# What is Venture Debt ft Vinod Murali from Alteria Capital I How VCs Think Episode 3

https://www.youtube.com/watch?v=OULfZXkFvsI

[00:00] So, I think first of venture debt is an
[00:02] oxymoron. But, the bet we take is will
[00:05] the company raise one more round of
[00:06] capital? From an equity perspective, you
[00:08] know the biggest win
[00:10] as a debt provider I'm known by my last
[00:11] mistake.
[00:12] In one line, you're a banker to
[00:13] startups.
[00:14] Absolutely, except the frills and we
[00:16] don't provide credit cards. We see is
[00:18] asking the founder chase growth at any
[00:20] cost.
[00:21] So, burn more money it's okay.
[00:23] On the other hand, you're asking him
[00:25] converting receivables into actual
[00:27] sales. How does the founder function on
[00:30] Equity investor interested in
[00:31] probability of growth.
[00:32] I'm interested in probability of
[00:33] survival. But, you can't grow if you
[00:34] don't survive.
[00:35] So, does the pedigree of the VC who has
[00:37] funded you matter?
[00:38] Who the investor is does matter. And
[00:40] when I say who is not just the firm,
[00:42] it's also individual.
[00:43] What am I negotiating with you, can I
[00:45] negotiate interest rates on the equity
[00:48] ownership?
[00:48] If you're massively successful, it's
[00:50] worth its weight in gold.
[00:51] Of course.
[00:52] Or silver as is the case.
[00:54] Also, what is your story with Dunzo?
[01:08] Vinod Murali from Alteria Capital.
[01:13] Welcome to How VCs Think.
[01:15] Thank you.
[01:15] Uh let me I know it might seem a mis-
[01:18] bit of a misnomer for you How VCs Think.
[01:20] You're a venture debt person.
[01:23] What exactly is venture debt? How is it
[01:25] different from being a VC?
[01:27] Uh thanks for having me here. Uh
[01:29] So, I think first of venture debt is an
[01:31] oxymoron. Right? It should not exist
[01:34] because venture and debt don't go
[01:36] together.
[01:38] If you look at the history of debt and I
[01:41] love trivia, so I'll throw a little bit
[01:42] of trivia if possible through the
[01:43] conversation.
[01:45] So, debt has been very boring. Right?
[01:47] It's been largely based on intent and
[01:50] whether you're capable of honoring your
[01:52] commitment.
[01:53] So, intent is if I know you I'll give
[01:56] you money cuz I know you'll pay me back.
[01:58] And if I don't know you, then I have to
[01:59] figure out surrogates to get confident.
[02:03] And that became, you know, are you a
[02:04] profitable company? Do you have assets?
[02:06] Do you have an actual asset, land or
[02:08] building or car or anything you call it?
[02:11] Which is well established now.
[02:13] But then you look at a startup.
[02:15] Right? And these are non-profitable
[02:17] companies, highly volatile journeys,
[02:20] young companies and young sectors,
[02:22] right?
[02:23] And many a time we are creating new
[02:25] categories, uh new habits. And so
[02:28] there's no benchmarking.
[02:30] So how do you give that to these
[02:32] companies, right? So that's the
[02:33] construct of the world in which we
[02:35] operate in.
[02:36] But there are some interesting,
[02:39] consistent uh patterns here, right? So
[02:41] the journey of a startup can be
[02:43] understood. So there is capital raising
[02:45] which happens consistently. There is a
[02:48] round, whether it's a seed, series A,
[02:50] series B, series C, all the way to a
[02:51] listing. So there is a lot of
[02:54] I would say predictability
[02:57] as a overall pattern. Every individual
[02:59] company, of course, will not be the
[03:01] same.
[03:02] But across a cohort, it starts to become
[03:05] a lot more uh
[03:07] sensible in some sense.
[03:09] So that is what we use. It's pattern
[03:11] recognition. It's portfolio
[03:12] construction. And the idea is when a
[03:14] founder is raising capital
[03:16] and they go out and raise equity and
[03:18] they are diluting their ownership. Uh so
[03:20] if it's $20 million company raising $5
[03:22] million,
[03:23] straight away 25% dilution.
[03:25] Can they have a product which gives them
[03:27] a little bit more extra ammunition
[03:30] or protects the dilution? So instead of
[03:32] $5 million of equity, can they raise
[03:33] four bucks of equity and a million
[03:35] dollars of debt?
[03:36] Which allows them to preserve that level
[03:39] of ownership. Or you've raised the
[03:40] equity and can you get a little bit more
[03:42] money to extend your runway further? And
[03:45] you can use the money for working
[03:46] capital
[03:48] for capex in some cases or for your
[03:50] performance marketing or you want to go
[03:52] offshore, or you want to hire more
[03:54] people. So, any of these purposes.
[03:56] It just gives you a little bit more heft
[03:58] to execute, or in a bad market, just buy
[04:01] more time. You know, you're ready, but
[04:03] the market's not. So, all of these
[04:04] purposes get served.
[04:06] And the payback is linked to your
[04:08] current stock of cash. So, you've raised
[04:10] the equity, so that takes care of part
[04:11] of the obligation.
[04:13] But, the bet we take is will the company
[04:16] raise one more round of capital?
[04:18] Okay.
[04:19] So, if I have to look at the objectives
[04:21] of a venture equity investor and a
[04:22] venture debt provider, the fundamental
[04:25] difference is
[04:28] is looking at long-term
[04:30] high risk, high return. So, will this
[04:31] become the next unicorn? Will this
[04:33] become the next big outcome, right?
[04:36] It doesn't help if it's a middling
[04:37] outcome
[04:38] for the equity investor.
[04:40] I'm looking at will this company survive
[04:41] 2 years?
[04:43] Right? It's a very you know, it's brass
[04:45] tacks at the end of it.
[04:46] If you marry the two,
[04:48] it's a great outcome. It means the
[04:50] short-term and the long-term are
[04:52] healthy.
[04:53] You could have companies which have very
[04:55] volatile short-term, and still become
[04:57] great in the long-term.
[04:59] But, if companies die
[05:00] in the next 12-24 months, that's a
[05:02] problem.
[05:04] So,
[05:05] I jokingly tell this uh to investors as
[05:07] well. From an equity perspective, you
[05:09] know me by biggest win.
[05:10] As a debt provider, I'm known by last
[05:12] mistake.
[05:13] Okay.
[05:13] So, the outlook is a little bit
[05:14] different.
[05:15] So, you're essentially, if I were to
[05:18] put it together in one line, you're
[05:19] banker to startups.
[05:21] I absolutely uh except the frills, and
[05:24] we don't provide accounts, and we don't
[05:25] provide credit cards. And you know, I
[05:27] used to be a banker in an earlier life.
[05:29] So, we provide debt or loans uh
[05:32] to startups.
[05:33] And we try to do it in a way that
[05:36] it factors in their life, it factors in
[05:39] their behavior, uh what can be expected.
[05:42] So, the issue is when a traditional bank
[05:44] looks into a startup, they have to force
[05:47] fit the startup to their framework. And
[05:49] they used to seeing profitable
[05:50] companies, used to seeing free cash
[05:52] flows being generated, used to seeing a
[05:54] plant and machinery. You have none of
[05:56] those.
[05:57] Then how do you
[05:58] you know, marry the two worlds, right?
[06:00] Precisely what my next question was
[06:01] going to be, but yeah.
[06:03] So that that's what we do in a nutshell.
[06:04] So it's it's debt to startups.
[06:07] Uh we try to take small bites.
[06:10] We try to do it across shorter tenures.
[06:13] So 2 years, 3 years compared to, you
[06:16] know, infrastructure financing and so
[06:17] on. Just giving an extreme example,
[06:19] right?
[06:20] And it's not very short-term either. So
[06:22] we want to improve the probability of
[06:24] success
[06:25] for the company, right? The idea is that
[06:27] it should move the needle.
[06:30] So the way I define it to founders also,
[06:31] it's not going to change your life.
[06:34] That's upon you, right? The equity
[06:36] helps.
[06:38] We help as a second layer, right? So
[06:41] you know, it's like a supporting cast in
[06:42] a film.
[06:43] Okay.
[06:43] You you actually mentioned that by
[06:46] raising venture debt, the founder does
[06:48] not get to dilute as much, right? Uh but
[06:51] I've also heard that venture debt does
[06:53] take a part of equity.
[06:54] Yes, a little bit, yeah. It's relative,
[06:57] right? So to give you actual math and
[06:58] that and the by the way, the point you
[07:00] make is absolutely correct.
[07:03] So the starting point is if startups are
[07:05] inherently risky,
[07:07] we have to wade through the risk and
[07:08] create some return. And we are backed by
[07:10] investors as well, right?
[07:13] And to put things in perspective, say
[07:14] about 10,000 startups are born every
[07:16] year in India, and maybe less than 10%
[07:18] get any form of funding. And that's
[07:21] about 1,000 companies a year, and there
[07:23] are a lot of repeats in that as well.
[07:25] So most startups
[07:28] will not find meaningful success.
[07:31] So that's that's true, it's a fact.
[07:33] Whether it's India or very high. Or more
[07:35] than mortality, they just zombie out.
[07:37] Where, you know, they don't grow. And
[07:39] this This business where there's a
[07:41] difference in definition. Traditionally,
[07:43] we had SMEs and we had family
[07:45] businesses. And why do we call startup
[07:47] differently? Because the path is
[07:48] different. You are on a high
[07:50] acceleration path, right?
[07:52] So, there is one factor which is there
[07:55] is a higher risk. There's a perception
[07:57] of risk and there's a real risk.
[07:59] Then you break it down to the math of
[08:01] it, right? In the example I gave
[08:03] earlier, a founder raising $5 million of
[08:06] equity and the company's value is $20
[08:08] million.
[08:09] In that case, if you replace the million
[08:12] dollars after the four through debt,
[08:14] then the dilution will be 4.1 million.
[08:17] You still save 900k
[08:19] of dilution in that company, right? So,
[08:22] whether you say 40 basis 4% or 6% or 8%
[08:26] depends on
[08:27] you know, the valuation and the
[08:29] situation.
[08:30] So, and there are I would say that when
[08:32] companies become massively successful,
[08:35] this shows up very starkly.
[08:37] A case in point was Spinny, where we had
[08:39] backed the company way back in 2019, 19,
[08:43] 20, 2021.
[08:44] And we came in
[08:46] along with a couple of our friends,
[08:48] Accel and Elevation, and
[08:51] you know, I ended up doing about 20
[08:52] crore of debt in 2019 and the company
[08:55] was
[08:56] you know, worth
[08:57] uh between 25 and 30 million dollars.
[09:00] The fact that that money went through
[09:02] debt along with another 10 million of
[09:04] equity, and today the company is worth
[09:06] upwards of 1.25 billion.
[09:08] You can do the math, right? It saved
[09:11] 5-6% of dilution easily, right? And to
[09:15] the founders, it's immensely valuable
[09:17] because the founders are getting diluted
[09:18] every round. There's no other choice.
[09:20] And initially, any saving you can have
[09:23] on on the equity ownership,
[09:26] if you are massively successful,
[09:28] it's worth its weight in gold.
[09:29] Of course.
[09:30] Or silver, as is the case.
[09:32] Actually, just a quick segue to that um,
[09:35] that point. So,
[09:37] how does a venture debt term sheet
[09:39] differ from a typical VC term sheet?
[09:42] Equity round, yeah.
[09:42] Yeah, so I've heard
[09:43] Vastly different, yeah.
[09:44] Yeah, so covenants, warrants
[09:46] And not just that, even the way the
[09:48] terms are defined. I mean, what matters
[09:50] to me as a lender at the end of the day,
[09:52] okay, for the amount, there's an amount.
