The Exchanges

Q So Ajay, can you please explain in layman terms, what is venture debt?

A The way we define venture debt, um, is that it's debt in any form provided to a company, uh, that is, uh, that's raised funding from a venture capital investor post series A or beyond. Now let's take an example of what we mean by that, right? So you have a company that's raised a series A round, and let's hypothetically say it's raised 30 crores. Now companies at this stage are usually cash burning. So let's assume this company burns two crores of money every month. So the company right now has 30 crores, burns two crores a month, has 15 months of life. Now within those 15 months, the company is expected to hit certain milestones. Hitting those milestones makes the company more valuable, and therefore can raise series, be it a much better valuation. That's as basic as it is. What happens is now the company has 15 months of life, and they have to hit these milestones. But the milestones sometimes take longer to achieve than what is expected. So the milestones could be adding a new product line, could be bringing five new companies or corporates, uh, as clients, um, and doing that basically improves the valuation. But like I said, getting those milestones done in time takes, you know, sometimes it takes more time than what is expected. And the last thing that you want to do as a founder is basically go into fundraise mode for your next round before you've hit those milestones, be…

AI assessment note: “The way we define venture debt, um, is that it's debt in any form”

Q Ajay, what were the things you did right back when starting the venture in 2006, 2007?

A So starting out in, uh, 2007, you know, I had, uh, the approval from, from SVB to set up the India business and I had a check for fifty million. So I had literally cash of fifty million sitting in the bank account. And, uh, you know, particularly there was a lot of pressure to deploy and to, you know, targets and things. I think the, the things that we did correctly, first of all, is that, um, we took our time in building the model and, um, it was not something we could just do, you know, bring the model in from the U S Uh, force fit that into India and make it work and expect it to work. Uh, because the industry environment is different. Uh, there weren't as many VCs in India at that stage. I think it was just beginning to build out. So we had to really take our time and make sure that the model that we were building was going to work, uh, which meant we had to be very patient, do the right deals. Um, and, uh, you know, make sure that we took the right sort of step as the first step and tested it to see the ground held firm and then take the second step. So in the first year we did, you know, just one deal. Um, and then the second year we did, you know, five deals. The third year we did seven deals. And it slowly built on that, uh, to the point where at the end we were doing, you know, several deals, uh, you know, upwards of 20, 30 deals in, in just a quarter. So for us, I thi…

AI assessment note: “things that we did correctly, first of all, is that, um, we took our time”

Q Ajay. Now coming to a more personal side of yours. What are your strengths and weaknesses?

A I think what I've been able to do well is to actually hire and build good teams. And, um, I think from the start, I've been lucky that I've been able to get good people to join. Uh, we've, um, you know, Vinod Murali, for example, my co-founder and managing partner at, uh, Ulterior Capital has been part of our team. Uh, you know, he's been with me for the last 12 years now. And, um, You know, like him, there's others who've been with us for a long time at this point. Uh, so I think, uh, building teams is something that I think I've been relatively good at. Uh, the other is, I would say just thinking a little bit differently, thinking out the box, um, using a slightly different approach to solve problems than what has been traditionally done. In terms of weaknesses, I think I'm not really as good operationally. Um, and that's where I think, uh, my co-founder and partner Vinod Murli has Really stepped up, and I think that's why we work so well as a team.

AI assessment note: “In terms of weaknesses, I think I'm not really as good operationally.”

Q Ajay, how is the debt structure like? How many years it's for the startup to pay, repay back the debt? What are the interest percentages?

A So the debt is generally structured as a medium term loan. Um, it's two years to three years, uh, depends with every structure. Uh, the loan is always a monthly repayment and monthly amortization, and the intention of that is to lower the burden on the company. Uh, you know, for example, if it was structured as a back ended payment or a bullet repayment, that puts a lot of stress in the company's repayment capacity, especially as the loan comes up for repayment rate. So these are two year to three year loans, monthly repayment. The, uh, commercials, uh, you know, that we expect on this, uh, obviously are, On the higher side compared to traditional bank funding, because the risk is much higher in these kinds of structures. What we do, however, is to, uh, make it easier for the companies. We price the loan in the mid teens, uh, and the balance portion of it, the return that we expect, we get it through a contingent sort of a payout as part by taking some equity kickers. So the, uh, you know, the, the, the reason for doing that is that we then are not, you know, we're sort of not loading the entire cost of the funding onto the company, uh, through the interest payments. And we are getting a part of the payment only when there is an exit and a secondary opportunity for the investors and for the founders. So we make a little bit of money when hopefully the founding team and the prom…

AI assessment note: “it's two years to three years... We price the loan in the mid teens”

Q At what stage should startups start engaging with you?

