Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Apoorva Sharma reveals the power of debt for funded startups | Stride Ventures
232 Plays1 year ago
Explore the intricate layers of venture debt, a unique blend of venture capital investing and private credit, where loans are tailored for VC-funded startups. Apoorva shares how venture debt transcends traditional lending by supporting loss-making companies, with returns stemming from interest payments and equity appreciation. This discussion offers both a bird's-eye view and a nuanced exploration of the venture debt business model.
Get notified about the latest releases and bonus content by subscribing to our newsletter at www.founderthesis.com
Read more about Stride Ventures:-
1.Why the venture debt market is bubbling
3.India’s venture debt growth hinges on uptick in VC round: Stride Ventures
Recommended
Transcript
Introduction to Stride Ventures and Venture Debt
00:00:00
Speaker
Hi everyone, this is Apoorva. I am our managing partner at Stride Ventures, which is a leading venture debt fund in India.
00:00:19
Speaker
There are levels of complexity in the business of lending. The simplest form of debt is probably a personal loan to an individual, and the most complex form of lending is probably venture debt. Venture debt is a beast that straddles the worlds of venture capital investing in private credit. A venture debt company makes a loan to a business, but what makes it unique is that it's essentially a loan to a VC-funded startup.
00:00:44
Speaker
So, unlike a traditional business loan, venture debt is regularly given to loss-making companies and the earning is not just from interest payment, but also from equity appreciation.
Venture Debt Business Model Discussion
00:00:56
Speaker
In this episode of the Found a Thesis podcast, your host Akshay Dutt talks with Apoorva Sharma, co-founder and managing partner of India's leading venture debt company Stride Ventures.
00:01:06
Speaker
This conversation will not only help you understand lending from a 30,000 feet above the ground perspective and also deep dive into the nuances of the venture-led business model. Subscribe to the Foundathesis podcast on any streaming platform for more deep dives into the world of startups.
00:01:36
Speaker
You need like a one minute elevator pitch. What is Tri-Ventures?
00:01:42
Speaker
Sure. So Stride is a differentiated venture debt provider to the new age businesses in India. We essentially lent to growth stage companies that are backed by VC and private equity investors. Stride really helps these companies grow and preserve dilution by funding for use cases like working capital, KPEX, acquisition, financing, or proper runway extension in certain cases.
00:02:08
Speaker
Stride loves to be like a partner to all its entrepreneurs, and we are not just a transactional capital provider. We really help the company navigate a lot of things, whether it's with respect to getting a bank on board, getting in touch with the right kind of capital allocators, customer introductions, enterprise contracts, contacts, etc.
00:02:30
Speaker
Okay. So you would fall under the category of private credit, private credit, private debt. What's the right term here?
Private Credit and Lending Strategies
00:02:40
Speaker
Yeah. So private credit. So within private credit, there are various verticals. One of that is venture debt. Okay. Private credit as opposed to, why is it called private credit?
00:02:53
Speaker
So essentially, private credit is credit to the unlisted space, financing solutions to companies which are not listed. And within private credit, of course, there are specialized verticals. So there could be real estate funds, there are infrastructure.
00:03:12
Speaker
which help you in so many infrastructure projects. Then you also have performing credit, which can give loans to say mid-market, SME kind of customers. Structured credit, they'll help you buy out an existing PE or a VC investor and things like that. And then there is venture debt, which is credit to the new age businesses, which are backed by VC or private equity investors.
00:03:39
Speaker
What is performing credit? Why is that word performing use there? I just want to understand the broad ecosystem once before going deeper into Stripe. Sure. So the reason it's called performing credit because this is two companies which are profitable. So performing credit, as they call it, is for companies which are generating profit.
00:04:04
Speaker
but they are not the large caps. So they are not companies which are kind of, you know, contacted by all banks and there's easy credit available to them. Because, you know, there's a big market, like banks typically focus on, say, A plus, double A plus kind of clients, and then there is a big space, either rated or unrated.
00:04:27
Speaker
which is not really serviced by the top financial institutions in this country still. But they still need credit, right? They'll have manufacturing facilities. They'll have larger other Capex plans or working capital mismatch. So they need credit for that. And which is why this category of performing credit, so to say, in the MSME space, mid-market space, but in profitable companies, these companies
Credit Ratings and Structured Credit
00:04:53
Speaker
are not essentially backed by VC or a private equity investor. So these companies could be bootstrapped where there's a promoter and it's in the family or running. Yeah. So it's like that. Yeah.
00:05:07
Speaker
Okay. Understood. Understood. Something like, say, you grow, have you heard of you grow? You grow would be in this space, performing credit. They give loans to businesses, small and mid-sized businesses. You know, there could be multiple players. So this can be serviced through wholesale lending in BFC.
00:05:25
Speaker
But it could also be serviced by AIF, which is alternate investment fund. So these are two formats wherein you can provide credit. But performing credit is the space that largely has spoke about mid market kind of companies which
00:05:39
Speaker
are not necessarily backed by PEOVC funds, but are generating some profit, not really bankable, so to say. May be rated, may not be rated. Even if they're rated, they're probably not near the A region. So that is the segment. There are a bunch of wholesale lending NBFCs.
00:06:00
Speaker
And there are a lot of... You know, before I forget some of the terms that you use, rated and rated. So this we are talking about being rated by a crystal kind of a credit rating. Yeah, by one of the rating agencies.
00:06:14
Speaker
Okay. And these rating agencies give a rating from like, say A means good, high quality and like a D or a E would mean like a risky. D is junk. But yeah, A within E world. So it's, you know, triple A, double A. Okay. There are many shades of B. Okay. And now, why use the word wholesale with NBFC? What does that mean?
00:06:39
Speaker
Wholesale is essentially loans to businesses. There could be retail lending, NBFCs also. So retail lending would probably be a gold loan to an individual or a housing loan.
00:06:50
Speaker
you know, or a personal loan to a retail consumer. So all those would be retail NBFCs, but they're wholesale NBFCs. And then there could be AIFs who are, you know, essentially catering to the segment. Within AIFs, so many structured related funds. What is the implication of being an AIF? So AIF stands for Alternate Investment Fund. How does that work?
00:07:16
Speaker
So obviously, NBFCs are regulated by RBI, the Reserve Bank of India. AIF, Alternate Investment Fund, they are regulated by SEBI. And AIF is essentially a pole vehicle.
00:07:34
Speaker
raise money from either, you know, institutional investors, like you would have insurance companies, pension funds, fund of funds, government of India, banks. And then you also have a lot of family offices, some corporate treasuries, and then you have H&I money also, and typically SEBI has a, you know, floor of one crore as an investment size, but anybody who can invest more than that,
00:08:00
Speaker
All of that together is an AIF and then AIF has an investment manager, which decides how to allocate these funds. And it's the responsibility of the investment manager to kind of liquidate those investments and return the money back within the investment horizon as per the return expectations. The way the VC industry works is also through AIFs. VCs are also AIFs, essentially. So any AIF can do both debt or equity.
00:08:28
Speaker
I mean, they love to declare it before they collect money that what they have is for. Of course, you file a PPM, which is Private Placement Memorandum with SEBI, wherein you detail your investment thesis, you know, what kind of exposures you will take, what is your tenure, what is your return expectation, everything.
