting into specifics, but any of these situations where companies go through a down climb, a downward trajectory.
01:47:28
Speaker
See, one main thing is the why it happened. So if it happened because of business failure and the founders are still good players and you know they they're working their way out, I think there's still a good scope for recovery. Can it be sold somewhere? Can can you have some assets which are useful and so on?
01:47:46
Speaker
and We've been part of that too. So we've had situations where some of our companies haven't done so well and you know there have been sales that have happened as part of the journey. right The problem of course is compounded if you know there's an issue with the founder as well.
01:47:59
Speaker
So in cases where there's fraud or any qualified activity and so on, then it gets into a difficult problem and where you have to solve for the person as well as the situation.
01:48:11
Speaker
um That's one generic answer. From an Agri perspective, so we we have a few portfolio companies. likely we dont know We just doubled down on Agristar literally this week.
01:48:22
Speaker
so you There are some of these three companies that we like. There's a long-standing relationship. and We keep doing more with these companies. and We like what they're doing. They've got meaningful scale.
01:48:34
Speaker
and We learn along the way. um Agri, as I mentioned, there's Agri and there's rural business as well. but There are different players within that. ah So you can have distribution models. So all of that needs fuel.
01:48:50
Speaker
hey So, for example, we have, it's not just Agri, it's in different pockets of the country. ah So retail is an area that is interesting for us. So we have companies like Apna Mart, Apna Club, they were all in our portfolio where they're trying to disrupt the retail model.
01:49:07
Speaker
and We like that space. Now, eventually it deals with the food chain. So you have ah you know an impact on the food supply chain in some sense. So it's not agri, it's not in the traditional sense, just in terms of farm. And you know we've we've got an eeky farms in a portfolio where it's a cusp of how can you be innovative in the way you go about agriculture itself.
01:49:30
Speaker
So all of these are different ways of... playing the same very, very broad segment. But within the Agri segment, like I said, Agrostar, EK, we've liked some of these companies and we've, and like a crop in as part our portfolio, which is playing on information, ah part of it. So we've taken some bets which have been been productive.
01:49:52
Speaker
But we like the thesis of domestic consumption overall. So and all parts of the supply chain, can we play an intervention role? ah you know That is what we would evaluate, I would say.
01:50:05
Speaker
How do you ah evaluate ah when a company comes to you for debt?
Risk Management in Venture Debt
01:50:11
Speaker
ah you You spoke of, I think, four types of ah risks. Selection risk, performance risk, payment risk, and resolution risk. So do you like have a scoring on each of these for a company which is coming to you for debt? or like How does that evaluate and help? Yeah, absolutely. So we have 10-point rating matrix, and it's a combination of various factors.
01:50:34
Speaker
The first thing, selection that you mentioned, is ah the best way to wire ah not have a problem is to avoid it in the first place. yeah So I think selection is key. Selection just means that are you selecting the right company to give a loan to? At the right time.
01:50:49
Speaker
So both matter. So a lot of this is about timing. So companies can to have a path like this. right so um You can get in and get out. So company may not have a great outcome for equity investors, but the short term it can still be fine.
01:51:04
Speaker
Selection is about the category, the founding team, the traction, ah you know why they are attractive. the cap table quality, market feedback. all of these things play a role in selection, right?
01:51:19
Speaker
Usually selection, there are binary layers where there are certain answers which mean there's no deal. And then there are certain answers which puts into a bucket of, okay, now, so what I would say that,
01:51:32
Speaker
all things around business are hygiene for us. So it needs to be a good business with hygiene. If not a good business, then there's no deal. But a good business is not sufficient. It's necessary, but not sufficient. right Then we look at other layers around it. Because what are the properties of the next ton of capital?
01:51:46
Speaker
so You can have a great business, but if it's a space that nobody's interested to fund, you cannot raise the next ton of capital. right if you If you have investors in a cap table who are completely done and they're spent and the external market does not like the space, then whatever you do, however well you perform, how will you access cap?
01:52:05
Speaker
So we look at both these aspects together. Selection is an important determinant Structure is a failure for us. Second thing is structure, the discipline in structuring.
