Ashish Sharma, CEO, InnoVen Capital IndiaImage: Madhu Kapparath In 2017, when Ashish Sharma was taking a fresh guard, the financial market veteran found something weird about the startup pitch on which he was about to play his new innings. The track looked dry and it did not have blades of grass. After spending two decades with GE Capital, where he was president and chief executive officer (CEO) for a good three years between 2014 and 2017, Sharma joined venture debt fund InnoVen Capital as the CEO. As an outsider venturing into the startup world, he had one big comfort factor. His previous company and the new one, both had the word ‘Capital’ in their names. The similarities, however, ended right there. The game at InnoVen was insanely different. Sharma explains. At GE Capital, there were thousands of people reporting to the CEO and the lending business was growing at a brisk pace. The ‘push and pull’ worked brilliantly as the lender and the borrower understood the need, and the rules of the game. GE Capital, as a brand name, was massive. Familiarity and credibility worked like a flywheel.At InnoVen, in 2017, Sharma struggled to make founders aware of the need to raise venture debt. Four years ago, India was in the thick of intense funding activity, and founders loved venture capital (VC) for two reasons. First, it brought instant money for growth. Second, founders have mentors on board to counsel according to their needs.“Why should I raise venture debt when I have venture capital,” was one of the bouncers bowled at Sharma. The bowlers, interestingly, happened to entrepreneurs who had raised loads of venture capital and were on track to becoming a unicorn, being valued at $1 billion-plus (over Rs 7,500 crore). For most of them, debt happened to be a dirty word that carried negative connotations. “What if I do not pay back on time? Would you guys take over my business,” asked one of founders of a soonicorn [soon-to-be-unicorn] startup. Sharma knew ducking the ball was not an option. Though startup founders knew InnoVen, they were hesitant about taking the leap of faith. There were many queries, apprehensions and misconceptions around debt. Sharma went on to the back foot, only to convincingly hook each query out of the park. “Why do Tatas and Birlas have debt on their book,” he asked a startup co-founder in 2017. “Do you think they cannot raise equity,” he underlined. The second counter-argument packed more punch. Quick capital, low rate of interest, and almost negligible dilution of equity. “It is not why you need venture debt, it is why not have it,” he told them. Almost at the same time, a bunch of seasoned entrepreneurs—most into their second venture—had learnt a valuable lesson the hard way: One must not dilute too much in one’s startup. Ashish Damera, co-founder of edtech startup Eruditus, which turned unicorn in August this year, explains the flip side of raising too much capital. “As a second-time entrepreneur, I have been a lot more to deliberate about how much equity to raise and when, as this impacts dilution,” he says. In July 2018, Damera reportedly raised venture debt of Rs19 crore from InnoVen Capital. Till then, Eruditus had raised a paltry $8 million (Rs 60 crore) in Series B in 2017, and was valued at $50 million (Rs360 crore).Venture debt turned out to be a tailwind for Damera. “It extended the runway before going for an equity fundraise,” he recalls. It also gave, he explains, more time to hit higher milestones and getter better financing outcomes. In August, when Eruditus turned unicorn, the co-founders still had 40 percent stake in the company. “InnoVen has been a great partner, and together we have done many transactions over the years,” he says. The familiarity helped in moving fast whenever there is an urgent need. For example. Earlier this year, when Eruditus needed some liquidity cushion to move quickly on an acquisition, InnoVen pumped in $20 million (Rs150 crore).Eruditus is not the only unicorn to add InnoVen’s debt to its growth story. There are more like edtech startup Byju’s, hotel chain Oyo, local language news aggregator Dailyhunt and online freight aggregator BlackBuck (see box) who have raised venture debt from the oldest and biggest venture debt player in India. “Overall, we have 18 unicorns in our portfolio. In fact, nine became unicorns this year,” says Sharma, who loves Virender Sehwag’s style of batting. The CEO, however, explains why Sehwag’s aggressive and hard-hitting style is not suited for venture debt. The not-so-glamourous cousin of venture capital, Sharma underlines, needs loads of patience. Venture debt, Sharma stresses, is more akin Rahul Dravid’s style of batting, which involves a lot of singles and occasional boundaries. What ‘quick singles’ means is taking money, returning it with interest and then taking more money. “What venture [debt] brings to the table is a lesser diluted way of financing business,” Sharma points out, adding a quick disclaimer. “Frankly, we do not substitute equity,” he says. For any startup that needs to raise venture debt, he explains, the pre-requisite is a previous round of venture capital. “We do not give money to companies that have not raised equity.”For those who think that venture debt fund means zero equity in the startups, there is a surprise. Tarana Lalwani, senior director at InnoVen Capital, explains that venture debt deals are structured to include a small equity component (typically 10-12 percent of the loan amount), which gives the lender the right to invest in the company and generate additional returns on a portfolio basis. Equity kicker, in short, takes care of the risk that the fund is taking while betting on the future performance of companies.