[09:54] But in our case, the amount has to be
[09:56] paid back. So, there's a tenor, there's
[09:57] an amortization structure. So,
[10:00] typically, we provide 24 to 36 months as
[10:03] a tenor of repayment.
[10:05] For Alteria, the average tenor would be
[10:07] about 28 months
[10:09] across about 240 companies over the last
[10:12] 8 years, right?
[10:13] Which means that from the day I fund the
[10:15] company, they may get 3 to 6 months of
[10:18] interest only, called the moratorium.
[10:20] And after that, they paid on every
[10:21] month.
[10:22] And we do equal principal installments,
[10:25] right? And it's not an EMI,
[10:27] right? I'll tell you the difference. And
[10:29] uh
[10:30] the idea is that in an EMI, you
[10:31] front-load income, and then you get
[10:34] capital later. It's a little bit more
[10:36] expensive for the company.
[10:38] If I give you 100 rupees, and I give you
[10:40] 25 months to pay, you pay me 4 rupees a
[10:42] month.
[10:43] So, your cost reduces because your
[10:45] principal is lower, right?
[10:47] So, our term sheet captures all these
[10:48] aspects, you know, the amount, the
[10:50] tenor, the moratorium, the interest cost
[10:52] or the coupon as we call it. And
[10:55] some aspects around risk, which is you
[10:57] know, if there's any covenants, if
[10:59] there's any expectations the company
[11:01] should honor before the funding, any
[11:03] conditions precedent, and so on.
[11:05] Then on the equity upside, we do it
[11:07] through partly paid shares.
[11:09] And there's a definition for the equity
[11:11] upside,
[11:12] which only rather than you want to
[11:15] clarify, we get that only if the company
[11:16] does really, really well, right?
[11:18] So, if the company doesn't do well,
[11:21] it lapses,
[11:23] right? So, there's no further there's no
[11:24] obligation on the company on that.
[11:26] And then there's some hygiene condition,
[11:28] which will be similar to an equity
[11:29] investor as well on this getting the
[11:32] deal done.
[11:33] It's also a far quicker process, right?
[11:36] So, uh
[11:38] we funded like 71 companies last year.
[11:41] And so, it's a It's like one and a half
[11:43] companies a week, right? On an average.
[11:46] So,
[11:47] our deal cycles are not like 4 to 6
[11:50] months. So, our deal cycles are
[11:53] 3 to 6 weeks
[11:54] from start to finish. It helped us that
[11:57] many of the companies are portfolio
[11:58] companies, and they raised
[12:01] It's a follow-on, rinse repeat. So, we
[12:04] can get there faster.
[12:06] But even otherwise, it's a much faster
[12:08] deal cycle.
[12:09] It's a templatized term sheet and
[12:11] templatized documentation. And also,
[12:13] because we work with investors, a lot of
[12:15] the VC friends that we have,
[12:18] we've already factored in a lot of their
[12:20] feedback into the documentation.
[12:22] So, if a company today raises money from
[12:25] Accel or Peak XV or any of the funds,
[12:28] and we know what the funds would expect
[12:31] in the documentation. That's already
[12:33] built in.
[12:34] So, for the founders, somebody who's
[12:35] taking debt for the first time, it's a
[12:37] very comfortable process.
[12:39] Because it's been validated
[12:41] by their investors.
[12:42] Can I interrupt you here and ask you,
[12:44] what is a covenant supposed to do for
[12:46] you?
[12:46] Yeah, it's a good question, right?
[12:49] At a headline, it's like taking the
[12:51] pulse of the company.
[12:52] Right?
[12:53] Now, do you check the pulse, or do you
[12:55] check the blood pressure, or do you
[12:56] check the heart rate, uh or do you check
[12:59] for migraines? It depends, right?
[13:01] Same for any company. So, for some
[13:03] companies, revenue growth may be the
[13:05] most important thing.
[13:07] For some companies, the profit margins
[13:09] that they generate are the most And
[13:10] maybe at a gross margin level may be
[13:12] very important. So,
[13:13] to give you some examples,
[13:15] if you're disrupting the retail supply
[13:16] chain in India, right? And you are
[13:19] somewhere between a brand, a wholesaler,
[13:21] a retailer, or a kirana shop,
[13:24] the margin you make is the most
[13:25] important thing because easy to become
[13:27] large in this business. So, if you know,
[13:30] drinking of a horse pipe,
[13:31] Yeah.
[13:31] but if you don't have the right margin
[13:33] construct, the business is not so
[13:34] valuable.
[13:35] In that case, it makes sense to
[13:37] measure the margin movement of the
[13:39] company at scale. Right? If it's a very
[13:42] young company, still doesn't make sense.
[13:44] Then you roll the dice on that. Then the
[13:45] check size has to be smaller.
[13:47] What we're trying to do is it's an early
[13:48] early warning signal
[13:50] to help me understand the health of the
[13:51] company.
[13:52] Okay.
[13:53] And
[13:55] if I contrast that with, say, a consumer
[13:57] brand, and
[13:59] it's, you know, crowded segment where
[14:00] they have to just get market share. Then
[14:02] the variable that matters is your
[14:04] the revenue growth.
[14:05] Because it's a market share game, and
[14:07] the margin construct is reasonably well
[14:09] defined. Then I'm interested in the in
[14:12] Got it.
[14:12] Or it could be a situation where I just
[14:14] want the founder to be comfortable on
[14:16] runway.
[14:17] So that they have enough time to raise
[14:18] the next round.
[14:20] Horses for courses, right? So, in all of
[14:22] these situations, we are trying to
[14:24] understand the health of the company.
[14:27] For a Series A or a Series B company,
[14:29] like I said before,
[14:30] it's covenant light, because the
[14:32] companies go through too much of
[14:34] volatility,
[14:36] and it makes sense to spend time and
[14:38] understand their business qualitatively.
[14:41] We still uh get their information
[14:42] monthly.
[14:44] We do our ratings, we do our work,
[14:46] but we don't have an explicit condition
[14:49] normally that they have to honor,
[14:50] because that may not be easy to judge up
[14:52] front.
[14:53] And then you grow with the company. As
[14:54] you get a better understanding,
[14:56] you double down, you increase your risk
[14:58] appetite, and then you have a handshake
[15:00] on what to measure.
[15:01] Got it. So, in this case you're
[15:02] measuring, so let's say I'm trying to
[15:04] get a little more firmer grip on this.
[15:06] Let's say you're measuring one of these
[15:07] financial health profiles that you're
[15:08] talking about, and you see it
[15:09] deteriorate, right?
[15:12] The covenant does something something
[15:13] kick in that allows you to
[15:15] it's a trigger to have a conversation.
[15:16] Is it just a conversation, or does it
[15:18] change things?
[15:18] It's usually a conversation, because
[15:20] these are the kind of technical terms in
[15:22] the document where I the objective is
[15:26] can we get on to
[15:28] can we get on the table to have a
[15:29] conversation?
[15:30] Because this parameter up front we had
[15:32] discussed that is important for the
[15:34] company. Ultimately, whether I'm an
[15:36] equity provider or debt provider or the
[15:38] founder, the objective is company has to
[15:40] do well.
[15:42] The reason our role is a little bit more
[15:45] I would say effective in this
[15:46] conversation is
[15:48] what we track and the frequency we
[15:50] track, it's not necessary that other
[15:53] stakeholders are tracking.
[15:55] So, we track monthly. For example, we
[15:58] track balance sheets monthly even for
[15:59] young companies. And the question that
[16:01] comes from some of our LP investors is
[16:03] but young companies wouldn't even give
[16:04] balance sheets. In fact, they are the
[16:05] best right? Because they they're more
[16:09] client as well and we've seen that
[16:11] there's an intent to be more
[16:12] disciplined, right?
[16:14] Since we track suppose we understand
[16:16] that the receivables of a company are
[16:18] out of whack, right?
[16:20] Now, that may not be a variable that an
[16:22] equity investor is tracking necessarily.
[16:25] So, the conversation between us and the
[16:26] founder and the other stakeholders help
[16:28] everybody at least be on the same page
[16:30] to assess okay, this is where things are
[16:31] today.
[16:32] What do you want to do about
[16:34] right?
[16:35] So, covenant is basically what do you
[16:36] want to do about it?
[16:37] Correct. And the answer has to be
[16:39] sensible for everybody. So, for example,
[16:41] if you are
[16:41] If it's not
[16:43] I'm saying usually it is. Okay, it's
[16:44] rarely not because see ultimately
[16:47] the logic here is
[16:49] nobody's interest is
[16:51] different. Right? So, all of us want the
[16:53] company to do well. So, if the
[16:54] receivables are poor if you have 6
[16:55] months of receivables and you're just
[16:57] selling selling selling and you're a B2B
[16:58] company, what it tells me is you're
[17:01] maybe stuffing the channel or it's not
[17:03] real sales cuz you're not collecting.
[17:05] And if you're doing that because you
[17:06] want a better valuation, it's important
[17:08] for your board to have a view on that
[17:10] because in 9 months time you're going to
[17:12] hit a wall. Right?
[17:14] The answer to that is then demonstrate
[17:16] you can collect. Maybe you paired on on
[17:17] your sales engine and divert efforts to
[17:19] collections. Or you demonstrate that the
[17:21] new sales you're doing you have a better
[17:23] quality of receivables or you do a cash
[17:26] and carry kind of So, there's many
[17:27] answers in just this example, right?
[17:30] But if I just take a step back and look
[17:33] at philosophically what we're trying to
[17:34] solve,
[17:35] we are trying to
[17:38] maybe not raise an alarm bell, but at
[17:39] least create a conversation where
[17:42] and we're ensuring that everybody who's
[17:44] interested in the company is on the same
[17:47] page.
[17:48] As long as that happens and you have
[17:50] enough time, we realize that you will
[17:52] have
[17:54] a good outcome.
[17:55] Because our
[17:56] credit loss levels are actually
[17:58] extremely low, touch wood.
[18:02] And the reason I would say largely is
[18:04] because of the statement. If you have
[18:06] this conversation earlier
[18:09] than not and you ensure all the
[18:12] stakeholders are aligned,
[18:14] it's usually
[18:15] a good outcome.
[18:16] Okay.
[18:17] And it's a healthy outcome.
[18:18] So, covenant is not necessarily a
[18:20] financial trigger for them to
[18:22] I don't know, pay you back quicker,
[18:24] shorten the tenure.
[18:25] See, but usually it won't be
[18:27] it may give us the right to do that, but
[18:29] I think that practically it doesn't
[18:30] happen that way because
[18:32] they don't have the money.
[18:32] Yeah.
[18:33] Right? So, I am already pricing the risk
[18:36] that they have to raise another round.
[18:38] Mhm.
[18:38] What we're all trying to achieve is will
[18:40] the company be attractive and healthy to
[18:42] raise another round? And everything we
[18:44] do for this statement is accretive.
[18:46] Got it. So, Karthik at the
[18:48] I was just thinking from the founder's
[18:50] perspective. Let's assume I don't know
[18:52] if these conversations happen, but
[18:54] curious to know. Let's say there's a
[18:55] founder who's raised VC money.
[18:58] And let's say the founder's also got
[18:59] venture debt.
[19:01] The conversations with the VC and the
[19:03] venture debt is very different, right?
[19:05] So, VC is asking the founder, let's say,
[19:08] chase growth at any cost. So, burn more
[19:10] money is okay.
[19:12] On the other hand, you're asking him or
[19:14] her to focus on, let's say, converting
[19:16] receivables into actual sales.
[19:19] So, how does the founder function in a
[19:21] Yeah, the answer is in the question.
[19:23] Both matter, right? Right? And it's also
[19:25] a question of what matters more at what
[19:27] point of time, right?