01:52:15
Speaker
So don't get carried away. There's a lot of money coming through. Then, you know, and if there's competitive pressure, so we don't do bullets. We don't do balloons. We don't do structures which are difficult and the markets are not conducive.
01:52:30
Speaker
So you have to, and that's why i call type two errors. Right. If you're not able to fund a good company, for my work, from a debt provider perspective, I'm perfectly fine with that.
01:52:42
Speaker
It's worse to fund a company and have a problem. hey It's the opposite for equity. It's errors of omission or commission effectively. So from my perspective, wherever we are part of a journey, am I confident about that journey?
01:52:58
Speaker
If I don't have the confidence and somebody else is one of the company and the company going to do extremely well, I'll do that. And maybe we'll try and find a way to get back on that train later on. But No problem on that front.
01:53:10
Speaker
So selection, one. Second is audio structure. I call it a triangle, which is the amount of money we give, the final date of maturity, and the amortization structure. So how of when do you start paying down principles?
01:53:23
Speaker
The center of gravity of that triangle will remain constant. hey So if you want more money, suppose in that example I gave, you say instead of a million dollars, want $2 million. dollars Then I would instead of a 30-month tenor, maybe I'll give you a 20-month tenor.
01:53:35
Speaker
like So I am looking at what is the exposure that is tail risk, as we call it, at the point when I think you'll run into trouble. That is the center of gravity of the triangle. That center of gravity will not change, not change a lot.
01:53:50
Speaker
Now, the reason that for us it's different and for one of our peers it's different is we may be seeing the same situation differently. I may know the founder for years. I may have understood the business because we've done four more deals in that space.
01:54:01
Speaker
Or I may not. Somebody else knows the founder better or somebody else knows the you know situation better. Then they'll price the risk better. right So there is always an arbitrage in this situation on the basis of ah relationships, knowledge, expertise, you know time spent, going through experiences, all of this matters. right The third is your monthly monitoring and collections. So we rate every company monthly.
01:54:26
Speaker
and So we have a very rigorous... process flow internally. And this is again going back to the SVB world. right So these are all learnings from SVB as to how do you do this well from a credit perspective.
01:54:39
Speaker
And their credit portfolio did very well, even till the end. So that rigor of monitoring and collection is important. The final variable is luck. think you're a little bit of luck in this business.
01:54:50
Speaker
And you know it works both ways. well and It's like in a cricket match, a couple of catches dropped, a person goes on to a century and run out at the wrong time, can sink a team's chances.
01:55:04
Speaker
Same thing applies to companies as well. You have to try and increase your buffer against bad luck and you have to try and improve your surface area for good luck. hey So I think that's par for the course, be it for myself or for founders, but that plays the role as well.
01:55:19
Speaker
How do you increase your surface area for good luck? For me, I'm a founder. yes Both, like like fundamentally as a concept, what does this mean? Increase your surface area for… I would say, suppose, you know, as a founder, you need to show four metrics and yeah what all do you demonstrate as success, right?
01:55:41
Speaker
Those are the cards you get to play. Can you show more which is in your control, right? Can you go deeper or wider? So suppose you're a food brand and you're in three markets. Can you go to a fourth market?
01:55:52
Speaker
Can you have two brands instead of one? Can you have four brands instead of two, right? Now, these are things you may be able to control. How much you invest in it depends on the capital that you have. when you How do you, it's like, you know, your delta hand, how well do you play with that hand,
01:56:08
Speaker
Second is relationships. um How do you build your relationships around How do you nurture the relationships around do you? At the end of the it's a people business, right? How people respond in good times, bad times, and everything in between.
01:56:19
Speaker
so do people want to help you? Do people want to hurt you? And I've seen both happen, right? How do you ensure that more people want to help you? but And it sounds simple, but a lot of fun is successful.
01:56:31
Speaker
right ah Becoming a podcaster is a good way to get more people to want to help you. Absolutely. It's a way to increase your relationship deck in some sense. ah but And also understanding journeys. I mean, you know some of this is about learning from other people.