00:08:51
Speaker
Okay. Understood.
Role of Venture Debt in Startup Financing
00:08:53
Speaker
Okay. Okay. Understood. So, performing credit, even a bank giving a loan to a profitable MSME would fall under performing credit. Like loans from banks are also part of this?
00:09:04
Speaker
Yeah, you can classify it as that. Within banks, also, you will see that there are verticals called MSME vertical and large cap MNC vertical. So it's that vertical, basically. But the bank concentration is less. It's significantly underpenetrated in this segment, which is why there are a lot of other formats through NBFC or AIF that have to plug this gap. OK. Understood. And you said structured credit.
00:09:35
Speaker
So structured credit is also, I'd say probably just a variation to the performing credit. What essentially happens in a structured credit fund, like generally when a bank will give you a loan or an NBFC or even for that matter, EIF will give you a loan. It will be within a defined tenor and generally amortizing. There could be some built of moratorium, which is essentially the period during which the principal repayment does not start. So those are more clean vanilla.
00:10:04
Speaker
cash flow based kind of lending, right? When I say structured credit, it's essentially that it'll give you something which is not very run of the mill, which means that I might give you a four year loan where the first one and a half years you don't have to pay me anything. And then there is ballooning of my principle, which means that you don't have to start paying equally, but probably I could start with first year being 10% and next year being 40%.
00:10:33
Speaker
and the last year being 50%, things like that. Or it could be, for example, basically giving money to a holdcoach does not have any cash flow for essentially buying out the venture capital or private equity shareholder, giving them an exit, which are not necessarily run-of-the-mill kind of.
00:10:58
Speaker
lending, because general lending is your regular amortizing cash flow based lending. So that is just structured credit. But yeah, all of structured credit, for example, you will not see NBFC is also giving structured credit, such back ending of principle and all that, right? So it's generally when we have format. Yeah. Okay. So the AIFs which do structured credits. Okay. What are some of the AIFs in this structured credit space in India? Any names I would have heard?
00:11:26
Speaker
Yeah, definitely. So, you know, there is a vendors, there is UTI credit, there is bearing, you know, so many of them, EDYs. Yeah. Okay. The investment banks basically, they launched these EIS sources. No, not really investment bank. You know, generally investment bank is essentially
00:11:51
Speaker
Anybody who's helping you with, say, a M&A transaction or a listing IPO or bond issuances or anything like that. Now, obviously, it makes sense for investment banks to go and diversify and start doing other things, right? So it is more because of that.
00:12:09
Speaker
Let's say a vendor started as an investment bank but has XYZ businesses also. Or, you know, same thing for probably some other investment bank, but it's not necessary. There could be a pure financial institution doing structured credit with no investment banking desk at all.
00:12:25
Speaker
Okay. The advantage of an investment bank is they have the right place. They know people who have money to give. They know people who need money so they can create a... Yeah, you build your intelligence and network. So definitely it helps. Yeah. Okay. Okay. Understood. So in the private credit space, there are these specialized loans for like say real estate or infra and then they're performing and then they're structured. And then there is venture debt, which is for startups.
00:12:54
Speaker
There's also revenue based financing that falls under the same bucket as venture debt or that's a separate bucket.
00:13:04
Speaker
So I want to put that in the same bucket as venture debt because the target segment, because we are here dividing us for the target segment, right? So it is still the new age businesses, you know, largely, but revenue-based financing in India is very, very strong, very, very small today. And, you know, I'll just explain the difference between venture debt and RBF, which is revenue-based financing.
00:13:30
Speaker
RBF is a very small portion compared to venture debt. RBF is essentially that I give you a loan, a company loan, and I say that, you know, say 4% of your revenue every month will be given to me. I don't create a charge on your assets or anything, but the payment gateway, I make sure that a certain percentage of your revenue every month directly comes to me. So that is revenue-based financing.
00:13:58
Speaker
Generally, the ticket size in RBF is very small, and it will be for companies which are very small, typically very early in their journey, and largely consumer names, because they'll have that predictability of revenue, and it's easier to underwrite RBF basis predictable revenue streams, or SaaS revenue streams, where there's a certain subscription revenue, and you're sure that that is predictable in nature.
00:14:27
Speaker
Venture debt, on the other hand, is a much bigger pie. And for much larger ticket sizes for companies, say, between Series A to pre-IPO. It can cover the entire span of your pre-listing journey. What would be the ticket size for venture debt, like 10 CR to 100 CR, something like that? Yeah. Typically, in venture debt,
00:14:56
Speaker
like the four, five players that are active in venture debt, they'll write you a check anywhere between say a half a million to $20 million. And average check size would be probably three, $4 million, but they can landscape your entire journey. Now, you know, increasingly there are certain players, two or three players with,
00:15:22
Speaker
who have recently just come up to even write checks starting from $20 million. So they can write from, say, $20 million to $50 million. So even as, obviously, things evolve as the industry grows, and the startup ecosystem is, say, 15 years old in India, practically, because they
00:15:46
Speaker
we keep the starting point as flip-cut. So say 15 years old, so within that venture debt has also evolved. A venture debt is now close to a billion dollars of annual deployment, which is quite a lot. It's about 7% of the venture capital deployment every year.
00:16:04
Speaker
And within venture debt now, earlier they were smaller ticket sizes and then each of us kind of started increasing the ticket size and being comfortable because you have to understand that ticket size is also a function of the fund size because generally every fund house will say that my maximum exposure in a single company as a percentage of my fund size will be say 5%.
00:16:28
Speaker
So, if I'm writing a 100 crore check in a company, I will get limited by that fact that should I have say a 2000 crore fund in order for me to write a 100 crore check. If I have a 1500 crore fund, probably I'll just cap it at 75 crore per deal. So, as the asset class evolves, as fundraising becomes
00:16:53
Speaker
slightly easier. I don't think it's ever very easy, but slightly easier. There is acceptance of the asset class amongst your domestic LP base, investor base. You start increasing the fund size, and then you start increasing the ticket size per company.
00:17:11
Speaker
The reason that I said that now there are funds who are writing 20 to 50 million dollar checks also, those kinds of funds also have some kind of international backing. So their fund sizes will be a certain size and then they can also write.
00:17:27
Speaker
So now I think venture debt is a fairly evolved space, become really mature in India. And there's acceptance from the LP base, acceptance from the founders, education across the founder base, why they should use venture debt. And
Due Diligence and Venture Debt Operations
00:17:42
Speaker
also with respect to fund managers underwriting the risk, to make sure that a certain return profile is delivered to the investors.
00:17:52
Speaker
Okay. You used the term landscape, that the landscape your entire journey. What does that mean? I just meant that, you know, for example, if today there is a company which is at less than a crore a month, and I have entered with a very small check today in the company. When this company goes and lists, I don't think they need
00:18:19
Speaker
some other player who will be able to take care of their financing requirements.
00:18:25
Speaker
better than me. So I can start early and right till the listing point, I'll be able to support with various check sizes because I'll also keep coming with new funds and I'll never want a good high quality company to go away from the portfolio. So we'll always try and help the company in their entire growth journey. Of course, as the company evolves, probably reaches a bit
00:18:53
Speaker
profit, there will be certain banks who can also coexist alongside you, but there'll be always use cases for which venture debt will be better suited in your growth journey.
