Emerging Fintech: Powering the Indian startup ecosystem through Venture Debt
Venture debt is an instrument that combines venture capital and traditional debt to provide startups with a financing that has been tailor-made for their needs. This model of financing was originally conceived in Silicon Valley in the 1960s-70s and has since been adopted by startup ecosystems across the world. In the US venture debt makes up 15% of all startup financing transactions, while the numbers for Europe, Latin America, and India are 3%, 13%, and 3% respectively.
In India, which is rapidly emerging as a leading startup globally, venture debt has been a bright spot in an otherwise muted fundraising cycle. In 2022, venture debt disbursed grew by 48% to reach $800 million while venture capital disbursed declined by 30% during the same time period. Moreover, Indian fintech startups have been the leading recipient of venture debt accounting for 31% of all venture debt deals in 2022.
In light of the increasing prominence of venture debt in the startup ecosystem, I had the opportunity to sit down for a conversation with someone who has deep experience in this domain — Ishpreet Singh Gandhi, the Founder and Managing Partner at Stride Ventures — one of India’s largest venture debt funds with 100+ portfolio companies including multiple fintech unicorns and soonicorns like Yubi (formerly CredAvenue), Upstox, MoneyTap, Money View, Rupeek, and Jupiter to name a few.
Tarang: Hi Ishpreet, let’s start by talking about your career. I know you have been in the financial services industry for a while, but how did you get your start here?
Ishpreet: Hi Tarang, yes, of course! First of all, think of me as any other person being in a corporate job wanting to do something of his own, and I opted for finance as a career after doing an economics major. Coming from an entrepreneurial DNA, I always thought that financial services in India would be a fairly large opportunity. What I realized after working with foreign and Indian banks in the SME, commercial, and corporate banking verticals was that I started having a penchant towards startups; somehow, I related more with them than with the traditional businesses. There was that sense of innovation, hustle, creativity and ownership that just went hand in glove.
Therefore, I deliberately started working and interacting more with startups since 2013 and if you see the Indian VC funding cycle, 2015 is the year when venture capital really took off and luckily for me it was the time when I was at the epicentre of the action from the banks’ point-of-view. As I understood the ecosystem in depth, I got a chance to fund some prominent startups back then; OfBusiness, LendingKart, Bira91, Leap India and Rivigo, to name a few. Not long after this I thought that it would make sense to create something of my own and that is how Stride Ventures came to be.
Tarang: That’s awesome! So, building on that, what is Stride Ventures and what was the inspiration behind it?
Ishpreet: Interestingly, people think of Stride Ventures primarily as a ‘venture debt’ player but that’s not the real motivation for starting Stride to be honest. While we do have a venture debt fund business, we in fact, have five venture debt funds under Stride Ventures, we also have a franchise called StrideOne, which very few people are aware about. StrideOne is an NBFC that is focussed on providing capital to the various players in the startup ecosystem such as invoice discounting, supply chain financing, etc. But it’s a franchise, so the point is that Stride, as the name suggests, is taking decisive, long steps in a positive manner. The name came in being because during the last five years of my career in banking, I realised the difficulty of being a Founder. If you want to become an entrepreneur tomorrow, you realise that it is not only important to have co-founders and a team, but you also understand that while you have an amazing idea, and hopefully product market fit for that idea, you also require a lot of financing support.
One basic support, which for me, is sacrosanct to building any business is understanding how you can protect your ownership, how you can grow while using the right kind of financing. So, what I really wanted to create with Stride was to be a financial partner to the founder, which we are in the form of Stride Ventures & StrideOne today, that solves for all possible financing needs of a founder.
Tarang: So, before my next question, I’m curious about what do you look for in business that you support? You’ve mentioned that you support businesses across lifecycle but there must be some common characteristics that you look for when you’re thinking that, hey, this is an entrepreneur who I want to back.
Ishpreet: First of all, the most important and integral element for any business to be successful is the attitude of the founder and the mindset for solving a problem. I believe that the attitude of the person who started the company, we can call it the founder, the CEO or even the promoter, his/her attitude must be that whatever obstacles I’m about to face, I’m prepared. I think that their attitude defines the attitude of the team which in turn defines the attitude of how the firm behaves and what they stand for. We can speak about product market fit, TAM, unit economics, and a host of other things but I think they are all byproducts.
Tarang: Now coming back to the more technical point, what is venture debt and how does it differ from equity financing like angel or venture financing?
