Trifecta Capital looks to raise $241 million for fourth venture debt fund

Trifecta Capital managing partner Rahul Khanna expects venture debt deployment to start picking up in the second half of 2024 once startup funding winter starts to ease out.

Trifecta Capital is looking to raise Rs 1,800-2,000 crore (around $241 million) in its fourth venture debt fund this year, as it looks to invest actively in newer sectors like electric vehicles and agritech.

The move to raise a fresh fund comes just six months after the final closure of its third venture debt fund of $213 million (around Rs 1,777 crore), amidst the ongoing slowdown in startup funding.

The venture debt firm has already deployed a majority of its third fund across various sectors, including emerging sectors such as electric vehicles, supply chain management platforms, and agritech.

Rahul Khanna, co-founder and managing partner of Trifecta Capital, told Moneycontrol that around $250 million has been deployed from the third fund, which includes recycled capital.

The third fund allowed capital recycling, meaning limited partners could choose to reinvest in the fund.

Trifecta also plans to launch its second growth-stage equity fund, Trifecta Leaders Fund 2, by early 2025. The first equity fund, launched in 2021, has already invested significantly across 12 startups. It still holds some unallocated capital, Khanna added.

“We've grown with each fund size. I don't see us increasing the fund sizes dramatically, here on, because we also recycle a lot of capital. So, our first fund (venture debt) was Rs 500 crore, the second was Rs 1,000 crore, and our third fund ended up at about Rs 1,777 crore. So the fourth fund could be between Rs 1,800-2,000 crore. We haven't announced that, but I think that range is reasonable for us.” Khanna told Moneycontrol on the sidelines of the IVCA Conclave in Mumbai.

“We raised and closed fund three (venture debt) and fund one (venture capital/equity) last year, and continue to deploy from those funds. We will raise venture debt fund four in 2024. We have called a substantial amount of capital from fund three, so as we get closer to being fully drawn, we will raise our fourth venture debt fund,” he added.

For the next venture capital fund or the growth equity fund, he said the fundraise will also depend on the firm witnessing more markers of success. Khanna expects a couple of its portfolio companies to file for an IPO. “I think as those returns start to play out, we will likely look to raise a second fund towards the end of the year, if not early next year,” he said.

Founded in 2015 by Khanna and Nilesh Kothari, Trifecta has invested nearly Rs 5,000 crore in over 150 startups across Fund-I, Fund-II, and Fund-III. The portfolio includes 21 unicorns and more than 12 soonicorns, with marquee businesses such as Zepto, BigBasket, PharmEasy, Cars24, Vedantu, Infra.Market, among others.

Investment rationale

According to a recent report by Stride Ventures, India's venture debt market crossed the billion-dollar mark in 2023, a 50 percent surge from the previous year.

Trifecta, however, did fewer deployments in 2023 as compared to 2022. Khanna expects venture debt deployment to start picking up for them in the second half of 2024 once startup funding winter starts to ease out.

“We don't want to be under pressure to deploy. If you raise a very large fund, then you are under an obligation to deploy in a hurry. And we don't want to feel that pressure. Venture capital is cyclical, there are years when you can put a lot of capital to work and then there are times when you just need to pace yourself,” he said.

For Trifecta, venture debt cheque sizes start from Rs 10-15 crore and can go up to Rs 100 crore over time. In comparison, venture capital cheque sizes typically range from Rs 100 crore to Rs 200 crore.

In terms of returns, venture debt offers around 17 percent, while venture capital generates an internal rate of return (IRR) in the mid-20s range.

Trifecta avoids deploying more than 10-15 percent of its funds in any single sector, and no individual deal exceeds 2-3 percent of the overall fund size. "By design, we already have 50 companies in our portfolio," Khanna said.

Describing the sectors the venture debt fund is bullish on, Khanna said that they prefer to be highly diversified and avoid sectoral biases.

While earlier funds have invested in vertical e-commerce startups like The Good Glamm Group, Cars24, Livspace, and DailyHunt, these companies are now mature and no longer require traditional funding, Khanna added.

“They don't need as much traditional funding. So increasingly, we see newer sectors like EVs, and some of the fintech sector has come back. We haven't done too much edtech. We are also continually seeing some appetite for agri and other areas like core science, space,” he said.