00:19:07
Speaker
Okay. I want to ask you a couple of more industry questions before zooming into specifically venture debt and stride. You would have heard about the loan that Baidu's took from Davidson. What kind of loan was that? So essentially Baidu's took this loan to acquire Akash, right? And
00:19:36
Speaker
It was a TLB loan. Honestly, I also don't know enough about the, I would say the nitty-gritties of that loan. But yes, you know, when it was like,
00:19:50
Speaker
Yeah, you can classify it as, see, you can classify it as venture debt as long as the company's loss making by Jews is definitely loss making, right? And they still took a call. And I told you performing credit, it's important that you're profitable. So you would definitely just classify it as venture debt. And there could be variations in the term, right? I might be comfortable writing only a two to three year loan. Somebody can give you a four year loan.
00:20:15
Speaker
with certain changes in commercials. Why is it called term loan B, that TLB? What does that mean? That is debt terminology. There is no TLB in India, so I'm not really sure of the mechanics there. Okay. So they took that debt and what happened subsequent to that? Why was that debt not fully released to them at all? There was some
00:20:47
Speaker
Yeah and you know every lender
00:20:52
Speaker
does tranching of the facility, right? That I might give you a sanction of 100 crore, but it is in say three tranches and 25, 25, 50, whatever. And there are certain milestones that the company has to achieve, certain covenants that the company has to comply with for me to release the subsequent tranches. It's not an obligation on the lender that just because I've sanctioned you, even though I'm seeing that your financial position is deteriorating, you're not complying with those milestones or covenants, I still release that.
00:21:22
Speaker
So yeah, that is probably what happened there. A covenant is like a precondition for releasing the next trance, like something which a company has to meet.
00:21:37
Speaker
So covenant, there are two, three kinds of covenants that the company should be in compliance with at all points of time. And all of this is captured in your debt documentation when you sign it prior to taking the money. And the covenants could be financial or general or information in nature.
00:21:59
Speaker
So financial covenants is essentially that I might say that your total debt at any point in time cannot exceed XYZ amount. It could be a certain percentage of your net worth or a certain percentage of your net working capital on your balance sheet. So there could be debt covenants. Or I could also add that you should have
00:22:21
Speaker
cash runway of at least these many months which means at any point in time you should have cash on your balance sheet that should take care of your operational expenses for the next X number of months.
00:22:33
Speaker
or there could be a covenant with respect to, say, a certain revenue that you definitely should make on a monthly basis. These would be the financial covenants. In information covenants, there could be things like, you have to share your monthly reporting to me by, say, seventh of every subsequent month. You have to share your annual operating plan, which gets decided in your board meeting.
00:23:00
Speaker
or you have to share, for example, any kind of key management hires or management exits and things like that. Then there are general or restrictive governance that you cannot hive off any part of your business or you cannot take more debt without my no objection certificate.
00:23:24
Speaker
You cannot, there cannot be change in management control. You cannot go and sell say 90% of the company to somebody else without telling me, right? Because then I'm left with new set of majority shareholders who
00:23:38
Speaker
who I did not take into account while underwriting you. So those kind of things are the financial governance. And there could be, as I said, milestones. There could be certain revenue threshold or certain equity rates that the company has to do before drawing down the subsequent charges.
00:24:02
Speaker
Okay. Understood. Now, tell me how venture debt works. What is the kind of agreement which you would have with a startup and how does that whole process start? Sure. So I'll just tell you the entire process and then I can cover what are the documentations involved. So when should a company take venture debt?
00:24:28
Speaker
A company should take venture debt after they've raised at least 25-30 crores in equity. And they make at least 2-3 crore monthly in revenue. And you have some sense of your unit economics.
00:24:44
Speaker
which means that you are positive on a contribution margin level, while you may be negative on a EBITDA level. And when I say contribution margin, I essentially mean that you should generate enough to take care of cost of goods sold, which is your, you know, before gross margin, your cost of the goods that you're selling.
00:25:07
Speaker
Then the logistics cost, which also includes
Stride Ventures' Journey and Market Analysis
00:25:11
Speaker
warehousing, shipping, collections, packaging, all of that. After you deduct that, you generally arrive at CM1, contribution margin one. That's the industry parlance that you subtract the cost of goods sold, you arrive at cross margin, you subtract the logistics, shipping, packaging, warehousing, SCPW, as they call it, shipping, collection, packaging, warehousing.
00:25:31
Speaker
You arrive at CM1. And then you subtract the performance marketing component of your marketing cost, which means anything which is just getting you the clicks and directly resulting in sales, not branding. But just performance marketing. That you subtract, and then you arrive at CM2. And then you have a host of fixed cost overheads and your marketing brand building stuff, et cetera, which is fine. So at a CM2 level, you should be break even or generating small profit.
00:26:02
Speaker
that is a good time to take debt. Because if you're taking debt before that, say your negative gross margin and you've taken debt, it is going to become more of a burden to you than solving anything for you. Because everybody should understand that debt as an instrument
00:26:18
Speaker
has to be returned back. You have to return that money. It's your responsibility to return that money. So at no point in time should you over leverage the company and make it so burdensome that there is no way to return that. Also a good way to think about it is that you are serving a certain cost of debt, right? Whatever it is, it says 16%.
00:26:43
Speaker
Are you able to use that money to generate better return on capital within the business? And that can happen only once you have that positive unit economics in your business. So that is the right time to think of venture debt. And venture debt is available only to VC or private equity backed companies. That is by design. No venture debt fund will give capital to a bootstrapped company.
00:27:13
Speaker
So that is the filtering criteria and I'd say starting point for a company to think of venture debt. How much venture debt to take? Because that is also a very crucial thing. You should not take so much debt that it becomes a burden. Debt is a double-edged sword, right?
00:27:31
Speaker
And, you know, we always used to call, you know, have this phrase indebted to debt. If you use the debt for right reasons in the right amount of time, it can do wonders in your business because it has the power to make sure that the business remains yours. You're not diluting your stake. You're using somebody's capital.
00:27:56
Speaker
to make sure you're generating a better return from that capital without having to give your shareholding in perpetuity. Once you've diluted equity, you've diluted, you can't get it back. So how much debt to take? Once you've decided that, okay, I am at that stage where I can think of entry debt, how much debt should you take? A ballpark number is 20% of the equity capital that you've raised, you can take as debt.
00:28:25
Speaker
in your capital structure, you can think of four fifth part equity and one fifth part debt in your sources of funds. So if you've raised $10 million, you can probably raise $2 million in debt. But there are exceptions. So if there is a company which is Capex intensive, which has its own manufacturing plant, will have its own equipments,
00:28:55
Speaker
then this percentage could be higher because end of the day, there is a hard asset for which you've taken debt. If nothing goes your way, you can say, take this machine. My company is mine. You take this machine, sell it, recover your money.
00:29:12
Speaker
If, for example, similarly, you have a lot of working capital on your balance sheet, there's a lot of inventory receivable from retailers, distributors, enterprise customers, things like that, then you can say that these are my receivables, you collect it, you take that money and fulfill the debt requirement.