Ishpreet: Venture debt is just another form of venture capital, but one which has to be paid back over a period of time, typically 18–24 months. So how do you manage your business in a manner in which that founder has a vision that how do I use this capital for 2,3,4 years and navigate financing in a manner in which we are not diluted but solve for the growth capital needs of the business in an efficient manner. That’s what venture debt is, in a sense, you can be more technical about jargons but ultimately, it’s just capital.
From our perspective when we give this capital, we tend to understand the planned use cases of this capital beforehand and it should not be used to find product market fit. Once you have product market fit, you’ve got the right understanding of your market and then venture debt is a preferred tool to opt for and scale the business. Subsequently, from our perspective there will be analysis around how that business is shaped well enough to use this capital as well as the ability to repay it. However, Stride’s purpose is to support businesses in which we can partner to give different kinds of capital depending on the lifecycle of the company .
As of today, we have five venture debt funds, we have three large INR venture debt funds in India: namely Funds I, II & III. We recently announced the first close of Fund III at $100M. Apart from this, we have USD venture debt structures based out of GIFT City & Abu Dhabi Global Markets (ADGM). The point is that we have multiple forms of capital, which are generally of longish tenure and can be used for organic and inorganic growth, working capital expenditures and then we have various other kinds of capital as a part of StrideOne, which is around financing the supply chain ecosystem of those startups.
Tarang: As you look to the next 5 to 10 years, you said that you’re looking to open a USD denominated fund and also have funds investing in Southeast Asia, what kind of strategy do you playing out? Do you see having a base in India and these entities working closely with the India office or do you see them operating independently, kind of like the Sequoia route?
Ishpreet: Our strategy is slightly different and unique as compared to any other fund in the market. We are truly committed to the Indian startup ecosystem and have been active backers since 2019. What’s happening, if you’ve been following the Indian startup space closely, is that a lot of companies are coming back home, by which I mean setting up the parent entities in India, so naturally India is a preferred place for them to raise capital and that might remain for a while. Now we can argue whether it will happen in the next 1–2 years or a decade, but I believe it will be this way moving forward.
The point is that when that happens, we are doing nothing but following the startups and their need for the capital in those countries/regions. So, we’re saying okay, we find them and solve for their capital needs in India. Now let’s say you run a company in India, and you want to expand to international markets and set up an entity in Delaware in the US, or Singapore or even UK for that matter, can we fund your international businesses as well based on the data we have on their parent operations in India? So, our USD denominated venture debt funds will become the go-to option to fund these companies for their international expansion without taking on the risk of exchange rate fluctuation. Earlier this market was typically served by some of the large foreign funds but now there is a gap given the recent turn of events. So our structure remains deep rooted in India but with a lens on going global as and when our portfolio companies desire.
I truly think that you should want to crack India and crack India in a big way before you even think about international expansion. But yes, as these businesses expand, and there’s a lot of Indian entrepreneurial DNA in the US and other places, we want to fund that ecosystem as well. So to answer your question, yes we’re developing that strategy as we speak given the recently evolving funding landscape, but the intent is to make sure that companies, first of all, solve for India through Indian funds.
Tarang: I know, this is a difficult question because it’s a lot of macroeconomic factors go into it. But do you have any target in terms of AUM or the number of startups supported or that number of exits that you are looking at for the next five years?
Ishpreet: By the end of this calendar year, our goal is to be around $600M in AUM as we just announced the first close of our Fund III. God’s been kind and whatever targets we have taken in the past, we have achieved them and hope to do so in the near future as well, despite the macroeconomic headwinds. The point is, if the Indian startup ecosystem is to cross the USD 50 billion mark and we are already coming close to USD 40 billion a year of investments in Indian venture capital flow, we aim to be at least a $1B AUM. While we want to reach this number quickly, we are taking calculated steps towards it without chasing headline grabbing numbers and hope to achieve it in a steady manner in the next few years.
I think the most important question which people ask us is how this asset class performs at the peak of a Bull Run, and at the peak of Bear Run. I think that’s what we are trying to solve for and the moment this happens the magic happens in terms of validation of the stats that we are talking about. But the whole purpose is, this has to be a globally accepted asset class and that’s what we want to solve for, the numbers are honestly a byproduct.
We have supported more than 100 portfolio companies and more than 300 transactions, and we are looking to build some avenues through inorganic activity where we believe we can add value. So, you will see us solving for many more companies in the near future through more transactions with a larger team across the board.
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