01:56:48
Speaker
And yeah how how can I avoid a problem before happens to me? right So a lot of these things improve. it's It's manufactured serendipity, the way I call it. It's a bunch of things that you do, not knowing which one will be productive and important, but you're doing all of those things. And you're doing that vigorously over a long period of time, more of a habit, not as a one-off.
01:57:14
Speaker
think that is important.
Lessons from SVB's Failure
01:57:15
Speaker
Why did Silicon Valley Bank fail eventually? Like if we'd got, there was like a distress seal. It's ALN mission. So, so it's be exactly what we talked about balance sheet mortality. It was exactly that.
01:57:28
Speaker
They had short-term obligations. which could not be met because they had long-term influence. And it is unfortunate that they didn't factor in the duration risk. There are some really smart folks in that institution, so it was unfortunate.
01:57:47
Speaker
But that was the crux of it. you know Their short-term obligations became too big. And see, the thing with all financial institutions is yeah everything is about trust and reputation. So if today every deposit holder of a bank thinks the bank...
01:58:04
Speaker
is failing, they're right. Because if everybody thinks it's failing, it will fail. It's as simple as sell it from the bank rough And no bank can handle the run on itself on one day.
01:58:16
Speaker
thanks So similarly, for any of the organizations that are in financial services, I think trust is the most important factor. and And operating efficiency matters. right So you need to, that's why the balance sheet kills.
01:58:28
Speaker
um A bad balance sheet kills. A good P&L gives you but valuation. Sorry? Like Silicon Valley Bank didn't build a buffer for bad luck. didnt I mean, I am the balance sheet size balloons. Then you're able to get short-term buffers are not enough.
01:58:45
Speaker
but You can solve a problem if it's 10 million. You can't solve a problem at 100 billion. Right. So, it changes as well. You know, you are like a pseudo VC in a way almost. Like like you also fund businesses. ah What advice do you have for founders? And this advice would come from my... Pseudo VC sounds really bad.
01:59:09
Speaker
So I would say, okay. i see The joke on this is 17 years ago when I started working the line venture debt and when you go for, you know, get together and reunions and parties and all that, people say, what do you do? You know, and and I meet my MBA class and I say, services.
01:59:26
Speaker
i So like let me take the broadest label without needing to explain you know what exactly do I do. ah Now I think we're in a zone, thankfully, where I can say I'm a venture debt provider.
01:59:38
Speaker
So I think it's well established as a category. so And that's the interesting thing. right you have You don't have private capital. You have private equity. right, and debt, but it's venture capital, which is venture equity and debt.
01:59:54
Speaker
And the reason for that is most of venture capital is venture are equity. So it natural that VC gets synonymized or, you know, it's conflated with venture equity for the right reasons.
02:00:06
Speaker
But instead of saying pseudo VC, I would say I'm a venture debt provider. Right, right, right, right. Okay. ah So, you know, what advice do you have for founders? And their advice would come from multiple lens, from the lens of a venture debt provider that how do you think about raising funds or in general advice on scaling, on going beyond PMF, things like that. So, you know, whatever juice I can extract from your 17 years of experience, I want to extract that.
02:00:37
Speaker
So um don't take advice from everybody. That's the first one. So I think the first de important thing is take advice from people who really understand your context. I think that is very important.
02:00:49
Speaker
um I think having mentors who care for you and who understand you is golden. And bad of course, they've been through the block, been around the block long enough.
02:01:02
Speaker
It helps. Because um really productive suggestions come only when people understand your context and who know the game. Both matter, right? the first one.
02:01:13
Speaker
ah The second aspect is strictly from a debt perspective. Debt is not for everybody. And um know I think I've said this multiple times in this conversation.
02:01:24
Speaker
a lot of debt can kill a company. And beyond the point, debt starts to hurt the company. You don't want to have your strategy focused around it. That the worst place to be.
02:01:35
Speaker
hey So it works in a lot of cases. It works very well in some cases. That's how I'd put it. That's the filter. right Now we know this in hindsight, unfortunately, both founders and providers. So we have to go through the journey and see where it helps. it's ah it's ah From a founder's perspective, again, it's an option.