00:29:34
Speaker
So in those cases, the debt percentage could be higher. It should not be very high, but at least a percentage of your fixed asset base or your networking capital base. If I have 10 rupees in networking capital, okay, I'll take eight rupees in debt. Even though I had raised, say, 15 rupees in equity or
00:29:54
Speaker
It's actually 50% of whatever equity I raise I'm taking in debt. But I have a justification that I have this much working capital, which is giving a cover of, say, 1.2x on the debt that I've taken, similarly on the fixed asset base. But if you don't have that much working capital and there is no fixed asset in your business, then as a thumb rule, people use that 20% of whatever equity you've raised should be the debt on your balance sheet.
00:30:24
Speaker
So that's one venture new start and how much? Yeah. Okay. Let me recap a bit. So as a startup, A, you need to be a funded startup. I wanted to ask you why not a bootstrapped startup? So, you know, Akshay, for a venture debt fund also, the fact that they are giving money to a loss-making company,
00:30:52
Speaker
you know, is difficult. And for a venture debt fund, it's important that all the companies that I give debt to should give me my money back.
00:31:04
Speaker
I don't have any power law, like a VC fund. It's not that two of my good companies are going to take care of eight of my bust companies. We have to follow that normal distribution. I keep saying that we don't have any power law curve, normal distribution where everybody has to land in that ballpark.
00:31:27
Speaker
I cannot take that risk of funding a loss making bootstrapped company because if the company has raised equity, it is definitely a couple of things that it gives me. One that I know because I don't have the mindset to understand how big is the target addressable market and will this company do well in future and things like that. I may have a view, I will have to have a view as a venture debt provider and that is a part of the underwriting when we cover it.
00:31:56
Speaker
But I don't think I'm an expert at that. So once there is a validation of a venture capital investor, a good, I would say, institutional, high quality venture capital investor,
00:32:10
Speaker
I know that there is basic level of comfort around the target addressable market, around the pedigree of these people to run this business. The pedigree may be very good, but can have zero relevance in the business that you're doing, right? There has to be some kind of industry insight there.
00:32:29
Speaker
Those kinds of things are important. The second is Akshay that, of course, we do our diligence and we do a massive diligence. But the kind of commercial diligence that a VC investor is doing on you to understand, say, the efficacy of your product or customer feedback, I may not be able to do it. So for that as well. And third, I'd say that, you know,
00:32:54
Speaker
I know that so VC has invested so much capital in this business. I also know that there is skin in the game from these VC investors. And if my debt is so small compared to the equity they've put, that definitely gives me a comfort there. So these are a couple of reasons why. Okay. Understood. I guess another reason would be that
00:33:19
Speaker
Part of your compensation for giving the loan is also equity. So if the company is funded and you can ascribe a value to that equity.
00:33:30
Speaker
Absolutely. So venture debt has two components of return. One is a coupon bearing loan that contributes to a debt IRR. And then we get equity call options in our portfolio companies. And essentially, that means that, say, I have, say, 15%, 16% on the IRR bid on debt, whatever that number is, between 14% to 16%. My call option gain, I expect that I at least get, say, 4% to 5%.
00:33:59
Speaker
You know, at a fund level, there might be some companies who have no valuation upside, but there'll be some companies who have significant valuation upside. So at a fund level, even if I'm able to make say five, 6% additional, and I reached that 20% ballpark in return, that is what I want. Because otherwise, why would I enter this territory of loss-making companies?
00:34:23
Speaker
Okay. The call option is essentially a right to buy the equity at a certain price. Ideally that price should be below what you feel is the potential price of this company one or two years down the line. Yeah. Yeah. So there's an exercise price. I have locked in the price, which is the price that you are at today, but I have this option for say seven, eight years.
00:34:47
Speaker
Even if three, four years later, your price has increased by 3x or 4x, I'm still able to buy it at the earlier committed price and then exit at the then prevailing price, book the capital gains that adds those additional percentage points to my return. Okay. Understood. And you could be selling this either in an IPO or in the next round, the investor of the next round could be buying that, buying the call rights from you. Yeah.
00:35:17
Speaker
Yeah, so actually, you know, you can sell it to the existing investors, a new incoming investor to the founder at listing before listing in the secondary market. Yeah. Okay. Understood. Understood. I wanted to
00:35:36
Speaker
So coming back to the recap of when to take that. So essentially what you're saying that CM2 should be positive means like the company should have in a way found the product market fit. In some sense, yes. The debt will help them.
00:35:53
Speaker
So if they are getting, let's say a 5% CM2, which is not enough to cover their fixed cost today, but that 5% of a larger base will cover their overheads and make them profitable one or two years down the line. So that's when you should take that, when you already have a positive number in the CM2. Yeah. They keep in all, you know, positive. Yeah.
00:36:19
Speaker
Essentially, what you would say like a growth funding is what venture debt should be used for. Yes, and you know, although venture debt does not have any end-use restriction, we don't ask for any end-use certificate unlike, you know, a bank. But still, when a founder is taking debt, he or she should know what are the reasons for which I'm taking this debt.
00:36:46
Speaker
And typically when you start thinking about it like that, you will never over leverage yourself. And it's not just the responsibility of the founder. It's also the responsibility of institutions like us, you know, just because a company can take, should we give that money or not? We should also educate the founders that, you know, it is enough for you at this time. Yeah.
Global Expansion and Gift City Advantage
00:37:21
Speaker
So a couple of reasons, Akshay. So one, definitely acquisition finance is an end-use restriction for banks. They don't fund acquisitions, right? Again, so acquisition is a use case for which you have to go to, as I said, a wholesale lending in BFC or AIF. Irrespective of whether it's a startup or not a startup, acquisition financing is an end-use. You have to go to alternate sources of financing, not
00:37:39
Speaker
Would you be comfortable also funding acquisitions as a venture debt company?
00:37:48
Speaker
you know, a bank. Now with respect to startups in acquisition, right? If for example, the company itself is loss making, but the company is acquiring a company which has a bit of profit, right?
00:38:05
Speaker
Exactly. So say, for example, that company, I'm just giving you an example, has 10 crores in EBITDA. Typically, you would have seen, heard that debt to EBITDA of 3x, 4x, depending on the industry, is the comfortable leverage for any financial institution. So if the company that is getting acquired is profitable, I'll definitely load some debt, this is the EBITDA that that company generates, to make sure that
00:38:35
Speaker
you know, I can finance that acquisition through debt. I don't have to dilute my stake. It may be completely dead, or it may be some bit of debt and some bit of equity. It's a mixture of all of that. But yes, it makes sense to fund some acquisitions through debt. A lot of companies have done that. All the thoracio-like models in India, whether it's say Mensa,
00:38:59
Speaker
We are there in Mensa. It makes sense to take debt to acquire companies which are profitable, which is what Mensa did. And I think it was Asia's fastest unicorn within six, seven months because they were able to build revenue, profitable revenue at a great speed without diluting too much equity because they use debt smartly to fund those acquisitions.
