Venture Debt refers to any form of debt financing provided to a company that is still dependent on Venture Capital (VC) financing to fund its operations. InnoVen Capital’s core offering is a medium term loan to VC-backed companies, depending on the stage of the company, quantum of equity raised and nature of the requirement. Interest rates and fees are fixed for the tenor of the loan. Repayment of the loan principal and interest payments are typically made on a monthly basis. If the borrower is significantly successful through its lifecycle and has a liquidity event in the form of an IPO or a buyout, an equity “kicker” allows the lender to make some additional returns to compensate for the higher risk.
InnoVen Capital does not normally mandate the end use for the funds and the company is free to use the loan proceeds to fund any number of uses which may include accelerating product development, key hires, expanding to a new market, making acquisitions, operational working capital or even refinancing. While InnoVen Capital does not take board seats on its portfolio companies, the team is happy to leverage its experience and network across geographies, a large number of companies and investors to assist clients as and when required in their business or strategic pursuits. While InnoVen Capital has a sector agnostic approach, the preference is to partner with disruptive companies in Technology, Internet, Media, Healthcare and Consumer.
VCs in global markets have traditionally invested in technology companies that have significant intellectual property assets behind them such as patents, trademarks, and copyrights among others. InnoVen Capital however, has successfully modified the lending approach to accommodate the wide variety of business models being funded in Asia. It stems from the understanding that companies in this region tend to have varied bases of value creation with different growth dynamics and inflection points. Factors such as gaining a first mover advantage, having a strong distribution network, building a unique process, or developing a recognizable brand confer relatively stronger competitive advantages than developing IP assets in this disaggregated and geographically diverse market. The team has been able to understand those dynamics and modify the framework within which loans are evaluated, structured and monitored.
In an environment with strong investor sentiment where companies often witness a compression in time periods between equity rounds, venture debt can help companies “supercharge” growth to increase enterprise value ahead of the next round. This could help the founders dilute less by virtue of higher valuations as well as attracting larger equity rounds on the basis of stronger performance and operating metrics.
Alternatively, venture debt can also provide “insurance” which supplements the company with valuable additional capital and runway extension when a company needs more time to achieve milestones ahead of an equity round. The additional time is important because a higher valuation going into the next round means that founders and existing shareholders do not have to sell as much of the firm to raise the needed funds. Venture debt might also reduce the overall number of equity rounds required, further preserving the current shareholders’ stake in the company.