There is higher investor interest in sectors enjoying tailwinds due to COVID, for instance, ed-tech, health-tech and ecommerce, says Sharma
Startups have increasingly resorted to debt to meet their need for capital but the coronavirus outbreak has upended plans and made investors cautious. In a phone interview to Moneycontrol’s M Sriram, Ashish Sharma, CEO, Temasek-owned InnoVen Capital, one of the largest venture debt funds in India, talks about the uncertain economic climate, consequences of blocking Chinese money and how venture debt will sustain in the next few quarters. Edited excerpts:
Q) For the last few years, venture debt has seen constant upticks and more deployments. Will you deploy less money in 2020 than you did the previous year? How is life as a debt investor different?
The size of the venture-debt industry has indeed grown nicely over the last few years, in part driven by a robust funding environment and in part due to a new supply of capital.
It’s possible that the quantum of investments we make this year is lower than last year but a lot will depend on how the second half of the year plays out and the pace of the economic recovery. We were very active during the early part of the year but after COVID, the focus was on portfolio management. The deal flow has now started to pick up and there’s a healthy pipeline of opportunities that we are evaluating.
Q) Demand for debt may still be there but are enough startups coming to you as you are directly reliant on VC funding?
The top of the funnel is weaker compared to last year, as a lesser number of early-stage companies got funded this year. However, we are sector and stage agnostic and expect that the deal flow will be higher in growth and late-stage companies. Many companies that had plans to close external rounds have either deferred the plans or done a smaller internal round. Some of them are now evaluating taking some venture debt to create additional liquidity buffers and extend their runway.
Q) What are the kind of deals you would want to do today?
At a broad level, the investment criteria haven’t changed. We still look to back strong founders addressing large market opportunities and building disruptive models. There is obviously higher investor interest around sectors that are enjoying tailwinds due to COVID, for instance, ed-tech, health-tech, select SaaS, media tech, ecommerce, etc.
Most sectors saw significant business disruption in the last quarter and we do look for early signs of how the demand is coming back. There is also emphasis around understanding any significant changes in customer behaviour due to COVID and whether this plays to the strength of the company. Investors also want to get a better sense of the ability of the founders to navigate their business in an uncertain time and this is a good reflection of their leadership.
Q) How do you view the China situation, especially since many of your companies have Chinese investors?
Chinese investors have been a major source of risk capital for the Indian venture ecosystem, perhaps the largest after Softbank. So there will definitely be some impact. Most companies have to plan attracting other pools of capital during their next capital raise and good companies should be able to achieve that.
Q) Late-stage funding was already getting tough. Is that now true for growth-stage funding as well?
The funding environment is weak across stages, which should come as no surprise as COVID has created a volatile macro environment, with significant uncertainty around demand as well as some supply- chain disruption. However, good companies with strong fundamentals and solid execution capabilities will always be able to raise capital, though the valuations may suffer a bit.
Sectors that are enjoying tailwinds continue to get a lot of investor interest and should close meaningful rounds at higher valuations.
Q) If you want to deploy money in 2020, as fresh deals are riskier, will you just top up existing companies the way you would do in a fresh deal?
We have always been very active in making follow-on investments within our high-performing portfolio companies. Over the last few years, we have been making 15-18 follow-on investments every year. We expect to make several follow-on investments this year but we are also actively scouting to add new companies to our portfolio.
Q) With valuations low, it could still be a good time to deploy. Is there any pressure to invest?Investors don’t get measured on how much capital is deployed… ultimately what matters is whether these investments can generate acceptable returns over the appropriate time horizon. So, there is no pressure to deploy and we don’t have any top-down targets around deployment. Our pace of investments will be a function of finding the right risk-return opportunities that fit our investment strike-zone.