00:39:30
Speaker
Okay. Interesting. All right. So we covered when a company should take debt. What's the next step? So, you know, you decided that you're taking debt. You also have a ballpark number of how much debt, you know, you want to take. You approach the venture debt funds, you know, typically good companies, venture debt funds would already have approached you.
00:39:55
Speaker
But yeah, you have those discussions. And then after a certain level of data sharing, which is generally your monthly performance, your balance sheet, your shareholding, your investor deck, those are the typical data requirements post which you can expect in principle head of terms or a term sheet, indicative term sheet from the venture debt provider. And
Apoorva's Professional Journey and Indian Market Insights
00:40:17
Speaker
there could be five, six key items that you should look out for. One, of course, is your coupon, which is your rate of interest.
00:40:25
Speaker
The tenor, what is the tenor of the facility? What is the repayment schedule like? Also, the warrant percentage, which is the call option percentage. How much call option percentage they are charging? So typically, in venture debt, your coupon will be, as I said, anywhere between, say, 14 to 15%.
00:40:44
Speaker
There could be a small processing fee, which is one time in nature. Then you have warrants, which is generally between 8% to 12%. It could be slightly lower also. But that is the ballpark figure of the debt sanction amount. So if I've given a 10 crore debt, I'll probably have a 1 crore of
00:41:08
Speaker
equity call option in your company. So that warrant percentage. And then what is the exercise price as we were discussing, right? What is the valuation for these call options? These are a couple of things that are obviously commercially important apart from the amount and your repayment schedule, et cetera. So once there is alignment on the indicative term sheet,
00:41:30
Speaker
Then of course, there's some higher level of data sharing. Any data sharing should be only post the non-disclosure agreement. Once you have shared the data, the venture debt fund will prepare the credit assessment memo.
00:41:50
Speaker
as we generally call it, which is essentially covering all aspects of, say, the founder pedigree, the team, how strong is the team, is the team relevant?
00:42:02
Speaker
What are the rounds of equity that the company has raised? How has the valuation for these companies moved? Are there strong institutional investors to keep backing them in their future journey? What is the differentiation of the company compared to the incumbents? What is the channel mix, the category mix?
00:42:22
Speaker
what is the traffic on the website, the daily active users, monthly active users, unit economics, then a deep dive on the financial section. Who's your auditor? Is there any qualification? Was there any qualification in the last, say, two, three years?
00:42:39
Speaker
your P&L, balance sheet, cash flow, just doing some stress testing to see that if you're not able to improve your margin, will you still be able to comfortably service this debt? Then obviously, what are the risks that we see? How do we mitigate it? Why are we recommending this transaction? Who have we taken reference checks from? There are a host of audit points also that gets checked. Is there any governance issue or litigation?
00:43:06
Speaker
GST reconciliation, bank statement analysis, for revenue cash tie up, you know, check bouncing, related party transaction. Are you paying your salary on time? Are you paying your profit and fund on time for the employees? A host of intelligence. And then, of course, we take it to our investment committee.
00:43:26
Speaker
And once that is approved, then we move to the documentation stage. And in documentation, there are largely, I would say, three agreements which get signed for a venture debt fund. One is your debenture trust deed, which is essentially your facility agreement, which talks about, as we were discussing earlier, of course, it will capture the commercials and repayment schedule and all of that. But it will also cover governance,
00:43:56
Speaker
you know, general information, restrictive financial governance and what will happen if you breach them, which is a term called event of default, you know, which is discussed at length in these documents that if a company does not pay on time or if there is a breach of some of these significant governance, what is the recourse?
00:44:24
Speaker
It's not that on day one, the lender can, you know, create havoc. There are certain cure periods. That is a cure period is essentially a time that is given to you to cure the default. How do you correct it? So there might be a temporary blip in my covenant, right? I might reach it for 15 days. Like what could be a.
00:44:50
Speaker
I'll tell you, for example, if I have asked the company to maintain a certain month of cash bond, that you should have at least this much cash to fund your operating expenses for say XYZ months, and today you are breaching it. But I know that you have already signed a term sheet with the equity investor and you are expecting that money to come in the next 30 days, the docs are currently in negotiation.
00:45:16
Speaker
As a lender, I will never do something which would sabotage my stand as well as the company's stand because Indian judiciary is very burdened. Nobody wants to go there unless they are compelled to go there. So, you know, I'd go meet with the founder, understand what is the plan. And if there is certainty that, you know, within the next three weeks, this government is getting rectified. Fine.
00:45:42
Speaker
I mean, no lender takes any major reaction for that. So there is a certain cure period to rectify your breaches of governance. And then even if, for example, something fundamentally has changed with the company and you don't see any concrete plan, then obviously there are other recourses of event of default wherein you could
00:46:09
Speaker
For example, you know, as we were discussing, sell the business to somebody else or whatever essentially you have charge on, you can go and sell it to anybody, you know, to recover your money. Or you could drag the company to NCLT, which is the insolvency court, right? And then obviously, you know,
00:46:36
Speaker
there will be no further equity investment in the company because the company is essentially going into liquidation. And then the liquidator will decide what to sell, how much they can sell it for, and as per the waterfall, who will get what money, right? And typically in the waterfall, number one is stat dues, which is statutory dues. So if you have any TDS, any PF,
00:47:02
Speaker
any unpaid salary dues, all of that has to be settled. Then you have your financial creditors, which are the secured creditors, they get paid. After all financial creditors, then there will be operational creditors, which are your vendors, your server bill, your rent bill, all of that. And then if anything is left, will it go to the equity shareholders?
00:47:29
Speaker
And in that equity shareholders, there is liquidation preference, which people sign in the SHA when they sign with the, you know, equity. The shareholder agreement. Yes. So as per that, the money gets distributed. So these are the, I think we went just too deep into year 54, but coming back to the documentation, these are a couple of main things in the facility agreement.
00:47:55
Speaker
And there is cure period, grace period, you know, lenders are always, you know, want the company to succeed always. And then the other document is your warrant agreement, which is essentially what we were discussing. What is the exercise price, locked in price? And what is the tenor during which it can be exited? And the third would be your need of hypothetization. The exercise price is typically the last round valuation.
00:48:24
Speaker
Yeah. It is typically the last round of valuation. If you've raised around say in the last six months or so, but if your round is very late, you know, I mean way back, say one year back, generally founders don't want to give that price. So they'll say, take it as a discount to my next round.
00:48:46
Speaker
which may be evident, may not be too evident, but it is a certain discount. It could be a monthly discount or a quarterly discount or a flat discount to the next round.
00:48:56
Speaker
Okay. So that is your second one. So your discount would be like, if my next round is after six months, then you get a six percent, like one percent per month, six percent discount. Yeah, something like that. You know, all of that is a lot of negotiation. It would be one percent, one and a half percent. Sometimes people say that, you know, don't take a monthly thing. Just take a flat 20 percent to my next round, depending on obviously they know best when they are entering the market. When do they feel the round will get completed?
00:49:25
Speaker
So, yeah. And the third document is the need of hypothecation, which is essentially just it lists down the things on which the lender has a charge on.
00:49:38
Speaker
So current asset, fixed asset, your brand, IP, those kinds of things are listed. And that is a document that gets filed with the Ministry of Corporate Affairs, MCA, on the website, you know, that gets filed. So that is a CAG9 form, which is a charge form, which essentially publicly says that this lender has this charge on this company.