[19:29] Like I put it, uh
[19:31] there's a probability of growth, there's
[19:33] a probability of survival, right?
[19:35] An equity investor interested in
[19:36] probability of growth.
[19:38] I'm interested in probability of
[19:38] survival, but you can't grow if you
[19:40] don't survive, right? So, the founder is
[19:42] interested in both.
[19:43] But, the near-term objectives are what
[19:46] I'm looking at. The long-term objectives
[19:48] are what an equity investor is looking
[19:49] at, but they have to wait through the
[19:51] near-term, right?
[19:52] So, it's not either or, it's usually a
[19:55] mix of both.
[19:57] In good measure.
[19:57] Absolutely. And
[19:59] even the example you gave, whether you
[20:01] chase revenue or you improve your
[20:04] margins or you improve your balance
[20:05] sheet. So, for example, you've just
[20:08] raised money.
[20:09] At that point, maybe the right objective
[20:11] is go chase growth, because
[20:14] the first 6 9 12 months after you raise
[20:16] money is when you can really flex your
[20:17] muscles and say, "You know what? Can I
[20:19] become the best biggest version of me
[20:22] from series A to series B?"
[20:24] But, as you go through that journey,
[20:26] you're learning every day.
[20:28] So,
[20:29] you don't realize what your margin is
[20:30] after 9 months. You're seeing that every
[20:31] day, week, and month, right?
[20:33] So, suppose you're a consumer brand
[20:35] company and your gross margins are at
[20:36] 50%
[20:37] and you're today at 5 crore a month, and
[20:40] you've grown to 20 crore a month,
[20:42] but your GMs are 130%. It means that
[20:46] you've bought some revenue, right? I
[20:47] mean, in the sense, you've sacrificed
[20:49] your margin, you've given a lot of
[20:50] discounts, and you're not making the
[20:52] same profit pool.
[20:53] The question then is at 30% GM,
[20:56] can the business survive and sustain?
[20:58] So, does the rest of your structure, the
[21:00] cost structure, make sense if your GM is
[21:03] 30%? If it doesn't, it doesn't matter if
[21:06] you do 50 crore a month of revenue. In
[21:07] fact, it will hurt you,
[21:09] cuz you're bleeding more fast.
[21:11] So,
[21:12] I think the situation kind of warrants
[21:16] the outcomes, and
[21:19] usually there's a fair bit of alignment.
[21:21] So, I would say in this example as well,
[21:24] suppose a company has raised money and
[21:25] gone through 8 months, right? And they
[21:27] thought they had 15 months of runway
[21:29] originally.
[21:30] So, at the end of 8 months, that is not
[21:32] math, right? It's not an Excel sheet,
[21:33] it's real life. So, it it will it can be
[21:35] anything from 0 months to 20 months, at
[21:38] the end of 8 months.
[21:40] Because we track monthly,
[21:43] our objective then is okay, if suppose
[21:44] we think that the runway is 4 months,
[21:46] and the founder thinks it's still 8
[21:49] months,
[21:50] and the investor thinks it's 6 months.
[21:53] It could be driven by some assumptions.
[21:55] The founder may be assuming that okay,
[21:57] you know what? I know I'm cutting cost.
[21:59] I put the stuff in gear right now, but
[22:02] the action will play out after 3 months,
[22:04] but I know it's going to happen, and
[22:05] hence my runway is that's one.
[22:07] Or it could be that I'm trying these new
[22:09] marketing initiatives, and I'm seeing a
[22:11] pop already,
[22:13] and it's expected to improve my revenue,
[22:15] and hence my GM, and hence my burn will
[22:17] reduce.
[22:18] That's on the founder's side.
[22:20] And from an investor's side, they could
[22:22] be seeing a derivative view of this,
[22:24] right?
[22:25] In some cases,
[22:27] maybe the investor told the founder, you
[22:28] know what? Don't worry,
[22:30] and spend on a marketing campaign, and
[22:32] I'll back you.
[22:34] I don't know that. If I don't know that,
[22:35] I'm only seeing the burn.
[22:37] So, it looks to me there's 4 months of
[22:38] runway,
[22:39] but there's another 6 months in the
[22:41] pocket, because the investor has already
[22:42] given that idea. So,
[22:44] all of these are possible
[22:46] in one situation.
[22:47] Right?
[22:48] Which means that you need to have the
[22:50] you need to have a frank conversation,
[22:52] first understand the performance.
[22:54] And as I put it, you know, be
[22:57] part of the solution, and not part of
[22:58] the problem.
[22:59] And have transparent conversations with
[23:02] founders as well as the other stake
[23:03] holders. We are not on board. We are not
[23:04] We don't take board seats. So we are a
[23:06] non-judgmental sounding board for
[23:07] founders, right? So we just
[23:10] give them inputs basis what we are
[23:12] seeing otherwise.
[23:14] And it doesn't come back and hit you in
[23:16] the next board meeting.
[23:17] Right? So they can have uh for example,
[23:19] if a founder is concerned about uh their
[23:21] own compensation,
[23:23] right? Who do they go talk to?
[23:25] Right? They can't go talk to the board
[23:26] member because
[23:28] they are invested parties, right?
[23:30] So there are so there are so many
[23:32] sensitive topics. They want to do an
[23:33] acquisition or if they want to raise
[23:36] money, is it internal, external, you
[23:39] know, do you go to your internals and
[23:40] have a chat about valuation?
[23:42] There are so many sensitive topics,
[23:44] right? Sometimes you just need
[23:46] some interference in between.
[23:49] So
[23:50] I heard that
[23:52] a venture debt will only fund companies
[23:55] that have raised a VC round. Is that
[23:57] true?
[23:58] Yes.
[23:59] And uh
[24:01] the reason for that is
[24:04] what we are trying to do at this point
[24:05] of venture debt is we are trying to fill
[24:07] a space which banks are not able to fill
[24:10] for reasons that I explained earlier,
[24:11] right?
[24:13] But if and that is assuming that we are
[24:15] not taking equity risk and getting debt
[24:17] return because that business doesn't
[24:19] make sense, right? So there should
[24:20] always be an arbitrage. You know, if the
[24:22] risk is here and return is here, the
[24:23] house always wins. Which means we lose,
[24:25] right? So you need risk to be here and
[24:28] return to be here and that arbitrage is
[24:29] what makes sense, right?
[24:32] Now beyond a particular threshold or
[24:34] below a particular threshold, all risk
[24:37] looks like equity risk.
[24:39] Because you don't have the data, right?
[24:41] So for example, today if somebody gave
[24:43] me $100 million and say, you know, "Why
[24:44] don't you fund seed stage companies and
[24:46] build a data bank?" My answer would be,
[24:48] "But you know, you can't have a data
[24:49] expectation on $100 million because it's
[24:51] a learning purpose, right?"
[24:53] That construct doesn't exist in the
[24:55] country or in the world for that matter,
[24:57] right?
[24:58] So, the data has been accumulated over
[25:01] time, over years, over hundreds of and
[25:03] thousands of companies
[25:05] in a segment which is series A plus,
[25:08] which seems to work.
[25:10] Now, below series A,
[25:12] there is no data.
[25:13] There's no data, yeah.
[25:14] And hence, either somebody has to
[25:17] provide that capital for learning,
[25:20] or you in So, for example, we've started
[25:22] doing a few take a few bets in the
[25:23] pre-series A segment where we feel we
[25:25] understand the business a lot. So, for
[25:27] What is that called? Angel?
[25:29] Angel venture.
[25:30] Post angel, right?
[25:31] So, we still need institutional
[25:32] investors. The reason for that is
[25:34] you do want somebody else's supervision
[25:36] in some sense, right?
[25:38] And you want at least one objective
[25:40] stakeholder to be there
[25:41] so that it becomes a three-way
[25:42] relationship, right?
[25:44] And also,
[25:46] we don't
[25:47] diligence the veracity of information
[25:49] because of our velocity of deals. What I
[25:51] mean by that is if somebody gives us
[25:52] data,
[25:53] you've given your audit statements,
[25:54] you're a MY S, your your plan forward
[25:57] projections are what they are, that's
[25:58] fine.
[25:59] But I believe that the data you've given
[26:01] me is real.
[26:03] Because there's somebody else who's done
[26:05] the legal and financial diligence.
[26:08] I don't want their reports.
[26:10] But I have to If I believe that the data
[26:12] is itself forged, it makes sense to just
[26:14] pass the deal.
[26:16] Because it's not worth the effort,
[26:17] right, at that stage.
[26:19] Post series A, typically there's more
[26:21] controls, there's better audit, there's
[26:24] better internal mechanisms
[26:27] to give us the confidence that the data
[26:28] is real.
[26:30] If it's a pre-series A company, that's
[26:32] not necessarily the case, right?
[26:34] So, then you look for situations where
[26:36] today all the labels are all over the
[26:37] place, right? So, a company can raise 15
[26:39] crore and call it series A, can raise 50
[26:41] crore and call it seed, right? So, I'm
[26:44] not going by labels.
[26:45] If you raise 20-25 crore of equity
[26:49] for a business where that capital gives
[26:51] you at least 12 to 15 months of time,
[26:54] I think we're in play.
[26:56] But if the company is
[26:57] very binary, you asked about AI earlier
[26:59] and address that. If the company is
[27:02] extremely binary on an outcome,
[27:04] that's a problem.
[27:05] Because I don't know if you need 6
[27:07] months, 12 months, or 24 months, or 36
[27:09] months to get over that cliff.
[27:12] So, pre-PMF we avoid, or pre-product
[27:15] market fit.
[27:16] And we need a level of capital which
[27:18] gives us the confidence that Okay,
[27:21] you're not going to sink in 6 months or
[27:22] 12 months. Then we roll the dice
[27:25] further.
[27:25] Does the pedigree of the And this is
[27:27] from your website, so I'm going to ask
[27:28] you that. You have mentioned backed by
[27:30] strong VC sponsors.
[27:32] Yes.
[27:33] So, does the pedigree of the VC who has
[27:35] funded you matter when they come to the
[27:37] room and ask you for debt? Or is it just
[27:40] all VC money is VC money? It's fungible.
[27:42] I'll just add to that. So, uh
[27:46] does the VC's due diligence
[27:49] uh does it uh what if there are blind
[27:51] spots in that? Do you do that?
[27:52] good questions, right? So, I'll address
[27:54] that and then come to this, right? And
[27:56] by the way, we don't share diligence
[27:57] reports and stuff. We do our own work on
[27:58] that.
[28:00] The
[28:01] who the investor is does matter.
[28:03] All right? And that's the first one.
[28:05] For venture debt in general or for you
[28:06] in particular is that
[28:07] Both.
[28:08] Uh both, I would say at this point. And
[28:11] when I say who is not just the firm,
[28:12] it's also individual.
[28:14] Okay.
[28:14] Right? And I know it can get a little
[28:16] bit controversial, but that's the
[28:17] reality, right?
[28:18] Okay, explain. I would love to.
[28:19] Exactly. So, I'll tell you And it's not
[28:21] about uh it's not it's not about amount
[28:23] of money or, you know,
[28:25] it's not just about size.
[28:27] Mhm.
[28:28] It's about the quality of conversation
[28:31] and the relationship depth.
[28:33] Okay.
[28:33] And these words are easy to throw, but
[28:35] difficult to earn, right?
[28:37] If I have a problem, we've done a deal
[28:39] together, you know, suppose both of you
[28:40] are in a company and I have funded that
[28:42] company, and in my view the company has
[28:44] 5 months of runway, and it you it had 8
[28:47] months of runway 1 month ago, and it
[28:48] suddenly burned through a lot.
[28:49] Mhm. And I get to know that literally
[28:51] today
[28:52] or tomorrow, right? And Friday night at
[28:54] 9:30, I'm messaging both of you saying,
[28:57] "Guys, are you seeing what I'm seeing?"
