Unicorn India shifts focus to venture debt, eyes first close of $93m debt fund by June

Sudip Bandyopadhyay, Managing Partner, Unicorn India Ventures

Unicorn India Ventures, which closed its early-stage venture capital fund, is now pivoting its focus towards venture debt, which has recently emerged as a strong asset class. The Mumbai-based investment firm, after closing its $15 million venture capital fund, last year launched its debut venture debt fund of Rs 600 crore ($93 million).

Unicorn India Ventures is headed by former SEBI chief M. Damodaran, and well-known investor Sudip Bandyopadhyay had joined the Fund as a managing partner last year. The founding Managing Partners of Unicorn India include are Anil Joshi and Bhaskar Majumdar.

Venture debt has grown as a means for funding for startups that are not keen to give up equity. While the market is led by Temasek-backed InnoVen Capital, other players in the market include Trifecta Capital and IntelleGrow. Recently, venture capital firm IvyCap also announced its plans to launch a $76.4 million venture debt fund.

In an interview with DEALSTREETASIA, Sudip Bandyopadhyay, Managing Partner, Unicorn India Ventures talks about the emergence and growing need of venture debt in India as well as the investment firm’s plans for its new venture debt fund. Edited excerpts:

From a venture capital player what made you get into the venture debt space?

Globally venture debt has been a significant part of the capital market ecosystem. It complements and supplements the mature equity investments. For any corporate you need equity and debt. Venture debt evolved along with venture equity in US and Europe. In India, we have seen the venture equity evolve around the last 15-20 years and it is now a pretty well-established asset class and the startup ecosystem that has come up in India is very encouraging, but we don’t have a thriving venture debt market. There are a couple of venture debt funds, but that is gross inadequate to cater to the startup ecosystem. We looked at the situation and realised that there is a significant opportunity of launching a venture debt fund and cater to this requirement of the startup industry.

I think there is a huge scope for deployment and Indian startup industry has realised that as well. If you look at the established startups all of them have already taken money from venture debt whether it’s a Big Basket, Grofers, Snapdeal, Flipkart, all of them have got debt funding. It’s an established thing which the promoter and market now understand, unfortunately, the ecosystem was not developed in India and now it’s coming up.

Is there bound to be an oversupply of venture debt with the entry of new funds?

The total investment in Indian startups was $12-13 billion last year out of that you take out the Flipkarts and Paytms, and then what is left is about $2 billion worth of investment that. According to that, we estimate that at least $500 million is the requirement for venture debt, since in a startup ecosystem the requirement for debt is about 1/4th of equity.
These are the broad numbers and I think we are very far away as there is one established fund, there are a couple of other guys raising funds. But, all of that put together will be Rs 2000-2500 crore that we all plan to raise and that is still lower than the annual requirement which we estimate.

Also, these funds have a 6-8 years horizon, so the 2,000-2,500 crore (($311 million-$388 million) will be deployed over the next 6-8 years and we are looking at per year requirement of $500 million. I think there is a huge scope for deployment and Indian startup industry has realised that as well.

Are you positioning yourself as a venture debt provider now?

We are positioning ourself as a partner to the startup industry, because a startup needs both debt and equity. These are two different asset classes with different requirements and structure, but if you come to us then we can give you both. It doesn’t necessarily mean that we will provide debt to only those companies in which we have invested equity in, but if our portfolio companies require debt, then we will, of course, provide that.

Will the same $93 million fund be used for equity as well?

These are separate funds, equity is a different fund. We are positioning ourselves more as venture debt provider because there is enough money getting deployed in venture equity and there is a huge cap in the debt space and we want to come in that.

What is the status of your fund? By when do you expect to close this fund?

We have have the regulatory approvals in place and we’re in the process of fundraising. We expect to have a significant first close by June this year. By the end of this calendar year we hope to close the entire fund.

What is the plan for your venture capital fund, since you reached a final close at $15 million last year?

That is almost fully deployed and it’s doing very well.

Since you’re almost fully deployed, would you want to look at a new venture capital fund or put all energy behind the venture debt fund?

Not right now, currently we are focussed on venture debt.

As you are currently in fundraising mode, what is the feedback from LPs on venture debt in India right now?

It is very encouraging. It’s a different kind of asset class. People who have invested in venture equity are realising that venture debt is not a black box. Investors are getting quarterly interest, so there is complete transparency. Whereas in an equity fund, they get returns after 5-7 years. Here it is a pass through, where we earn interest and we pass on interest to them. So, it’s different asset class for them, and most of the investors are excited about this.

Are you also reaching out to global investors for your venture debt fund?

Not right now, for this fund we want to reach out to domestic investors. Maybe at some stage for our next fund will reach out to foreign investors.

How do you view the next couple of years for venture debt in India?

I think more people will come, there will be a thriving ecosystem. Debt and equity should both go hand in hand. While equity market has developed, debt has just about started. Over the next few years, you will see many more players coming into the market and some of us raising our second or third fund. It will be a fully developed market in the next few years. As we move ahead and evolve, venture debt market will be significantly bigger than what we see today.

How do you the growth path for Unicorn India, both from an equity and venture debt point of view?

We will raise a second debt fund in about three years time. Not sure, if we will raise another equity fund, but we will definitely raise another debt fund.

From an equity standpoint, will you still look at new investments?

We will do a little bit of equity out of the debt fund only as a structure, but as far as the fund is concerned we will focus on the debt fund.

What is the average debt that you are looking to provide?

We will have a usual ticket size of Rs 15-20 crore and per year we will probably be doing 10-12 investments, so we can run two cycles. In three years we  hope to deploy full Rs 600 crore, then one more cycle should happen. So, it would be six years of investment and two more years of harvesting.

Also Read:

India: Unicorn India launches $92m venture debt fund

Venture debt player InnoVen Capital mulls launching AIF in India

Venture debt as asset class coming of age in India