00:50:07
Speaker
So these are the three documents essentially, which one should be aware of. And once the documentation is signed, obviously there's a lot of negotiation, you'll have your lawyer, they'll have their lawyer. But once that's negotiated and signed, then we move to disbursement. So we will disburse the money after the documentation is assigned.
00:50:26
Speaker
Your due diligence sounds more stringent than what a VC does, I guess, the amount of things that you do in your underwriting slash due diligence.
00:50:42
Speaker
Yeah, so I think VCs generally have to be more optimists and we have to be optimists if you have to be in this segment, but with a, I would say, slight realistic side also. Just because a company has done well in the recent past, I can't assume that next year, Forex,
00:51:08
Speaker
The week, the year after that will be eight X. So if, if I am not that optimistic and I have to, you know, tone down my assumptions that whatever the company is doing, it'll probably do similar or slightly better. So we'll have to be prepared for all those things. And, uh, you know, just, as I said, we don't have any power law thing. So it's important that all my loans come back to me. Yeah.
00:51:34
Speaker
Okay, understood. Okay, and then the money dispersal is also done in tranches typically? Yeah, you know, if, for example, we have given a larger sanction, as we were discussing, there are certain milestones post which the subsequent tranches are paid, it's fine. Sometimes it could be a single tranche, you know, and that also happens. What is more common?
00:52:01
Speaker
I think trans approach is more common because you've already under written the company, you want to sanction a particular mark, you don't want to get into the hassle of documentation for every tranche, but you're also sure of when do you want to give that second tranche or third tranche. Okay. Understood. So is Stride an AIF? Yes, Stride is an AIF.
00:52:28
Speaker
Give me like a little bit of context on the origin story of Stride and maybe a little bit of your personal origin story also.
00:52:41
Speaker
Sure. So Stride is founded by Ishpreet. Ishpreet is a career banker. He started it in late 2018 when he was coming out of his bank job. And he's worked across multiple Indian private banks and MLCs. And I had joined right when the first fund had just kind of, we were just about to do our first transaction. And so I've been with Stride since 2019 and grown
00:53:11
Speaker
within the system. So I joined as a principal, got promoted to a partner in the second fund and then a managing partner in the third one. Laid a lot of investments, done a lot of fundraising, so been involved with all the activities at the fund level on the performance of the fund. Stride across the last four, five years has now become the largest venture debt provider. We have three funds in India.
00:53:39
Speaker
And across the three funds, we have $450 million in assets. And this $450 million is in about 135 portfolio companies that we have. We have been able to demonstrate industry-leading returns, a very robust asset quality, and a very diversified portfolio of category leaders across the length and breadth of the startup ecosystem. We have some very, very high quality names.
00:54:07
Speaker
For the listeners, they should definitely visit our website and see the kind of companies that we have invested in. 40% of our portfolio is consumer, and it is because of the inherent requirement for working capital in those businesses. Whether it's beauty and personal care, fashion, jewelry, home decor, footwear, we have food and beverage. We have all those high-quality companies.
00:54:33
Speaker
Then financial services is another big sector for us. And then, of course, there is EV, clean tech, B2B commerce, et cetera. So three funds for $50 million in assets, 135 portfolio companies. This is all in India. And now we have two global vehicles also, which we started last year. One is out of Gift City. We became the first credit managers to get the license in Gift City. And we became the first Indian fund managers to get the license in Abu Dhabi.
00:55:03
Speaker
So we want Abu Dhabi to be the global footprint for Stryde. And whatever we have done and achieved in India, can we do it for Middle East, Southeast Asian countries as well? Because Middle East and Southeast Asia venture debt as an asset class is not as evolved, not as mature. So yeah, this is your own Stryde journey. With respect to my personal background, I've been working for about 14 years.
00:55:32
Speaker
Since 2019, I've been with Stripe, but prior to that, I was at Zander. Zander is a private equity fund. They also have a structured credit desk through which they were doing basically lending to companies more in the brick and mortar mid-market space. Prior to Zander, I was at HSBC in their investment banking vertical.
00:55:58
Speaker
Okay, 450 million deployed out of how much raised? No, 450 million is the total raised. Okay. 450 million total raised. That is the corpus that we manage. And out of that 450 million, we would have deployed, yeah, 350 million we would have deployed. Okay. 350, 375 million we would have deployed, yeah.
00:56:20
Speaker
Okay. Does it operate the way we see operates that you call the funds when you want to deploy them from your limited partners, the investors? Yes. Yes. You call the fund when you want to deploy them, but our deployment cycle is much faster. So if we have raised funds and we have typically a four-year timeframe during which we keep the money invested, but to our investors, we have to distribute quarterly coupons.
00:56:47
Speaker
And after four years, we have to distribute the initial capital as well, the principal component as well. So during the four years, typically during my first year or maybe first 15 months, we deploy the full capital and then we are just churning the capital. Okay. Okay. Okay. Understood. Understood. Is there ever a case where you've reached the end of the fund life of four years, but you're yet to get the money back and what happens in that case then?
00:57:18
Speaker
So fund one, we have been able to distribute the entire capital in entirety. That is the fund which, you know, 2019 vintage, we completed the fund commitment period. We've returned the full money, very happy with the performance. So that is done. Fund two, we still have 15 months left before we have to start returning the principal. So I hope that situation does not come, but yeah, it hasn't happened so far.
00:57:42
Speaker
While deploying only, you would keep that in mind that I will not have a tenure which is longer than my repayment date of the fund. Of course, we are very mindful of that, that the day I have to start returning my principal, my tenors have to be locked in accordingly.
00:58:00
Speaker
Okay. How much did the investors get as a return on investment for fund one, the fund one LPs? So fund one for us, the gross return was 22% and net, which is post your expenses, fees, et cetera. We are at 18% net to our investors. 4% is your income, that 22 minus 418, that 4 is your income, essentially.
00:58:22
Speaker
So basically the management fee, the upfront one-time fee, all of that, and then there is a small percentage of carry. All of that subtracted is what gets distributed. Okay. So the way Stride earns is through that difference between Gross Margin and what is distributed back to the investors. Yeah. So any fund typically earns through management fee, the upfront fee and the carry component.
00:58:52
Speaker
Okay. And like, you know, we see the partners, the GPs are more like, they have a profit share rather than like a fixed salary or at least a fixed salary is marginal compared to the profit share. Is it something similar here that the partners are more like profit share partners rather than on salary?
00:59:16
Speaker
No, so there is a salary, which may be, yeah, not a very handsome figure, but yes, definitely your remuneration has a component of carry, which is expected to be bigger. Yeah. Okay. Okay. Understood. And do you, do you get to earn more if you generate higher returns or is your earning fixed? How is that calculated? What is the formula?
00:59:45
Speaker
So, you know, the carry component is what we'll decide. So carries performance fee, right? So for example, if I had committed
00:59:59
Speaker
x percentage of return, but I have given you 1.5x. On that 0.5x of incremental return that I have over-delivered, I have a certain profit share, which is generally anywhere between 10% to 20%. So that the fund keeps. And that is distributed to, say, the partners and other senior leadership team.