[28:59] And you know, what do you think about
[29:00] it, right?
[29:02] If you respond in the next hour or two
[29:04] or three, and then we have a chat on
[29:05] Saturday morning, and we, you know,
[29:07] understand at least, okay,
[29:09] first we're on the same page, and maybe
[29:11] we figure out a plan.
[29:13] That's gold standard, right? And it
[29:14] doesn't mean that your answer is going
[29:16] to put money in the company. Yeah. Your
[29:17] answer is not going to save the company.
[29:18] There's no guarantees. But it's a
[29:19] conversation at that time, which ensures
[29:22] that I don't have my stomach juices
[29:24] churning over the weekend, right? And if
[29:26] he doesn't give me the time of day,
[29:28] right? And I get an answer 1 week later
[29:30] saying, "Let's talk 2 weeks later,"
[29:33] so who am I more likely to work with,
[29:35] right? The answer is obvious, right?
[29:37] I think though there is a learning curve
[29:39] for equity investors as well.
[29:42] I would say, going back 2008, when I
[29:44] started my journey, the first few years
[29:46] were just spent in explaining, "We don't
[29:48] want your lemons."
[29:50] That's the statement.
[29:52] I have debt is not meant to bail out a
[29:54] company because there's no alternative,
[29:55] because the risk is highest then.
[29:58] If you remember the arbitrage, risk is
[29:59] here and return is here. Makes no sense,
[30:00] right? So,
[30:02] when it's literally in dire straits, you
[30:05] need equity capital,
[30:06] right? And therein comes the music
[30:08] references as well, right?
[30:09] So, if the situation is such that
[30:13] or for example, if we've had some
[30:14] situations that investors and especially
[30:16] people who work in lots of you know
[30:17] what, this is the situation, this
[30:19] company is where it is,
[30:21] and that answers your blind spot, and we
[30:24] feel that okay, they don't have blind
[30:25] spots, and they've called out the
[30:26] issues. We have taken mutual calls to
[30:29] support companies when it may not have
[30:32] passed muster normally,
[30:34] right? What I mean by that is it's not
[30:35] the easiest of credits,
[30:37] but because you have all the information
[30:39] available, you're able to take a more
[30:41] qualified judgment.
[30:44] And
[30:45] maybe you'll have a short-term risk
[30:47] which is higher, but you're playing for
[30:49] an outcome which is sensible, right?
[30:52] So, I would say the
[30:54] pattern recognition relationship that is
[30:57] there with the investor, understanding
[30:59] their own dynamic. So, for example, if
[31:01] an investor loves a founder, wants to
[31:03] support, but there's just no capital,
[31:04] there's no reserves, then
[31:07] you take their feedback, but you don't
[31:08] rely on them for the next round because
[31:10] they can't. Right. Because they don't
[31:11] have reserves in the company.
[31:13] Or if they have reserves in the company,
[31:14] and if they have 20 companies, they're
[31:16] not going to back all 20.
[31:18] So, I think it's important for us to
[31:19] understand these metrics as well.
[31:22] But more often than not, I think it
[31:23] comes down to just the human factor,
[31:25] which is
[31:27] there are times that I'll be nervous,
[31:28] and there are times that I'll be feeling
[31:30] very good about a company.
[31:33] How do we respond in those situations,
[31:35] right? So, within a firm there could be
[31:37] different partners or senior folks
[31:40] who are in from the equity funds,
[31:43] and we have different relationships with
[31:44] them.
[31:45] And it's not necessary that we'd have
[31:46] the same response to all of them.
[31:48] So, to clarify this for my
[31:50] understanding,
[31:51] because you did say controversial.
[31:53] So,
[31:55] so there is, let's say, I'm not naming
[31:56] the fund, so let's say
[31:58] Yeah, so let's say
[31:59] the most pedigreed fund in India, as an
[32:01] example.
[32:03] And an investment in the company is led
[32:05] by not their most senior folks who've
[32:08] been around.
[32:09] That's fine.
[32:10] Yeah. So, who leads that investment does
[32:12] not matter to you.
[32:13] No, it's not like it doesn't matter.
[32:14] What I mean by that is See, there's
[32:16] always relative gradients, right? It's
[32:18] not like we'll only work on our fund or
[32:20] we've got 240 companies. You go through
[32:22] that and you'll see that it's a maze of
[32:24] responses, right?
[32:25] We, in fact, that's why I'm indexing on
[32:27] the quality of conversation, the inputs
[32:30] that we receive. So, for example, if I
[32:31] want to know what your thesis is.
[32:33] And you can give me a two-line answer,
[32:34] I'm going to have a two-hour
[32:35] conversation.
[32:36] I I'd like the tour conversation.
[32:38] But that is with the
[32:39] founder of the company, right?
[32:40] No, no, with the investor also.
[32:42] Why the investor invested?
[32:43] Because that that's the blind spot
[32:45] question.
[32:46] So, let's take the same example that I
[32:48] gave in the supply chain, right?
[32:50] So, you're doing doing your due
[32:51] diligence on the VC's due diligence and
[32:53] Both both ways. By the way it happens
[32:55] two-way street. They also talk to us to
[32:58] and the question is like I said
[33:00] Sometimes we do joint diligence in some
[33:02] sense. The question that they ask from
[33:03] us is what do you
[33:05] go wrong in the short term?
[33:06] And the question we ask them is what do
[33:07] you go right in the long term?
[33:08] Right?
[33:09] And the reason why that what will go
[33:11] right in the long term matters to you
[33:12] because you have an equity
[33:13] Exactly, right? So, I am looking you hit
[33:15] the nail on the head, right? So, it's
[33:17] not just the fixed income or it's not
[33:19] just the coupon and the fees. You want
[33:21] to fund companies where there is some
[33:23] appreciation of value, right?
[33:25] So, it's a bit of both and hence it's I
[33:27] would say it was an art than a science
[33:30] say 15 years ago or 18 years ago. It's
[33:32] gotten more scientific now because we
[33:35] have more data, right? Now, coming to
[33:37] your specific question
[33:39] it's not like okay, there's a senior
[33:41] partner who's funded
[33:43] So, by that metric then any company a
[33:44] senior partner funds will always have a
[33:46] great outcome and listing. It doesn't
[33:48] happen that way, right?
[33:49] Sometimes the junior partners are more
[33:51] hungry, right? And they have more to
[33:52] prove.
[33:53] For us it's more important to understand
[33:56] why are they doing the deal?
[33:58] What do they expect?
[34:01] Is there a resonance with the founder?
[34:02] So, suppose you funded a company and you
[34:05] know, it's a consumer product company at
[34:06] 5 crore a month of revenue and you've
[34:08] invested 10 million dollars.
[34:10] Great.
[34:11] You think as investors the company will
[34:12] go to 25 crore in the next 15 months
[34:15] monthly. 5x assume, right?
[34:17] Founder might be thinking, you know
[34:18] what? I think it'll get to about 3x.
[34:21] And I might be thinking it's getting to
[34:22] 2x.
[34:23] See where the dichotomy is, right?
[34:25] How do you
[34:27] harmonize this?
[34:28] That's more important. So, then if this
[34:31] is the construct, I don't want to fund
[34:32] the deal. Because the investor is going
[34:34] to push the company to grow to 25 crore
[34:36] come what may. The founder is going to
[34:38] do because they don't have a choice.
[34:40] Then 9 months later, hitting a wall,
[34:42] running 100 miles an hour, which is a
[34:44] recipe for disaster.
[34:46] So, I think it matters as to whether
[34:48] there's alignment on the thesis broadly.
[34:52] The timing and timelines can change.
[34:54] Because I'm not forecasting 7 years.
[34:57] But I like to have a view on that.
[34:59] I'm forecasting in 24 months. And there
[35:03] a lot of equity investors have
[35:06] conversations with us because they know
[35:08] that
[35:09] seeing the landmines that's our
[35:11] expertise. So, if you ask me which of
[35:14] our companies will be the next big, you
[35:16] know, outcome, I don't know. There's
[35:17] many We have 100 shots on goal, right?
[35:20] But I know which companies would have a
[35:22] problem in the next 2 months or 1 month
[35:24] or 6 months. And that's what we use when
[35:27] we decide on new transactions as well.
[35:29] Just to sorry, just
[35:30] take a step back.
[35:31] Very quickly. So, there is debt, there
[35:33] is an equity component.
[35:35] Do you also do convertible debt where
[35:37] Good question. We don't.
[35:39] And actually it's a nuanced
[35:41] question because it's very easy to
[35:43] assume that, okay, there's some debt and
[35:45] there's some equity and hence it
[35:46] converts, right? And it's not wrong to
[35:48] think because in a mature world when I
[35:50] say mature world, I'm saying large
[35:51] companies, it's a fairly normal
[35:53] construct, right? You had convertible
[35:55] bonds
[35:56] day in day out.
[35:58] We don't do that. Venture debt as a
[36:00] product traditionally works with debt
[36:03] with an equity upside. So, the idea is
[36:05] that
[36:06] if I fund 100 companies, I say I'll
[36:08] contrast with an equity investor, right?
[36:10] Say, let's say 50 companies for me and
[36:12] 20 companies for an equity fund, which
[36:14] would be an equal in comparison.
[36:16] For the equity investor, the top five
[36:18] companies will return the fund.
[36:20] Right?
[36:21] Whether the other 15 die or do okay, it
[36:26] doesn't matter beyond the point, right?
[36:27] Maybe five or seven companies would
[36:28] return the fund, right?
[36:30] In our case, out of 50 companies,
[36:33] 48 to 49 companies have to give money
[36:35] back.
[36:36] Mhm, yeah.
[36:36] And give our fixed income, right? We
[36:39] make about 15-16% typically. So, that's
[36:42] what That's the foundation.
[36:45] The equity warrants will behave like
[36:47] that portfolio. Which means that if I
[36:49] have 50 equity warrant positions, only
[36:51] maybe seven or eight or 10 of those or
[36:54] five to 10 companies would actually give
[36:56] some return. But only on the warrant
[36:58] portion.
[36:59] And that warrant is alive from day one?
[37:01] From day one, and typically have 7-8
[37:03] years to exercise it because
[37:05] there the warrants are mirrored with the
[37:07] equity outlook, where I need time. But
[37:09] for the founder, the dilution is on day
[37:10] one. Then the timing doesn't matter,
[37:12] right? Because it comes up in some
[37:13] conversations. The minute a founder
[37:15] takes the dilution onto the cap table,
[37:17] so for example, in the example I gave
[37:19] earlier, $5 million of equity versus
[37:21] that they've taken $4 million of equity,
[37:23] $1 million of debt, 100k warrant, $4.1
[37:25] million is in the cap table.
[37:27] So, that gets recorded.
[37:29] We pay up that 100k later, right? If
[37:32] there is any liquidity event, but they
[37:34] are diluted for 4.1.
[37:36] So, they're diluted, but money could
[37:37] come in at a later stage.
[37:38] Got it.
[37:38] And it only comes in and the dilution
[37:40] actually only happens if there's an
[37:41] outcome. If the company's gone from
[37:43] 20-21 million to 200 million
[37:45] or 50 million,
[37:47] yeah, we pay up on exit, right?
[37:49] So, to that extent, these factors are
[37:51] important to keep in mind.
[37:52] Mhm. All right. Assume I'm a founder,
[37:55] I'm raising money, Karthik is a VC,
[37:56] you're the venture debt person.
[37:59] I'm going to Karthik and I'm negotiating
[38:00] with him on valuation, right? I'm trying
[38:02] to figure out what dilution, what he's
[38:03] going to give me, all of that.
[38:04] Yes.