02:01:58
Speaker
The same way that you you can be an option trader and lose everything, you have to treat this carefully. So don't be foolhardy about that. and If a company is still binary and only a founder knows it truly, and I say binary and include everything, binary is then you're not a cheap product market fit.
02:02:19
Speaker
You're not sure if the core of the business is stable. Like your fundamental proposition works. Like do you deserve to exist kind of a question, right? That sounds harsh, but what I mean is, you know is the core value proposition making sense?
02:02:35
Speaker
hey and I mean, I say making sense. You can deliver the product or service. There a price point to it. And everything around the transaction is taken care of. All of these aspects, the investment into the product, the service, the delivery, collection, full circle.
02:02:52
Speaker
Then you know it works. Till then, you should be equity funded, in my view. Till then, pre-PMF, high mortality, you just want to try
Leveraging Debt for Growth
02:03:03
Speaker
different things. You don't want uncertainty to be compounded by further uncertainty. So I that should be addressed by equity equity capital.
02:03:12
Speaker
Once you are stable, and see, different categories can reach stability and at different points of time. So a consumer brand company can become stable at 3 crore of monthly revenue or 2 crore of monthly revenue. But for a SaaS business, you may want to show a little bit more time in terms of PMF, right? A real adoption, or you could be a space tech company, which may need five years to show that PMF adoption, right?
02:03:34
Speaker
So each category has its own journey. So it's not one size fits up, but you need to be at PMF or beyond to you know, be ready for leverage. The next thing is how much and who should be the person you work with? Because ah nervous lender again can kill a company.
02:03:54
Speaker
right How does the lender not stay nervous? Have they done this long enough for the founder to have an understanding that this the way the person has responded in a tough time? It's a small world. hey so Founders have the best network.
02:04:06
Speaker
I would like to believe that of the things Altery has done well as a team, um where we've been part of the solution and the problem in most of the tough situations, And there are some which of course are extremely difficult, but predominantly ah that shows in the way that, especially when founders go a tough situation, they come back and they work with us again. I think that's been the best, ah you know, testament to that.
02:04:27
Speaker
And it's not getting it always right. I'm sure we also make our own mistakes, but I think founders like the approach, which is in a tough situation, does your tone change? ah Simple things. Do you go meet them in their office? Do you still, you know, do you go meet them, spend four hours and just hear them vent, right?
02:04:43
Speaker
Sometimes you may not even offer an answer, but you're just there with them. And that shows you care. Can you provide access to a contract? Can you provide access to the form of capital? and you So is it just you know adding stress versus subtracting stress?
02:04:56
Speaker
So that makes a big difference. Do we have a network as a lender to be able to solve the problem? I think that is and that is what we need to worry about if we keep working on.
02:05:07
Speaker
think far from being perfect on that. But that's something which you know we are diligently working on. hey So some of these aspects are important for a founder. So Should I take debt? First question. How much debt should I take? Second question.
02:05:21
Speaker
ah Who do I take it from? Third question. What should be the structure of the instrument? Fourth question. Focus on the downside in that mainly. Be convinced about obligations.
02:05:33
Speaker
yeah Those are all you know in the realm of I need to. hey All the upside is good to have. hey So focus on the I need to part. Referencing. Referencing.
02:05:45
Speaker
Look at what people say negatively about the lender. So if somebody says, you know what, they're not the most aggressive, that's one thing. So they are not the best in a tough situation. That's another a thing. or they don't understand the business well enough. It's another thing. So i think you have to look for markers and say what other founders have felt in that journey.
02:06:04
Speaker
And from a lender perspective, these are things that I need to work on or as a team, we need to work on. When we have a founder in 30 minutes of the founder conversation, if they don't think that we are able to understand the business, if it's a space that we already backed before, there is a problem, right?
02:06:19
Speaker
Either we're not smart enough or good enough for that situation or we're not getting the right answers as well. So, There is an issue in that case. Then there's or a lot of validation that happens, which diligence, of course, takes care of.
02:06:32
Speaker
And there's a brand new space. right But some of the advantage for us is we've done work with a lot of companies. We're like Switzerland. That way we're neutral. And for many of the founders, the biggest advantage that, for example, I bring to the table is being a non-judgmental sounding board.