01:00:26
Speaker
And that gets negotiated once you're joining or at the beginning of the fund that this much percentage of whatever profit the fund keeps will get distributed to these many people in this percentage ratio. What is the amount that you guarantee to your investors?
01:00:47
Speaker
Yeah, so we have the highest hurdle in the industry. The amount that you, so to say, I'd not say guarantee because this is not like a fixed deposit, but below this, you can't take any performance fee as such. So 11% is the hurdle for us, and it's the highest compared to any other venture debt fund in India. And we've been able to distribute, as I said, you know, 18% is the net distributed return, so it's way higher.
01:01:17
Speaker
than what the hurdle is. How did Isrit put together a fun one in terms of finding the investors? Because I'm guessing the key thing here is to find investors because the startup boom is very much here and there would be a lot of potential candidates who could be lent to. But finding investors would be the tougher challenge?
01:01:46
Speaker
The trick is that first fund you keep smaller, you know, keep it definitely lesser than 500 crore, you know, and that is just for you to demonstrate what you can do, right? It's also very important that
01:02:02
Speaker
The first set of investors that you have, get some, and thankfully nowadays there is Sid B, who really promotes new fund managers, and Sid B was very helpful in our first fund. Our first fund was 350 crore, but a very big size of it, I'd say more than 20% came through Sid B. And so any government, I would say,
01:02:27
Speaker
belief solidifies the faith amongst other LPs also. Because Sydney, of course, does a lot of diligence on the background, reference checks, what you've done in your previous experience and all of that. And then, of course, there's a bunch of family offices, et cetera, that you raise for. So I'd say the first important thing is keep the fund size below 500 crores in your first fund.
01:02:50
Speaker
You can also keep it 250 to 300 crores. I think there is nothing wrong with starting with a smaller fund size. It's important to get fully subscribed, and it's important to do a good job, which means that you should be very careful of your initial few investments. These have to be your ambassadors of the kind of credit quality, your equity quality, depending on whether you're a debt fund manager or an equity fund manager. It's also very important to
01:03:18
Speaker
higher, the right kind of team. And obviously at the onset, you can't have a very big team. Even if you have, say, seven to 10 people, they should have that intensity, that hustle to make sure that the fund does well. And I think once your first fund has done reasonably well, from the second fund onwards, you can increase your fund size.
01:03:46
Speaker
but remain true to your roots and just make sure that you're doing the same good job, even with an increased fund size. As your fund size increases, you obviously take the help of a distribution partners also, wealth managers. And if you have three, four good wealth managers, they'll also help, you know, raising a lot of capital for you. Yes.
01:04:11
Speaker
What percentage of your funds is raised from Indian investors or LPs? So all the three domestic funds that we have, it's all domestic. I mean, barring one or two percent, everything is domestic. Yes. Okay. Okay. Obviously for our international footprint, it will be very different, but for all the three domestic funds that we have, it's all largely domestic. Okay. Yeah.
01:04:39
Speaker
venture debt driven by the VC funding cycles, you know, for example, like this, they say that it's a funding winter. Does that also mean that the investors who invest in venture debt start pulling back? I mean, are these correlated? So of course it's correlated, Akshay. And as I said, you know, venture debt is a certain percentage of venture capital that gets deployed every year. If that venture capital
01:05:10
Speaker
I'll just give you a stats around it. You know, 2021, the venture capital was about $35 billion worth of investment in one year. Venture debt would have been say close to 800 million. No, sorry, it would be close to 600 million in 2021.
01:05:31
Speaker
In 2022, that venture capital fell to 25 billion, but venture debt still increased from the 600 to 800 million. And that increase happened because the venture debt as an asset class was underpenetrated and there was room for growth also because the fact a lot of companies in 2021 had raised massive rounds of equity, which could add debt even in the subsequent year.
01:05:58
Speaker
But then in 2023, venture capital fell again from 25 to, say, $11 billion. And with that $10 billion, venture debt is flat at $800 million, or maybe a billion. That is the range. But what I want to say is that it cannot grow in silos. It is a correlated asset class.
01:06:26
Speaker
And it should be a correlated asset class because most of these companies are loss making. How can you keep giving them debt when they're not raising equity? So definitely, the growth of venture debt as an asset class is dependent on the growth of venture capital as an asset class in terms of the annual deployment.
01:06:44
Speaker
At the same time, Akshay, this year, there was massive demand for venture debt because many companies who earlier thought that raising equity is super easy and every six months you can go in the market and raise equity. And you can ask for any valuation and you will get it. They realized that equity is not cheap.
01:07:07
Speaker
Right? And it's important to save your dilution. Otherwise, you raise equity, you raise equity. And by the time you reach Series D, you are reduced to single-digit shareholding, which significantly impacts your capability to raise further round of equity and is a suboptimal outcome for the founder, for the existing shareholders, for the business, everything. So use that for the right reasons in the right quantity from the beginning of your journey. Use it smartly as part of your capital structure.
01:07:35
Speaker
This year, we had a lot of demand because people thought that they would raise debt to defer equity raise. But unfortunately, not a lot of that demand is serviceable because we also have to underwrite risk, protect our investors. So that's why the growth in venture debt hasn't been as much this year, even though the demand was much higher. And that's why it's a correlated asset to us.
01:08:01
Speaker
Do you have an investment thesis the way VC fund has an investment thesis that we will fund companies who are operating in this space and with this kind of an approach? Does a venture debt also build a thesis or you are neutral?
01:08:19
Speaker
No, so we have thesis. We might not have a very, I would say specific thesis. So I might not say that, you know, I'm going after cross-border payments and I look at every company in the cross-border payment and all of that, but at a larger level.
01:08:35
Speaker
The thesis that we have is that we'll only invest in companies which are category leaders, which are backed by strong VC investors, which have positive unit economics, breaking even a profit on a CM2 level, not burning a lot of cash, well capitalized, have cash for more than say 9-10 months sitting on the balance sheet.
01:08:55
Speaker
you know, good ref check of founders. Those are the kind of filtering criteria that we will have. And the companies that fit those filtering criteria, then of course we'll diligence it in a very different way, but a very comprehensive way. But we are not too fussed about, you know, that I want the next biggest space tech company. No, I probably not invest in a space tech unless it becomes mainstream.
01:09:21
Speaker
So my idea is not to find those moonshot companies which may become a hero or may not exist tomorrow. I will look at companies which are already the category leaders. And you know, I'm comfortable that my debt will come back. They'll end up giving me some warrant upside as well.
01:09:41
Speaker
Okay. Okay. Understood. Tell me about Gift City. What is Gift City and why did you decide to launch a fund for funding Gift City based companies? So Gift City is government's endeavor to make it easy for international investors to invest in an Indian fund. And you know, all of us know that how popular is, for example, Mauritius.
01:10:08
Speaker
you know, all fund managers have a feeder fund there and you raise capital there and that fund eventually deploys out of India or anywhere else, right? So I know it's popular, but I don't know why. Why is Mauritius popular? Taxation. Okay. You know, taxation. I'll tell you the benefits with gift city and how it's trying to replicate what say other, some of these, you know, feeder funds.