[38:05] What am I negotiating with you, Vinod?
[38:07] Can I negotiate interest rates because
[38:10] you're also saying it's fairly
[38:11] templated.
[38:11] Yeah, but
[38:13] first up, you you negotiate everything,
[38:15] every single line of the term sheet make
[38:17] a negotiate.
[38:18] It helps that suppose we've done five
[38:20] deals together.
[38:21] Mhm.
[38:21] And you've already finished the
[38:22] negotiation with them and there's a
[38:23] layer of trust that has kicked in.
[38:25] Then he will tell you, "You know what?
[38:27] For this company, from what I've seen in
[38:29] the other five situations, broadly, this
[38:31] is what you can expect, right? On the
[38:34] size, on the tenor, on the coupon,
[38:36] there's a range. And it's a very narrow
[38:38] range. So,
[38:39] What is it typically?
[38:40] So, for example, is it a 14% coupon or a
[38:43] 13.5% coupon or a 14.25? It's in that
[38:45] range.
[38:45] For all for uh
[38:47] Pretty much most companies, right?
[38:48] So, A to D to C startup
[38:50] Yeah, across A through D. I'll tell you
[38:51] why. And the question is, why would a
[38:52] Series D company pay the same coupon as
[38:54] Series A company? Because the risk is
[38:55] different, right?
[38:57] So, one is all these companies fall in
[38:59] the bucket of below investment grade,
[39:00] right? So, if you look at a conventional
[39:02] pricing methodology, they're all below
[39:03] investment grade, right? Which is why
[39:05] banks don't touch them. That's one thing
[39:06] I tell founders also, right?
[39:08] But, we believe they're investment
[39:10] worthy. We believe they're valuable. And
[39:12] that's why I have a business to run,
[39:13] right?
[39:14] The elasticity is more on the equity
[39:17] dilution. Which is What I mean by that
[39:18] is,
[39:19] I have to return or I have to give my
[39:22] returns to investors. So, it's supply
[39:23] demand as well, right? So, the
[39:25] the capital that is chasing startups for
[39:27] venture debt
[39:28] has an obligation of returns.
[39:30] I have to, for example, distribute 3 to
[39:32] 3.5% every quarter to my investors.
[39:34] I can't do that if I charge 11% to the
[39:36] company.
[39:37] The investors won't invest in my fund if
[39:40] I give them 10% return.
[39:42] Because they'd rather put it in a bond
[39:43] which is low risk and more you know,
[39:45] easy to ascertain, right?
[39:47] So, there's a thread of continuity here
[39:50] on what an LP expects
[39:52] and what a company pays. And we are in
[39:54] between.
[39:56] Same like equity.
[39:57] Why would an LP put money in equity fund
[40:00] if they generate 14% return? They won't.
[40:03] They invest in me,
[40:04] right?
[40:05] But, they would invest in the equity
[40:07] fund because they can get 25% return or
[40:09] 30% return. Or the best funds will give
[40:11] 40% return, right?
[40:12] So, to that extent,
[40:14] whether it's the amount I I call it two
[40:16] triangles. There's amount, the
[40:19] moratorium on principal and the tenor is
[40:22] one triangle, the risk triangle.
[40:24] The center of gravity of that triangle
[40:25] remains constant.
[40:26] Which means that what a first judge in
[40:29] this construct is supposed to give you 5
[40:31] million,
[40:32] and I believe that the 5 million gives
[40:33] you about 18 months.
[40:35] And you're worth 25 million today.
[40:38] I'll first take a call on what is the
[40:39] residual risk I want to take at the end
[40:41] of 18 months, right?
[40:43] Not today, the end of 18 months. And
[40:45] suppose that answer is 4 crore in this
[40:47] construct.
[40:47] When you say residual risk, what do you
[40:48] mean?
[40:49] At 18 months from now, if you've honored
[40:51] your obligation, life has gone wherever,
[40:53] you suppose end run out of money. Or say
[40:55] 18 plus another 2 months, 20 months of
[40:57] the debt we give, whatever the numbers
[40:59] are.
[41:00] The day all of us expect to run out of
[41:02] money, what is my risk? His risk is all
[41:04] his money. My risk is some portion of
[41:06] the debt I've given you.
[41:08] Suppose that portion is that amount is 4
[41:10] crore,
[41:12] then like you said, take a step back,
[41:14] right? And roll back the math to today,
[41:16] right?
[41:17] So either in some
[41:18] Discount it.
[41:19] Sorry?
[41:19] You discount it.
[41:20] Or inflate it, right? So that is the
[41:23] residual risk. So then we have got into
[41:24] the whole other thing, what do you want
[41:26] to optimize? Like, do you want more
[41:27] money? So for example, if you say I want
[41:30] as much capital as possible today
[41:31] because I'm going to run a campaign this
[41:32] IPL, and I want the money next week or
[41:35] whatever next month. And it has to be,
[41:37] you know, it has to be effective in May
[41:39] of 2026. It doesn't help if I get the
[41:42] money in September, and I don't want a
[41:44] long tenor.
[41:45] So there the answer could be okay, maybe
[41:46] you'll get 12 crore,
[41:48] and you get a
[41:50] 2-year structure, right? Where I get
[41:52] back 8 crore in the time that I'm
[41:53] talking about. And the answer is 4
[41:55] crore.
[41:56] But in another situation, the founder
[41:57] will say, you know what, mine is a
[41:58] linear business.
[42:00] So I want a long tenor,
[42:02] and I don't mind the size. There the
[42:04] answer could be okay, I'll give you a
[42:05] 36-month structure, but I might give you
[42:06] only 9 crore.
[42:08] Right? Because the answer is still at
[42:10] the end of 20 months is 4 crore in both
[42:11] these structures.
[42:13] Roughly.
[42:13] Right.
[42:14] So that's the risk triangle. The return
[42:16] triangle is the coupon, the fee, which
[42:18] are the 1% upfront fee, and the equity
[42:21] upside. That center of gravity remains
[42:23] the same.
[42:24] Which means that if somebody says,
[42:25] "Okay, what? I'll pay another 25 basis
[42:27] points of coupon, but I want a lower
[42:29] equity upside in this case." And there's
[42:31] a band we work in on that.
[42:32] Yeah.
[42:33] So typically the equity upside would be,
[42:36] I would say, at 6 to 10% of the debt
[42:38] value,
[42:39] average being around 8%, which means
[42:41] if I've given him, say, 10
[42:44] 10 crore of debt, then my
[42:47] equity upside portion
[42:49] is, you know, at best a crore, and could
[42:51] be 60 lakhs, right? Again, that's the 6
[42:53] to 10% that I talked about.
[42:55] Now, if I want 80 lakhs,
[42:58] and you want me to take 70 lakhs,
[43:00] that comes out through the coupon. So
[43:02] we'll maneuver.
[43:04] It's all in these ranges. Now, the
[43:05] clincher here is if he tells you, "You
[43:07] know what?
[43:08] These terms look reasonably okay. You're
[43:10] not getting
[43:12] you know, plastered in the process,
[43:13] right?"
[43:15] That gives you a lot of confidence to
[43:17] embrace the term sheet.
[43:19] So I can negotiate, but I don't also
[43:21] have too much power or
[43:22] No, the power is there in the range,
[43:23] because it's already we've brought it to
[43:25] a 95%
[43:27] kind of a situation on
[43:29] you know, making it work.
[43:31] Taking his inputs, and if you have
[43:32] another investor taking their inputs, we
[43:33] know, and it's a market. It's a supply
[43:36] demand, right?
[43:37] If I'm mispricing this deal,
[43:39] Yeah.
[43:40] you will know because somebody else will
[43:41] give a better deal, which I also It's
[43:42] game theory, right? So we all work in
[43:44] zones. I would say it comes down to
[43:47] some arbitrages, right? So for example,
[43:49] you could have an arbitrage of
[43:50] information. You could have an arbitrage
[43:52] of relationships. You could have an
[43:53] arbitrage of timing.
[43:55] So
[43:56] we recently found a company called
[43:57] Ultrahuman, and you know, we've known
[43:59] the company for a couple of years, but
[44:01] finally when the deal happened, it
[44:03] happened in a matter of a quick 3 4
[44:04] weeks.
[44:05] And they had a moment in time where they
[44:08] had to fulfill a particular purpose in
[44:09] the US.
[44:11] And because we knew them for so much
[44:12] time, we were able to get over the line
[44:13] quickly and make the funding happen.
[44:16] So, is the deal time 4 weeks or is it 2
[44:18] and 1/2 years? Right? So, it depends on
[44:20] perspective.
[44:22] But that arbitrage of relationship and
[44:24] timing both helped in that case.
[44:25] But you're constantly trying to from
[44:27] what I gauge so far, you're constantly
[44:29] trying to gauge I mean
[44:31] determine your tenure with the runway
[44:33] that the company
[44:34] Yeah. And a little bit extra, right? So,
[44:36] for example, we have 18 months of runway
[44:38] and I give you a 12-month product,
[44:40] then why would you give me warrants? Why
[44:42] would you give me anything? Unless I'm
[44:43] giving you working capital, which is a
[44:44] different construct. Because the risk is
[44:46] lower and the return is lower.
[44:47] Which you do as well.
[44:48] As well. We have a separate product for
[44:49] that. But that serves a I'm not doing
[44:52] runway extensions. So, I don't want
[44:53] warrants in that. So, I'm okay.
[44:55] Sorry, that's a separate product to fund
[44:57] working capital.
[44:58] Yes. So, in our third fund, it's really
[44:59] two parts.
[45:00] Uh so, our third fund we raised a
[45:02] venture debt fund and we raised a
[45:05] shorter duration scheme,
[45:06] uh which is backed by IFC. And uh that
[45:09] product is meant to solve for short-term
[45:12] balance sheet pain, which is, you know,
[45:13] you have receivables or inventory or as
[45:16] an NBFC, you're a young NBFC and you
[45:18] want to manage your ALM. These are three
[45:19] things that we solve.
[45:20] So, no equity warrants with that.
[45:22] I'm okay with that. Right? So, because
[45:24] I'm solving a different purpose for
[45:25] those founders, for my venture debt
[45:27] fund.
[45:28] financing.
[45:29] Working capital, right? So, but even
[45:30] there banks don't do it. So, most banks
[45:32] don't do it.
[45:33] So, if I give an example, let's say uh
[45:35] Giva, it's a jewelry company. If I'm
[45:37] helping Giva manage their store
[45:39] expansion
[45:41] and their uh they want to create 25 new
[45:43] stores, take venture debt. Because
[45:45] that's revenue accretive, it helps you
[45:47] build your business, right? But if I'm
[45:49] helping you on your inventory,
[45:51] where you actually have gold on the
[45:52] other side,
[45:54] then the cost structure and the
[45:55] transaction structure change, right? It
[45:56] changes there. So,
[45:58] the same company, it's like
[46:00] traditionally how banking works. If
[46:01] you're setting up a factory, take
[46:03] five-year money.
[46:04] For your inventory, take 60-day money.
[46:08] In our world, there's no factory.
[46:09] Yeah.
[46:09] And there's no data.
[46:10] Mhm.
[46:11] So, you're helping companies build value
[46:13] ahead of data. That's my product. That's
[46:15] venture debt.
[46:16] Okay.
[46:16] The working capital,
[46:18] I need data.
[46:19] So, I need to see the current assets. I
[46:21] need to see your inventory. And I'll
[46:22] back that. It's a different purpose.
[46:24] Your investors, you had invested in
[46:26] Dunzo. But, I also want to bring up
[46:27] Dunzo from the perspective of debt to
[46:29] equity. Because obviously in the listed
[46:31] markets, when you're tracking companies,
[46:32] debt to equity is a big thing, right?
