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The burgeoning Indian startup ecosystem, now in its best year in terms of funding, needs capital in all forms, and it is here that venture debt is making its presence felt.

Stride Ventures, a venture debt firm founded by Ishpreet Singh Gandhi in 2019, is keen to strengthen its foundation in the startup ecosystem as the go-to financial institution for startups. The venture debt fund works with a network of partner banks from the private sector, which includes Indian and foreign entities, to facilitate the debt funding.

Ishpreet Singh comes with over a decade-long experience in the banking sector, which proved helpful to set up the venture debt firm.

Stride Ventures typically invests in startups in the B2B ecommerce, direct to consumer (D2C), agritech, and healthcare sectors.

It has funded around 28 startups till now, including Pocket Aces, Sugar Cosmetics, Spinny, HomeLane, Zetwerk, Bizongo, Infra.Market, etc.

The challenges

Ishpreet says: “I started lending to this ecosystem since 2015 as a banker, but there were several challenges. This made me realise that one can create a strong financial institution, which understands everybody’s needs.”

According to him, the challenges centered around the general inability of banks to be meaningful partners with startups, venture capital firms not getting adequate from these lenders, and the lack of awareness among founders on how to use venture debt.

Ishpreet felt he could connect the dots by talking to all these important stakeholders. He met scores of venture capitalists to understand their requirements, spoke to the founders, and made them realise that venture debt is a better alternative to fund their capital requirements in a non-dilutive manner.

In the case of banks, it was less of a challenge for Ishpreet, given his experience of working with them earlier, but the need was to create innovative financial models, which will be in sync with their structure.

Differentiation

The key task before Stride Ventures in the relatively smaller-sized venture debt industry in India was to create a differentiation.

Typically, venture debt firms come to startups after they raise an equity round of funding, but Stride Ventures does it differently.

Stride provides venture debt to startups generally in between equity rounds of funding. More importantly, it partners along with banks to provide this capital where the former also becomes an important financial partner.

“We were looking at how banks can become complementary partners, and for this, we came out with unique structures,” says Ishpreet.

Stride Ventures launched its first fund in 2019, which was closed at Rs 350 crore in November that year. In 2020, it sanctioned investments into 15 startups.

Rationale for funding startups

The founder strongly believes that every segment within the startup ecosystem has a strong use case of venture debt.

Stride Ventures generally funds those startups which have a reasonable flow of revenues, say around Rs 40-50 crore, with the potential to scale rapidly and is a contributory positive margin business.

Abhinav Suri, Managing Partner, Stride Ventures, says, “Our endeavour is to always look at startups which have a reasonably predictable cash flow and where they can use debt financing.”

He opines that for many of these startups, there is a strong need for working capital and do not have to use equity funding for this requirement. These include requirements such as fund receivables, inventory management, supply chain financing, etc., where venture debt can play a critical role.

At the same time, startups in their early stages are unlikely to have strong financial teams to navigate them through various modes of financing.

Ishpreet recalls the first startup they invested in was Stellaps, the IoT company focused on the dairy industry, which was not keen on raising debt. But Stride Ventures saw that there were many assets in its portfolio which could be leveraged to raise venture debt.

He says the firm has always believed in founder-friendly debt products.

Partnership with banks

To enable the flow of capital, Stride Ventures partners with banks that are comfortable with these modes of financing.

“Through this model, we have been able to bring down the average rate of financing for the startups and also created seven to eight different structures for the banks to blend with venture debt,” says Abhinav.

Stride Ventures also does its own due diligence of startups, which provides much more comfort for the bank to put in their money.

Abhinav says, due diligence helps them size and structure the entire debt funding better.

“We wanted to bring that flavour of transformation where things were not looked at with a single lens of a term loan and create a framework, which was similar with the banks,” says Ishpreet. He adds, “this is very complementary where one can co-create along with the banks.”

Stride Ventures is engaged with around six to seven banks in the country, which include the likes of Kotak Mahindra Bank, IDFC Bank, HDFC Bank, etc.

“It is also important that we understand what kind of sectors or companies will suit a particular bank and then approach them,” says Abhinav.

Unlocking businesses

In May this year, Stride Ventures announced the launch of its second fund with a targeted corpus of Rs 1,000 crore and a greenshoe option to raise an additional Rs 875 crore.

Since the launch of the second fund, the average ticket size has gone up from Rs 15 crore to Rs 30 crore.

“Since we co-lend, there have been term sheets given, which are beyond Rs 100 crore, and this has unlocked businesses,” says Ishpreet.

The partnership with Stride is also helping banks as it offers many other products in its portfolio like cash management, foreign exchange services, and general liquidity, which can be used to cross-sell to the startups.

Ishpreet claims it has seen zero delinquencies or restructuring in the current portfolio of startup investments.

The venture debt firm has deployed around 90 percent of the corpus from the first fund, and now the scale has become bigger where it has deployed capital from the second fund.

“This is the need of the hour when you see so much action around and we are trying to cater to the needs of the startup founders,” says Ishpreet.

This would also mean that Stride Ventures would look at various models for the startups like supply chain financing, on and off-balance sheet, etc.

The impact

Speaking about the impact the venture debt segment has had on the Indian startup ecosystem, which is still a very small part of the entire funding, Ishpreet feels there is a growing acceptance of this kind of capital, given the aversion to debt in the country.

“There is a tremendous change in the mind space of the founders with regard to venture debt and we expect the deployment of this capital to go up significantly in the next one to two years,” says Ishpreet.

Abhinav believes that if the underlying revenue of the startups continues to rise, then it would mean lot more debt use cases.

“We would like to be the single financial institution catering to all kinds of needs for startups,” says Ishpreet.

This would mean working along with banks and co-creating products to support the startup founders.

“From day one, our goal was not to be a traditional venture debt firm but the vision was to call ourselves as a startup bank,” says Ishpreet.