01:10:36
Speaker
Incorporation regions have been, what is the benefit essentially for gift? So, sorry, two main things in gift. Okay. So I'll just give you an example of why gift city is an attractive jurisdiction and what are some of those benefits that it endeavors to give to the investors, which say jurisdictions like Mauritius had been giving.
01:11:05
Speaker
So out of gift, two main things. You can raise in dollar, deploy in dollar, return in dollar. My money is not getting converted to INR. A lot of international investors always have to worry about hedging costs, about depreciation. Their returns get impacted a lot when the rupee depreciates. So I think that problem gets solved.
01:11:32
Speaker
you don't have to worry about all of these things. I can raise USD in gift and invest anywhere outside of India. The second thing is the withholding tax component that today when international investors invest in India, they have every country has a DTW kind of thing, right? Double tax awarding avoidance treaty. So essentially,
01:12:04
Speaker
Say if an investor has come from Dubai or from Singapore, I'm not sure of the tax brackets, but say, for example, the normal interest is taxed at the marginal tax rate in India, as per the Indian taxation laws. If it's an international investor, the fund manager will still deduct tax at source, TDS, as per the DTAA norms with that country. So am I deduct 12.5% and give you the money?
01:12:33
Speaker
You may be in a region which has to pay zero tax, but now that 12.5% is blocked, and then you have to do a host of, you know, compliances and documentation to retrieve that. In Gift City, there is no withholding tax. You pay tax as per your home jurisdiction.
01:12:55
Speaker
The fund manager distributes it. We are not deducting any TBS. So these two things make it easy for international investors to invest in gift city. And these two things are very powerful. Gift city is
01:13:12
Speaker
a step in the right direction. They have also made sure that there's a lot of single window clearance. There is office space. It's like an SEZ, Special Economic Zone. A lot of ancillary value-added services are available in Gift City. There are proper offices in Gift City. You have single window clearances. The approvals are faster. And then there are obviously these are the benefits that we spoke about.
01:13:37
Speaker
So that was our attempt that if we want to take stride global, as in raise in dollar, deploy outside of India as well. Can we start it from gift? Because that's a known territory, you know the benefits and it solves your purpose. If I'm, you know, incorporating a fund in Singapore and I'm doing the same thing, I might as well do it from gift city.
01:13:59
Speaker
Okay. So gift city, the goal is to raise there, but not to deploy in gift city. The deployment could be in India or Middle East. No, no, you can't deploy in India because I'm talking about debt funds. Okay. This may not be true for equity funds, but debt fund may, but not India.
01:14:29
Speaker
Not India. Because of the ECB norms. So for debt specifically, you know, those ECB norms kick in, which is external commercial borrowing. Okay. Okay. Okay. You know, and that is the reason, if you look at the global MNC equity funds, if you look at the tax, if you look at the debt, if you look at the U.S., if you look at the debt, if you look at the debt, but debt funds,
01:14:58
Speaker
India has to open a subsidiary outside of India to raise that debt. But you will not see a lot of global venture debt or generally debt funds directly investing in India because then the ECB kicks in external commercial borrowing and that has a lot of
01:15:20
Speaker
caveats with respect to minimum tenor, interest rate, compliances. So while you can navigate all of that and probably still end up investing in India, but I'm just saying it's very complicated. So generally we'll not see USD debt funds investing directly in India. Okay. Understood. So gift city and Middle East.
01:15:45
Speaker
How would you raise funds for these two? Because so far your LPs have been in India. So you built a name and a brand and reputation in India. You have the network in India to raise. How will you do it for these funds?
01:16:00
Speaker
Yeah, it's a learning process, Akshay. We are also figuring out, obviously, we have a certain playbook of sorts for India. We know what kind of families invest or our existing LP base. You can reach out to them if they've had a good experience. They'll definitely be repeat investors in your subsequent funds and all of that.
01:16:22
Speaker
But of course, international fundraise for us is also new. So we are trying to see if we can get some good anchors out of Abu Dhabi. And the Middle East has a lot of big sovereign funds. We are in multiple conversations with those guys to get a solid anchor and after which we can start approaching families and treasuries for whom this may be of interest.
01:16:47
Speaker
Okay. Understood. Help me understand what the stride organization looks like. Like how many people doing what kind of roles? So stride ventures, you know, obviously there are three partners and then we have directors and principals who are responsible for sourcing deals and leading those deals as in being a part of the commercial negotiations and
01:17:17
Speaker
you know, making sure that deal goes through, presenting to the investment committee. Then, you know, there's a layer of associates and principal associates who do a lot of heavy lifting with respect to diligence in the credit assessment.
01:17:33
Speaker
documentation negotiation as well, and then analysts. There are about 40 people in our organization. It's actually large for a venture debt fund, and that is because a lot of our processes are extremely institutionalized. Of these 40 people, about 25, 27 would be on the investment side.
01:17:59
Speaker
But then we have a finance and treasury team. We also have an investor relations team. We have a couple of people who are only looking at warrant exits. Some people who are only looking at making sure that your security is perfected. There are a host of institutional things that is needed in a debt fund.
01:18:19
Speaker
And because your monitoring is on a monthly basis, and I have to be short of early warning signals and everything, my monitoring has to be tight. And I have to have that kind of headcount, you know, to make sure you will see a lot of VC funds having $1 billion in AUM with just 10 people.
01:18:38
Speaker
And that, you know, kudos to them, but that cannot happen in a venture debt fund, where I have so many companies to monitor on a monthly basis to make sure I'm getting everything. My documentation is watertight. My security is watertight. You know, all of that. We have an internal legal team as well. So, yeah. Okay. My last question to you. What do you love about your job?
01:19:03
Speaker
I think it's been a very satisfying professional journey for me since the time I had joined Stride. First, because I got to see the entire
01:19:15
Speaker
entire, you know, all verticals of how a fund operates, right? Whether it's with respect to fundraising, managing your treasury, managing your drag, which is how much capital is unutilized and you still have to bear interest for your LPs, that is drag. So how to manage that, make sure your deployments are doing where your founder relationships are good, your sourcing network is strong, your VC relationships are good. You're also differentiating yourself for your founders. You don't want to be a transactional capital provider.
01:19:45
Speaker
You're also differentiating for your investor base. How are you making sure you're arranging for co-investment? And beyond all of that, also just making sure that the brand stride up holds. So I think just the entire complexity of various verticals and the perspective it gives, that is number one. Second, you get to meet so many accomplished founders
01:20:12
Speaker
So many inspirational people. The third thing is that you're not married to a particular sector, right? You get to take views and perspectives and build your own opinions around whatever is happening in India. It's actually a sample of how India is evolving. So I think
01:20:35
Speaker
It's a, all of this together, you know, keeps you satisfied that you're meeting so many good people, doing so many different things. And yeah, I think all of that.
01:20:49
Speaker
And that brings us to the end of this conversation. I want to ask you for a favor now. Did you like listening to the show? I'd love to hear your feedback about it. Do you have your own startup ideas? I'd love to hear them. Do you have questions for any of the guests that you heard about in the show? I'd love to get your questions and pass them on to the guests. Write to me at ad at the podium dot in. That's ad at T H E P O D I U M dot in.