[46:34] So, if my numbers are right, in 2018,
[46:37] Dunzo had raised equity capital till
[46:39] then of around 12 million.
[46:40] Yeah.
[46:40] You brought in 1 million of debt.
[46:43] Two years later in 2020, the equation
[46:45] flipped a little.
[46:46] Yeah.
[46:47] 45 million in equity overall, and which
[46:49] they raised, and you brought in 11
[46:51] million in debt.
[46:51] Yeah, across two pieces, yeah.
[46:53] Yeah. So, one, how does debt equity
[46:56] Yeah.
[46:56] change based on Does it change based on
[46:58] series or whatever?
[47:00] Also, what's your story with Dunzo?
[47:02] Yeah.
[47:03] I don't know. By the way, I think it was
[47:05] a fantastic brand, and a lot of respect
[47:07] for what Kabir built. Uh Kabir and uh
[47:10] entire set of co-founders built.
[47:12] And
[47:13] the relation I think it's a great
[47:14] example of, you know, growing with the
[47:16] company
[47:18] till you don't, right? In some sense.
[47:20] So, 2018-19 was the first uh uh the
[47:23] starting point for us.
[47:25] And we grew with the company. So, part
[47:27] of the risk appetite for us
[47:29] keeps improving as we see more and more
[47:32] milestones in the same company, which is
[47:34] part of our DNA.
[47:36] So, when we get into a series A, and
[47:37] then the company goes to series B and
[47:38] series C, we start doing more and more
[47:40] in the same company because
[47:42] we've learned more, it's a good
[47:43] relationship, they understand,
[47:44] hopefully, the situation better.
[47:46] Yeah.
[47:46] We totally funded Dunzo 140 crore of
[47:48] debt.
[47:49] Okay.
[47:49] Right?
[47:50] And that was a big number for one
[47:53] company, even over three, four years at
[47:55] that time, right?
[47:58] And we got all 140 crore of debt back
[48:01] and we had no delays and we had no
[48:04] impairment, right?
[48:06] So, Dunzo is
[48:09] a situation where
[48:11] it was a deep market,
[48:13] great brand
[48:14] and in 2022 they felt that, you know,
[48:17] they could really conquer the world or
[48:19] conquer the market in some sense and
[48:21] they went on a
[48:22] a massive expansion plan after that.
[48:25] And it if you go back to what I said
[48:27] earlier, they hadn't asked for leverage
[48:29] at that point and it was venture 101.
[48:31] They just raised $220 million of capital
[48:34] and
[48:35] you know, they wanted to raise a couple
[48:37] of hundred crore of debt
[48:38] and we had the
[48:40] ability and we were the only lenders at
[48:42] the time. We were the only venture
[48:43] providers at the time.
[48:45] And we did our own assessment and we
[48:47] felt that the company maybe had a
[48:49] shorter runway than what they thought.
[48:51] So, we had a conversation around that
[48:53] and
[48:53] Which year was that?
[48:54] 22.
[48:55] Okay.
[48:55] Summer of '22, right?
[48:57] And it was probably one of the toughest
[48:59] underwriting decisions of my career. I
[49:01] mean, over the last 18 years I think
[49:03] if I look back, that was difficult one
[49:06] because we had the relationship, we had
[49:08] pole position, we had seen the company
[49:09] grow, they had $220 million of capital
[49:11] raised, they were $770 million, it's
[49:13] venture 101, all the things that I've
[49:15] said so far, right?
[49:15] So, 2018 you had given them debt, 2020
[49:18] you gave them
[49:18] From '18 onwards over 4 years, we had
[49:20] given them about 140 crore across
[49:22] multiple rounds, right?
[49:24] And 2022 was the fund raise from when
[49:26] Reliance came in.
[49:27] Correct. Yeah,
[49:29] exactly, right?
[49:31] But the issue that we had then was we
[49:34] couldn't get an alignment on
[49:37] frankly, the runway estimation.
[49:39] Okay.
[49:39] Right? And we felt that they were going
[49:42] to hit a wall
[49:43] way sooner than what they
[49:46] thought.
[49:46] Because competition was heating up or
[49:48] Multiple reasons, expansion. I I for
[49:51] their own reasons they were expanding
[49:52] very quickly.
[49:53] Right.
[49:53] And they had more than 1,000 crore in
[49:55] the bank.
[49:55] Mhm.
[49:56] And they felt that their market will
[49:58] hold.
[49:58] Mhm.
[49:59] It didn't. And uh we saw that 2022
[50:02] summer onwards, the venture funding
[50:04] climate just froze.
[50:06] Mhm.
[50:07] And you have businesses where uh
[50:10] you can't
[50:11] plug 5-10 million dollars of capital
[50:14] you know, because the scale is just too
[50:15] different.
[50:17] So, we since we got in so early, we
[50:20] actually had an equity upside there,
[50:22] which was marked up to that round, and
[50:23] we had to lose that value.
[50:26] So, I would say that's an example where,
[50:27] you know, it was and team gave it
[50:29] everything. I think uh
[50:31] So, 2022, you did not underwrite the
[50:32] We did not do any further debt. And they
[50:34] raised some capital from some other
[50:36] folks.
[50:37] And uh we kind of eased off at that
[50:39] point because there was a fundamental
[50:42] difference in
[50:43] what we thought was the trajectory at
[50:45] that point.
[50:47] And uh
[50:48] we also felt that we no longer
[50:50] understood the capital from that point.
[50:53] It was not our zone.
[50:55] Right? So, we understand the venture
[50:57] equity zone.
[50:58] Mhm.
[50:58] We don't understand uh we didn't
[51:01] understand that new investor, right?
[51:02] Okay.
[51:03] So, that also meant that we cannot
[51:05] assume things.
[51:06] Mhm.
[51:06] So, uh so
[51:08] fundamentally, I would say
[51:10] the two words which define our life is
[51:12] optimistic paranoia.
[51:13] Mhm.
[51:14] So, you have to be optimistic. You have
[51:16] to be on the phone at 11:00 on 2019.
[51:17] Mhm.
[51:18] And you have to be paranoid. Right?
[51:20] So, we kind of eased off mean our
[51:23] exposure ran off over the next 12
[51:24] months. And uh you know,
[51:27] we kept tracking them, but we didn't
[51:29] find an opportunity to uh do anything
[51:31] further.
[51:32] And then it kind of met a end, which was
[51:35] uh unfortunate.
[51:36] So, I'm just trying to understand this
[51:37] bit over here, my curiosity, right? So,
[51:39] you had warrants. You had equity in the
[51:41] company.
[51:43] And it was doing seemingly well, right?
[51:46] Um
[51:46] And for your fund, like the returns of
[51:48] fund thing this could have been
[51:50] Yes
[51:51] at that time it was significant booster
[51:54] for that fund.
[51:55] So you are marking to market.
[51:57] It would have been zero
[51:58] on the warrant side yeah.
[51:59] But that is only after the company
[52:01] failed right?
[52:01] No 23 so the next 12 18 months it was
[52:04] Right but in 2022 when you were taking
[52:06] that underwriting decision
[52:08] did the warrants how much of a role did
[52:11] the warrants play in your discussions?
[52:13] For any new transaction we don't look
[52:15] behind and say what do we have that's
[52:17] priced in.
[52:18] Because those warrants belong to the
[52:19] earlier check that we wrote right?
[52:22] So the debt
[52:23] that we underwrite a fresh purely
[52:27] depends on that day what do I believe.
[52:30] So you're not tempted to give in a
[52:32] little more debt extend the runway.
[52:34] New money
[52:36] is like you know good money after bad
[52:37] right? So that is the first test when
[52:40] you're underwriting debt
[52:41] does the company deserve to get that
[52:43] debt for whatever reason? Could be
[52:45] quantitative qualitative relationship
[52:46] category founder market
[52:49] 17 different things right?
[52:51] But that is the first decision we take
[52:52] as the investment committee.
[52:54] The second thing is what should be the
[52:55] returns associated with that
[52:56] transaction.
[52:57] What happened prior
[53:00] could help induce a better relationship
[53:02] you know angle to it or better
[53:04] understanding of the company but the
[53:06] capital has to speak for itself.
[53:08] And by the way the warrants are on the
[53:10] previously done debt.
[53:11] Yeah.
[53:11] So there is a price tag to every rupee
[53:13] that we fund.
[53:15] Cuz we have a finite pool.
[53:17] That pool of capital has to deliver
[53:19] those returns. So every rupee that goes
[53:21] out goes with the same expectation.
[53:23] I don't know so when I fund the company
[53:26] I expect that company to be in the top
[53:27] 10%
[53:29] every deal I do.
[53:30] Like every equity investor believe that.
[53:32] They don't fund a company that they
[53:33] think okay it's going to be the 15th
[53:34] company in my fund.
[53:36] So to that extent
[53:38] new underwriting comes down to assessing
[53:40] the risk at that point.
[53:43] At that point in 2022, we felt that that
[53:45] risk we could not uh absorb.
[53:48] Mhm.
[53:49] And definitely not for the quantum of
[53:50] capital that the company wanted.
[53:52] Got it.
[53:52] Okay. So, you made money on the debt.
[53:54] You were you for forwent the money on
[53:56] the
[53:56] Correct. Completely the equity upside
[53:58] got zeroized.
[53:59] Got it.
[54:00] This is This is on the fund structure
[54:01] itself. You said 140 crores to Dunzo,
[54:04] right? Was this all from a single fund
[54:06] or
[54:07] Largely the first fund, a little bit for
[54:08] the second fund.
[54:09] Okay. So, do you limit exposure
[54:11] do. Yes. That's one of the reasons we
[54:13] split as well.
[54:14] Okay.
[54:14] And uh it's not 140 crore on one day,
[54:17] right? So, it's over a period of time. I
[54:18] think our peak exposure might have been
[54:20] like 60-70 crore.
[54:21] Mhm.
[54:22] So, uh because it keeps pairing down.
[54:24] So, we look at peak exposure.
[54:25] Okay.
[54:26] And uh normally only a handful of
[54:28] companies will be more than 5% of the
[54:29] fund.
[54:30] So, it's
[54:32] our average check size
[54:34] Mhm.
[54:34] is about 20 crore per company.
[54:36] Okay.
[54:37] All right. And we've deployed 8,000 plus
[54:39] crore.
[54:39] Mhm. Mhm.
[54:40] So,
[54:40] Yeah.
[54:41] it just keep Average check size when you
[54:42] talk about it at the point of time,
[54:43] right? So,
[54:45] that's been the track record for us.
[54:47] But how do you decide the debt-equity
[54:48] ratio that you're comfortable with
[54:49] across companies?
[54:50] It's a moving number.
[54:52] Okay.
[54:52] So, when we start, suppose a Series A,
[54:55] like I said, it depends on the company,
[54:56] the sector, the founding team quality.
[54:58] So, there's a lot of factors go in.
[54:59] Mhm.
[55:00] Normally, it ranges between say 10-15%
[55:03] on the lower side to 20-25-30% on the
[55:05] higher side for a new relationship at a
[55:07] Series A.
[55:09] As the company grows,
[55:11] it depends on our conviction.
[55:12] So, this is on existing capital that
[55:14] you're looking at or on the fresh
[55:15] raised 5 million,
[55:17] you've just got the money in, I'm not
[55:18] going to give you 5 million dollars of
[55:19] debt.
[55:19] Mhm.
[55:20] I might give you a million to 2 million
[55:23] or 750k, depending on the company.
[55:24] Mhm.
[55:26] But the next round, like I said, maybe
[55:27] we construct it together, I might do 5
[55:30] on 15.
[55:32] Right. 15 being the fresh fund raise.
[55:33] Correct.
[55:34] So, if they already have, let's say, out
[55:35] of the five they raised earlier, if they
[55:37] have two still in the bank.