02:06:46
Speaker
So I'm not in their board meetings and I'm not attending the board calls. founder compensation is a tricky topic. <unk> Retention, ah you know, in terms of what to do with a workforce is a tricky topic.
02:07:02
Speaker
How to handle different stakeholders, investors at the board, how to have conversations around fundraising. You know, do you show weakness? you show, you know, strength? How do you talk about some of these topics to somebody who's going to come in the next board meeting and also opine on them, right?
02:07:18
Speaker
So sometimes our advantage is being in this but being out of this. and So it's a unique position. So I pleasure that position. I think um from our perspective, we have to develop expertise and understanding businesses.
02:07:36
Speaker
We have a lot of anecdotes to fall back on. We've seen multiple cycles. So that gives us referencing ability to tell a founder, know what, this is what happened. What do you think? you know I see some similarities, right? And hence, this you could compress the learning curve path. I think this is what worked.
02:07:52
Speaker
Maybe this could in your case is also, right? Again, like I said, take part of that which rele is is relevant to the context of the founder. So some of these things, I think, would be important for founder to keep in mind from a debt perspective.
02:08:05
Speaker
But some of these also extend to their business as well. Is it a harder sell to founders or a harder sell to investors for you? like like do you Do you have to work harder to convince founders to take your money or work harder to convince investors to give you money?
02:08:23
Speaker
The best investors, best founders, significantly hard. i So, um see, again, it's um there's always a gradient.
02:08:34
Speaker
I think today there is a much better understanding of what is this product. So there's enough, I i mean, we've got 220 companies that are re-backed in our Altera portfolio.
02:08:44
Speaker
Right? We tell founders, you pick any founder in our portfolio, talk to them or talk to some of the founders they can do, then you'll get an understanding of what the debt product is. So first is asset class. Is there enough awareness? I think definitely there's a much better awareness today compared to when I started 17 years ago.
02:09:02
Speaker
At that time, it was a much harder sell to founders. So I think the first few years, months I've spent in just explaining to founders and understanding mutually. It's not just explaining, it's a two-way street, right?
02:09:13
Speaker
I am also trying to understand, you know, what is this company. I'm guessing the VCs would also be helping you, right? For a VC also, it makes sense for their portfolio company to not dilute.
02:09:24
Speaker
ah So we didn't cover that aspect enough here today in the conversation, but the first constituency to be convinced was the VCs. We had to do that because the biggest issue for us is I have several friends or investors.
02:09:36
Speaker
This is not a product which bails out their portfolio because that is not the risk. I don't want the limits. Okay. Because that risk is the highest. Right. So it took years for the statement.
02:09:48
Speaker
hey What my proposition to VCs is simple. You have 80-20.
02:09:55
Speaker
2 out of 10 companies will return the fund for you. Can more capital help you get a better return from those companies? That's the best case. Your next 3 companies, can I give you some more capital to allow them to get into the first 2?
02:10:09
Speaker
The last 4-5 companies, I'm not the person for that. right So from a VC perspective, it is important we understand this distinction. I am not bailout money.
02:10:21
Speaker
They have helped some companies through difficulty if there is a reason, there is a way out for that transaction. So suppose they're raising capital, they are three weeks away from funding, they can't upset the cap table by getting an equity bridge at that point.
02:10:34
Speaker
So we're willing to look at that situation. But if there's no the investors are not interested, nobody is putting equity capital, then debt can't play a role there. Debt is the worst product there, right? So it took us quite some time to evangelize this with VCs and the first phase of founders, I would say.
02:10:51
Speaker
Today, I think that is pretty well understood. From an LP perspective, well, we've got several hundred investors already in Alterior. So it is a journey. I think we've gone through different constancies of investors.
02:11:03
Speaker
I think the first wave, 2017-18, when we spoke to investors, it was more like, You definitely don't lose money. Tell me how much. mean, capital. When COVID happened, I remember getting calls, you know, are you losing 20, 30 or 40% of capital?