[55:38] Yeah, I've accumulated, right? So,
[55:40] because that two gets spoken for,
[55:42] typically you almost get to near zero,
[55:45] you know, maybe a million or two the
[55:47] next round.
[55:48] Or even can we do a little bit more?
[55:51] Uh for example, if you don't want to
[55:53] raise a pure external round and they
[55:54] tell you know what, let's put three four
[55:55] million to work, can you guys do a
[55:56] couple of million? But we like the
[55:58] business, we think there's value to be
[56:00] generated by not going out, that's fine,
[56:02] too. So, it comes down to the
[56:04] relationship company performance, our
[56:07] assessment of risk, the sector, how it's
[56:09] behaving, what we think is the macro,
[56:12] looking into the company,
[56:14] you know, is the market warm, hot,
[56:16] lukewarm, cold?
[56:17] All of that plays a role.
[56:18] Got it.
[56:19] So, I think one last question for me. Uh
[56:22] at what point in a company's life cycle
[56:25] it doesn't make sense for the founder to
[56:27] take
[56:27] Oh, yeah, that's the most important
[56:29] question. Thanks for asking that.
[56:31] If the business is not predictable, not
[56:33] yet.
[56:34] Okay.
[56:34] Right? If the business is binary or if
[56:37] you're not as a founder, if you're not
[56:39] confident about and see,
[56:41] when I mean when I say predictable, I
[56:42] don't mean the extent of success.
[56:46] Is there going to be success? So, it's a
[56:48] fundamental question. What I mean by
[56:49] success is, will you generate revenue?
[56:51] So, pre-revenue we don't touch normally,
[56:53] right? So, once you generate revenue as
[56:56] well, for different kinds of industries
[56:57] there's So, for example, if you're a
[56:59] food brand or if you're a uh beauty and
[57:02] personal care brand or if you're a uh EV
[57:05] OEM two-wheeler company, there's
[57:07] different metrics for what is binary.
[57:09] If you sell 3,000 bikes a month,
[57:12] that doesn't give me confidence that the
[57:15] brand works. So, I may want to see about
[57:18] 2,000 units of sales, right? But if
[57:20] you're doing 4 crore a month of revenue
[57:22] as a food brand,
[57:24] that's good because and if it's one
[57:26] product or one brand, then we've seen
[57:28] the journey, we've been in Rebel Foods
[57:29] and Curefoods and so on, so we've seen
[57:31] those journeys, right?
[57:32] So,
[57:34] we look at whether we are able to
[57:36] understand and predict the company's
[57:38] journey.
[57:40] If it is too volatile or too binary,
[57:43] which for example, a lot of the AI
[57:45] conversations we're having, that's been
[57:47] the problem for us.
[57:48] Uh it's very difficult to capture the
[57:51] disruption quotient say in the 6 9 12
[57:53] months in a lot of the We like some
[57:55] spaces. We like for example, voice is a
[57:58] an area that we like a lot and you know,
[58:00] found a couple of companies there and
[58:01] some areas that we like which we are
[58:03] able to understand better.
[58:05] But there are many areas we don't
[58:06] understand. Uh you know, how much
[58:08] disruption will happen in the next 12
[58:10] months. Then it's better for us not to
[58:11] be in that. We don't do anything in the
[58:13] crypto space or anything which is
[58:16] even deep tech is hard because there's
[58:18] long gestation periods and uh
[58:21] companies may go through 5 years of a
[58:23] trough before they see success.
[58:25] Our product is not geared for that.
[58:28] Then it's better to stay out and wait
[58:30] till there's commercialization, till
[58:32] there's some kind of revenue visibility,
[58:34] and then back that.
[58:36] So, I think we need to have a fair bit
[58:38] of humility in understanding our
[58:40] constraints. Uh and we educate founders
[58:42] also on that saying, you know,
[58:44] debt sounds cheaper than equity,
[58:48] but in the wrong situation, it becomes a
[58:50] noose around your neck, right?
[58:52] And you shouldn't do it up front
[58:53] knowingly.
[58:54] Eventually, we get to where we get to
[58:56] and we'll work with you and figure out a
[58:58] way,
[59:00] but it's not ideal you know, if you
[59:02] could avoid the problem up front.
[59:05] You said we'll work with you with
[59:06] reference to the founder.
[59:08] Uh I know I said the last question, but
[59:10] this is really the last question. So,
[59:12] how do you look at yourself uh more as a
[59:14] creditor or as a partner to the founder?
[59:18] I think the first thing is you need to
[59:20] approach this with a lot of empathy. We
[59:21] are entrepreneurs ourselves. It's an
[59:23] entrepreneur fund. So, it's the same way
[59:26] can I predict my fund raise journey or
[59:28] fund raise cycle? I can't. It's you
[59:30] know, the mercy of the markets, right?
[59:31] Same way with founders. So, there's a
[59:32] lot of uncertainty in their lives and we
[59:35] found
[59:36] See, we don't take personal guarantees.
[59:39] And it's quite bizarre, right? Uh if you
[59:41] think about the perceived risk
[59:44] and we don't take personal guarantees.
[59:45] So, we're sitting in a room with a
[59:46] founder saying, I'm not doing this
[59:48] because I expect you to backstop the
[59:49] company and finance the company. That's
[59:51] out.
[59:52] Right? So, that's not the expectation.
[59:55] The second thing we realized is if
[59:57] founders believe that we are working
[59:59] with For example, can we try and get
[01:00:00] them a revenue opportunity?
[01:00:02] Even if we just make three connections,
[01:00:04] we realize that the intent shows, right?
[01:00:06] If we work with them conjunctively on
[01:00:07] even their cost cuts.
[01:00:10] So, the difference is should you make
[01:00:11] your staff payments? There's payroll and
[01:00:14] there is marketing. And there is debt
[01:00:16] obligation.
[01:00:17] But if you put marketing over debt, I
[01:00:18] have a problem with that. But staff and
[01:00:20] payroll, I have no problem with that
[01:00:21] because you need to do those, right?
[01:00:24] If your overheads are inflated and it's
[01:00:26] a consensus that it's inflated and you
[01:00:28] need to cut on that, yeah.
[01:00:29] But can it happen overnight? No.
[01:00:32] So, I think there's a lot of sensitivity
[01:00:34] that needs to be brought in.
[01:00:36] So, I would say
[01:00:38] you and it helps that, you know, we've
[01:00:40] done this long enough. We're able to
[01:00:42] give a lot of benchmarks and suggestions
[01:00:44] on what has worked. It's not like we've
[01:00:46] not gone through tough experiences,
[01:00:48] right?
[01:00:49] In fact, I would say maybe 30% of our
[01:00:51] companies will go through temporary
[01:00:52] difficulties where, you know, they're
[01:00:53] about to raise a round and you know,
[01:00:55] slip by one to months and then they get
[01:00:56] through and then they become a prospect
[01:00:58] for us.
[01:00:59] So, company which looks weak today
[01:01:01] may become very strong and a prospect in
[01:01:03] 60 days time.
[01:01:05] Yeah.
[01:01:05] So, it's equally important that you
[01:01:07] manage this and this. Without this
[01:01:09] management, there is no next deal.
[01:01:10] Right.
[01:01:11] It's not just for that purpose. I'm
[01:01:12] saying ultimately, it's a hard life,
[01:01:15] right? And first, understand that.
[01:01:18] Within reasonable bounds. I think the
[01:01:20] most important thing is as debt
[01:01:22] providers, we expect to be paid back
[01:01:25] exactly within reasonable bounds.
[01:01:28] Equity has a different expectation. So
[01:01:30] first founders have to appreciate that.
[01:01:32] That we do up front.
[01:01:34] That conversation is up front. You can't
[01:01:35] have it on the day after
[01:01:38] you know, they've had a problem.
[01:01:40] So we know one question from me, which
[01:01:42] is if a startup goes through some form
[01:01:44] of struggle and I know you said you try
[01:01:46] to spot the landmines before the short
[01:01:49] term before
[01:01:51] But what happens when they miss a
[01:01:54] payment
[01:01:55] for a month or two?
[01:01:56] Yeah.
[01:01:57] So I think the first thing is the why,
[01:01:59] right? So you like I mentioned earlier,
[01:02:01] it could be temporary.
[01:02:03] Mostly the reason is they're about to
[01:02:05] raise a round.
[01:02:06] We've done the math, 18 months, 16
[01:02:08] months, 20 months and maybe they've
[01:02:10] slipped by a couple of months.
[01:02:12] But it's visible that a round is
[01:02:13] happening, right? So
[01:02:15] a term sheet's done or docs are
[01:02:16] happening and so on. So in those
[01:02:18] situations actually many a time we come
[01:02:19] in consult with the existing investors
[01:02:21] and see if we can buffer the company.
[01:02:22] Maybe they can get a small inside round
[01:02:24] with some debt. So we as long as
[01:02:26] certainty that there's a round
[01:02:27] happening.
[01:02:28] So
[01:02:29] what are we working towards is
[01:02:30] important, right?
[01:02:32] So one is as a round that you have the
[01:02:33] answer on that. Second is
[01:02:36] a round is not possible right now,
[01:02:38] but the business is fundamentally
[01:02:41] uh valuable,
[01:02:42] right? And there are some such
[01:02:43] situations where, you know,
[01:02:45] they are not in a position where they
[01:02:47] can go out and raise capital for certain
[01:02:49] purposes, for certain reasons.
[01:02:51] But it's fundamentally a valuable
[01:02:53] company and value is determined
[01:02:55] determined by how?
[01:02:56] See, what is Suppose you're a brand and
[01:02:58] you know, at a
[01:02:59] 8-9 crores, 100 crores level, you could
[01:03:01] raise money, but at a 3 crore monthly
[01:03:03] level, you can't raise money unless
[01:03:05] you're profit you're say a CM2 positive
[01:03:07] company. But today you're bleeding say
[01:03:09] 4%, 5% at a contribution margin level.
[01:03:12] Then you may need 4 to 6 months to
[01:03:15] right the ship, right? So you need to
[01:03:16] improve your profit margin or grow to
[01:03:18] that level.
[01:03:19] Mhm.
[01:03:20] One of the two. But, if we believe that
[01:03:23] okay, that option is feasible, then we
[01:03:25] give them some time. And maybe we'll
[01:03:28] give them a moratorium in those cases.
[01:03:29] But, these are
[01:03:30] not the norm. These are the exceptions.
[01:03:32] Right?
[01:03:33] Okay.
[01:03:33] Now, worst case is if say the equity
[01:03:37] investors wash off their hands.
[01:03:39] Mhm.
[01:03:40] What do the founder do then? Right?
[01:03:42] Normally, the I would say when I say
[01:03:44] normally, it doesn't happen in 98 99% of
[01:03:47] the cases because for somebody to put
[01:03:49] money and in 18 months decide they're
[01:03:51] not interested anymore at all is a super
[01:03:53] low probability event. Right?
[01:03:55] And usually, that kicks in we've
[01:03:58] realized if there's a issue between the
[01:04:00] founders. So, if there's a fight between
[01:04:02] the founders or founders investors,
[01:04:03] that's possible. Or there's change in
[01:04:05] regulation. Like because of regulatory
[01:04:07] issues, your business become
[01:04:08] Yeah.
[01:04:09] you know, low to no value.
[01:04:10] Yeah.
[01:04:10] It's very tough to price in these risks.
[01:04:12] Right? Which we tell our investors all
[01:04:14] these two risks like we could fund and
[01:04:16] then 30 days later I'm pricing in that
[01:04:18] for 15 months there's no problem. But,
[01:04:20] in 60 days if the founders have a fight
[01:04:21] and they implode and three of them leave
[01:04:23] out of four.
[01:04:24] That is not priced in. Right?
[01:04:26] And will the person who's continuing the
[01:04:28] business be able to run the company? So,
[01:04:30] that's a different question that comes
[01:04:32] up. Right?
[01:04:33] So,
[01:04:35] how we reach there matters. What we are
[01:04:37] working towards matters.
[01:04:40] We separate them into short-term
[01:04:42] situations and fundamental situations
[01:04:45] where there is a Suppose the business
[01:04:47] model itself is not viable.
[01:04:48] Yeah.
[01:04:49] And in some cases in between, you could
[01:04:51] have reasonably good business models,
[01:04:53] but there's no way out. You have to go
[01:04:55] on a path to sale. Right?
[01:04:57] Okay.
[01:04:57] And we've been part of those processes
[01:04:59] also.
[01:05:01] Ultimately, in India, my my conclusion
[01:05:05] is if somebody wants to honor their
[01:05:07] commitment
[01:05:08] or if they don't, that's the answer.
[01:05:11] So, if they want to honor their
[01:05:12] commitment, they will and you can find a
[01:05:14] way in which
[01:05:16] you know, there is some residual value
[01:05:18] and you eke out some and there's a
[01:05:20] cascade. The debt comes first. Right?
[01:05:22] So, as long as all this is understood by
[01:05:24] everyone you get paid off first because
[01:05:25] we have primacy.
[01:05:27] Yes, we are at the top of the stack. So,
[01:05:29] as long as these things are understood,
[01:05:31] I have an issue upfront by everybody.
[01:05:33] We realize that it is
[01:05:35] it is not as damaging as it seems.
[01:05:39] If you wake up 3 days after a problem if
[01:05:42] the day after there's no money, there's
[01:05:43] no money. Right? So, there's no use in
[01:05:45] asking the founder why would they? They
[01:05:47] can't print money.
[01:05:48] But, do you speak to VCs because a lot
[01:05:50] of this conversation you talk about
[01:05:51] doing things in
[01:05:53] a concert with the VCs?
[01:05:54] Heavily in concert and collaboration. Of
[01:05:55] course, so that's why that's what gives
[01:05:57] the confidence to take that risk in the
[01:05:59] first place again with the same person.
[01:06:00] So, to your earlier question on what we
[01:06:02] index on with investors, it's this
[01:06:04] variable. In a tough situation
[01:06:07] how did they engage with us and the
[01:06:09] founder? Make a huge difference. And
[01:06:11] even then I'm not saying that there's a
[01:06:13] guarantee they'll put more money. It's
[01:06:14] not that.
[01:06:15] Maybe they're not in a position to put
[01:06:16] more money.
[01:06:17] It's not just the capital. It's the
[01:06:19] conversation quality. It's you know,
[01:06:22] what we are hearing, what they guide the
[01:06:24] founder to do.
[01:06:26] So, all of that makes a difference.
[01:06:27] So, you're also going out there and
[01:06:28] batting for the investor I mean sorry,
[01:06:31] for the founder.
[01:06:31] I think we're all batting for the
[01:06:33] company. So, the answer is in those
[01:06:35] situations you're batting for the
[01:06:36] company.
[01:06:37] And
[01:06:38] I often say this to my team. That's the
[01:06:40] difference between fair and appropriate.
[01:06:42] And I keep harping on appropriate,
[01:06:43] right?
[01:06:46] I have after I've given the company
[01:06:48] money and I expect it back and they're
[01:06:50] going through difficulty, is it fair to
[01:06:52] ask a founder to
[01:06:54] you know, still slice out some cash
[01:06:56] flows and give us?
[01:06:58] May or may not be, but it's the
[01:06:59] appropriate answer. Because uh there's
[01:07:01] an expectation and context layer around
[01:07:03] fairness, right?
[01:07:04] So, if they have no money, they have no
[01:07:06] money, right?
[01:07:07] So, the objective is
[01:07:10] sound the alarm bells before so that you
[01:07:12] don't hit a wall at 100 miles an hour.
[01:07:14] That statement is what has preserved
[01:07:16] value the most. Because it's not in the
[01:07:18] founder's interest to also destroy the
[01:07:20] company.
[01:07:21] So, first thing is objectives are
[01:07:22] aligned that the company should survive.
[01:07:25] Second is
[01:07:27] raise or have the conversation ahead of
[01:07:29] time.
[01:07:30] And do it in a structured way with
[01:07:33] enough empirical data and enough effort,
[01:07:36] right? You can't just sit in your office
[01:07:38] and just call something.
[01:07:39] Yeah.
[01:07:40] Be in the trenches.
[01:07:41] So, I would say about 40-50% of
[01:07:43] bandwidth will go into these situations.
[01:07:46] Regardless of size.
[01:07:48] And we've created
[01:07:50] sale of brands, we've created sale of
[01:07:52] companies as opportunities and finally
[01:07:54] that allows for some outcome.
[01:07:56] Right.
[01:07:58] So, we've been through these
[01:07:59] conversations and we've been through
[01:08:00] these outcomes across our life cycle.
[01:08:03] And hence you know, even our investors
[01:08:06] understand that, you know, just because
[01:08:07] there's a problem doesn't mean company
[01:08:09] will die in 6 months.
[01:08:10] Mhm.
[01:08:10] Uh five different ways it can play out
[01:08:12] from there.
[01:08:12] Got it.
[01:08:13] And it also comes out of the DNA of the
[01:08:15] firm.
[01:08:17] Are you part of the problem, part of the
[01:08:18] solution?
[01:08:19] I think that matters a lot. If the
[01:08:20] founder believes that you're fighting
[01:08:22] for them, even if you're trying, we
[01:08:25] realize that it matters more than money
[01:08:28] on the table.
[01:08:29] Got it. Let me play devil's advocate
[01:08:31] here for for a moment.
[01:08:33] Founders, we have heard are delusionally
[01:08:35] optimistic about their ideas, right? Um
[01:08:37] crazy moon shot ideas they have.
[01:08:40] Yes.
[01:08:40] And they raise money to chase after
[01:08:41] those, equity money.
[01:08:43] Yes.
[01:08:43] Right? And then you have that Vinod
[01:08:45] coming in with debt.
[01:08:47] And saying, "Hey, listen, pay me back
[01:08:49] every month, every quarter, however you
[01:08:50] structure it."
[01:08:51] Yeah.
[01:08:52] Are you clipping is venture debt, and
[01:08:54] I'm not saying are you putting you on
[01:08:55] the spot, but clipping those wings and
[01:08:57] those dreams?
[01:08:58] question, actually.
[01:09:00] I'm trying to find nuanced way answering
[01:09:02] this, right?
[01:09:04] I think venture it can do one of two
[01:09:06] things.
[01:09:08] It can be the additional rocket fuel,
[01:09:12] right? Or if you've seen the Fast and
[01:09:13] the Furious, the NOS that is there,
[01:09:15] right? You flip it on and boom.
[01:09:18] So, the fuel is the equity. We are the
[01:09:20] NOS in that case, right? So,
[01:09:24] depending on the market, depending on
[01:09:25] the company, you may just want to pound
[01:09:27] harder and you may want to grow faster.
[01:09:29] We can help you do that, right?
[01:09:32] Or on the other side, we can give you a
[01:09:34] little bit extra runway,
[01:09:36] right?
[01:09:37] Now, in both cases, the answer is known
[01:09:40] after 18 months,
[01:09:41] right? We don't know up front if we are
[01:09:44] fueling you or extending runway, giving
[01:09:46] you a little bit of oxygen extra. We
[01:09:47] don't know.
[01:09:48] We may have
[01:09:50] post Exactly. And And we learn through
[01:09:52] the journey, right?
[01:09:54] Now, in the 14th month,
[01:09:58] if you've not got visibility of another
[01:10:00] round,
[01:10:02] you should not be flying high because
[01:10:05] that's not responsible.
[01:10:07] That's the maturity.
[01:10:09] But is it a unilateral decision? No.
[01:10:12] I can tell you that nobody can make
[01:10:14] anybody do something today. It's a
[01:10:16] contract like country work in.
[01:10:19] You can have all the rights in the
[01:10:20] world, but it has to People have to buy
[01:10:22] in to what what you're asking for,
[01:10:25] right?
[01:10:26] So,
[01:10:27] what we have realized is as long as the
[01:10:29] end game makes sense,
[01:10:32] life's all right, right? You've got four
[01:10:34] months of time. What are you going to do
[01:10:35] in this four months? If If the founder
[01:10:36] says, "You know what? I'll do this this
[01:10:37] this and after 90 days I'll go to market
[01:10:39] and raise capital in four weeks."
[01:10:41] Both of us know it's not going to
[01:10:42] happen, right?
[01:10:44] So, the answer has to make sense.
[01:10:46] And if the answer is, "You know what?
[01:10:47] I'm already talking to four people."
[01:10:49] Our contribution there is we can check
[01:10:52] with those who we have spoken in
[01:10:53] in this community, right? We talk to
[01:10:54] everybody. So, we have far better
[01:10:59] ability to ascertain real interest
[01:11:02] than even equity investors because the
[01:11:04] person will feel there's a conflict. The
[01:11:07] other investor.
[01:11:08] So,
[01:11:09] there's a lot of back channeling that
[01:11:10] happens.
[01:11:12] We have a lot of sensitive
[01:11:13] conversations.
[01:11:15] Sometimes existing investors tell us,
[01:11:17] "I have this money, but I'm not telling
[01:11:19] the founder that today
[01:11:21] because I want them to
[01:11:22] you know, just tighten down a little bit
[01:11:23] more for the next 2 months."
[01:11:25] It's fine.
[01:11:26] All right? It's a purpose you're working
[01:11:28] towards.
[01:11:29] Or there's an investor that I've told
[01:11:31] the founder this, but they have to meet
[01:11:32] these conditions.
[01:11:34] Then it's about sitting with the
[01:11:35] founder, "How will you meet these
[01:11:36] conditions?"
[01:11:37] Or get close to those conditions.
[01:11:40] And what does it take for that?
[01:11:41] Sometimes that takes more time. Then you
[01:11:43] have to give them the time.
[01:11:44] It comes down to what are you working
[01:11:47] towards? So, if the worst thing for us
[01:11:49] is if somebody, "You know what? Can you
[01:11:51] uh just give a moratorium or a bridge
[01:11:53] and it's a bridge to nowhere?"
[01:11:55] I don't know on the other side of this.
[01:11:57] I don't know where it will be, but 6
[01:11:58] months may some paradigm, right?
[01:12:01] That we won't endorse. There has to be a
[01:12:05] finite
[01:12:06] a path leading somewhere.
[01:12:08] If does If it does not, then it's not my
[01:12:10] risk to bear.
[01:12:12] Any more questions, Karthik?
[01:12:13] No, I think we're done.
[01:12:14] Perfect. So, thanks so much, Vinod.
[01:12:16] Absolute pleasure having you here on How
[01:12:18] We See It.
[01:12:18] My pleasure. Thank you.
[01:12:19] Or this should be How VCs Think in that
[01:12:22] case.
[01:12:23] I would say that it's a tricky product
[01:12:25] in some sense and a debt always has this
[01:12:28] hangover of, you know, what can happen
[01:12:30] when things go wrong and you know, does
[01:12:32] it make sense and so on. I think there's
[01:12:34] improved awareness. These kind of
[01:12:35] conversations help.
[01:12:37] Uh I think you asked a lot of
[01:12:39] I would say impactful questions right at
[01:12:41] the heart of, you know, what can go
[01:12:43] wrong and what can hurt situations and
[01:12:45] as well as what can help situations. So,
[01:12:48] I've quite enjoyed the conversation. So,
[01:12:49] thanks a lot for having me here.
[01:13:12] Yeah.