02:11:18
Speaker
Those are the choices. It's not less than that. We came through COVID losing zero. COVID, in fact, became a booster. All that gave confidence to our investors as to how this product behaves. fit So if you want a high-quality founder who's doing well, it is a definite pitch.
02:11:36
Speaker
and So we will be camped out with them and saying why and we have to do it with all humility. ah We cannot assume that it's an obvious entitlement. I mean, if anybody's entitled, it doesn't matter if you're an equity provider, debt provider, whatever. I think it works for everybody, ah even a founder for the matter.
02:11:53
Speaker
So it is a conversation. we do pitch for the situations that we definitely want to get into, saying whyly why is the product sensible and why are we the best fit, right?
02:12:04
Speaker
Happens day in and day out. Same way with LPs, right? So, it's a ah that's one of the perks or perils of being in the middle. You're pitching on both sides.
02:12:15
Speaker
ah yeah LPs largely are relationship-driven? Is that how you acquire LPs? or like what So, it is a combination. so so yeah i mean I don't imagine like a performance marketing as a way to acquire lps No, no, it's not that way. So, and by the way, you're not supposed to go mainstream. It's meant for investors who are, yeah you know, for a particular category network.
Building Relationships in Venture Debt
02:12:41
Speaker
There's different, ah you know, criteria. So, you can't advertise, basically. can't advertise, right. It's not meant to be a broad spectrum kind of advertisement class.
02:12:50
Speaker
So, mutual funds can do that because it's meant to be for retail investors. AI are a difference. It's meant for larger, more sophisticated investors, family offices, institutions, endowments, and so on.
02:13:04
Speaker
So it is, and tell you a small anecdote at the end of this on a message that one of the people sent me. It's kind of, satisfying in some sense. But the outreach is relationships.
02:13:14
Speaker
ah Sometimes we use distributors in the domestic ecosystem who help access more investors. The Government India fund the funds. I think that has been a strong stimulate stimulant for domestic fund managers.
02:13:27
Speaker
We've been one of the largest recipients of capital. We've also been a big part of their DPI is what I realized when they recently put out some data. I think they're almost 20% of their DPI. or their returns, right, in terms of their liquidity.
02:13:40
Speaker
So I think that's worked well. um But overall, it's a cross-section of investors. And I think it's it's a constant process. You need to keep matching the relationship. It needs information. It needs transparency.
02:13:55
Speaker
Everything we expect from founder, LPs expect from us. Are you communicating every quarter? There's information, there's statements, there's an update deck that goes out, there's conversations that are had. So the small anecdote is one of our LPs has sent a message recently to me which said, know, they've...
02:14:10
Speaker
It's a large foundation and they provided scholarships to, I think, about a few lakh students, especially female students in India, and this is for education across.
02:14:21
Speaker
And, you know, they said it's returns from funds like yourselves, which allow us to make this happen. and And, know, sometimes you think about the numbers and math of it and you forget about the purpose, right? Which is, know, ultimately that's where the money, the returns are being used for.
02:14:37
Speaker
And so felt good. and but One last question. um What do you need to build a career in venture debt? What kind of people succeed in this space?
02:14:49
Speaker
I think it's, again, I like math. So it goes back to shapes and math. So it's a triangle. So there are three vertices there. ah One important vertex, I would say, is underwriting ability. So pricing, risk, understanding, credit, process, you know, the whole nine yards, understanding a company, um documentation, law of the land, all of that.
02:15:09
Speaker
The second vertex, I would say, is the having a set of relationships in the venture ecosystem. So founders, investors, bankers, lawyers, the whole relationship density.
02:15:21
Speaker
The third vertex is having an entrepreneurial mindset. So founders engage well when there's empathy, you know, and Can you be an entrepreneur as well? And that resonates very, very strongly with founders.
02:15:32
Speaker
So all three vertices together, I think, make for a fantastic venture lender. You're strong in your underwriting ability. You've got the relationship density and you're you entrepreneurial. So you can speak the same language. right I think those are the three ingredients, I would say.
02:15:54
Speaker
Amazing. Thank you so much for time, Vinod. I truly enjoyed it and I took up a lot more time than you had allocated, but I was enjoying too much.