A So the right time to engage, uh, for the venture debt, Conversation is really when a company is looking to close a series A round or beyond. Uh, that's a starting point for us. Um, and a series A for us is, uh, anytime a company raises three to four million dollars of institutional VC funding. Um, we have a separate, separate program called activate, which I referred to earlier, uh, which is where we work with large corporates and help them, uh, with their corporate innovation programs and, um, really help them find and connect them with startups that can help them to in-source innovation. And in those cases, uh, we often find, uh, you know, there's lots of great, uh, pre-Series A companies that we reach out to and connect with. Um, and that's an ongoing effort. We've got several mandates running with, you know, fairly large corporates today, uh, almost a dozen of them. Um, so I think the right time, uh, you know, is when we have some of these mandates, we go out looking for some of these startups.

AI assessment note: “really when a company is looking to close a series A round or beyond”

Q So among the things which went right, you give a lot of credit to serendipity and luck. What were those instances and why? Such credit to it.

A Yeah. You know, um, if I trace back my sort of, uh, history of doing this from the start, uh, there were several moments when, uh, I never thought things would happen, but they happened. And, uh, it was either when I found myself in front of the regional director at Citibank, for example, who somehow miraculously knew about venture debt, uh, was convinced that it was a great model, gave me the, uh, the approval to do it, which was a first for the bank because nowhere else in Citibank globally, Uh, in the history of the bank had anyone done venture debt, so it was amazing to me that the bank stood up and allowed me the chance to do it. Uh, thereafter, when I decided to move on, um, you know, Silicon Valley Bank sort of stood up and said, you know, we'll give you the funding to start an India business, when up until that point, it had not really done, uh, put money to work outside the US. So, uh, you know, at, at every stage, I felt that, uh, there was obviously, uh, uh, You know, preparation from my end in some ways, there was an understanding of what was needed to be done, but there was an element of luck where people stepped in, opportunities presented themselves, which I think really helped me to take this, uh, and run with it as a product.

AI assessment note: “Citibank, for example, who somehow miraculously knew about venture debt”

Q Ajay, which markets have been a win for you in an average of last 10 years?

A Look, I think in India, um, it's largely been the consumer space, but that's again, not a secret because that's the way that most companies have been in India, but, um, you know, that, um, we don't have a top down approach the way that most investors think about it. We have more a bottom up approach to how we do deals. And for us, it's not about the industry. It's about the specific combination of investor, founder, and, uh, you know, the business idea. Uh, so we've actually had a fair number of successes across Industries , I would say, uh, and that's a representative of our, of our portfolio. We've had, uh, you know, B to B, we've had B to C, we've had SAS, we've had a whole bunch of companies across the spectrum. Uh, our portfolio very closely approximates the portfolio of most VCs around us because that's the, you know, our, our target market is a sub-segment of what VCs are doing in the market today. So, um, we've really had a string of success across the industry, and we've been doing this now for 12 years. In the past, we've had a 106, seven companies in our past Uh, in this fund we've had now about, uh, 30 or so, uh, 30 transactions rather. So, uh, we've seen the cross section really of the venture capital industry.

AI assessment note: “in India, um, it's largely been the consumer space”

Q Ajay, in venture debt industry, you have to be very close with the VC to know what kind of startups he's going to invest in and simultaneously engaging with those startups as well. Can you give an analogy? How can this relationship works out? Why there's so much trust on the VC saying that, you know, I love this startup. I'm going to back it for long.

A So obviously our, um, you know, our engagement to the VCs is, um, the single most important, uh, sort of risk mitigation that we have while we underwrite our credit. Um, and, you know, let me give an analogy and, uh, you know, this is kind of a little bit flippant sounding, but it might, uh, you know, illustrate how we look at things is basically, uh, this is kind of a relationship between a parent and a child, right? Where the VC is the parent and the child is the startup. And as long as the parent Uh, loves the child and is protective of the child. Um, you're relatively safe as a lender to that startup. Um, you're expecting the VC to basically contribute and help the company navigate through its minefield of growth. It's when that child grows up and becomes an adolescent and is, uh, um, you know, it's not completely controlled by the parent when things get a little bit hairy. Um, and when that adolescent grows up and becomes a responsible mature adult, That's a safe time again to lend, right? And that's the world of corporate banking, corporate finance that we see around us. The world of venture debt that we do is, uh, the, the stage when we are funding that little child that's been protectively held and, and managed by the parent. And that middle ground there is when the companies are sort of an SME stage company, which is why you find that a lot of the credit troubles aroun…

AI assessment note: “this is kind of a relationship between a parent and a child”

Q Are there situations where VC, a tier one VC has backed the business, but you haven't. And what was the reason for that?

A The venture capital decision and the venture debt decision come from different directions, right? Uh, and, uh, what works for equity may not work for debt and vice versa. So when a VC has invested in a company is obviously, you know, they've got their own thinking and logic and rational for it. Uh, from our perspective, we have to look at whether the deal is underwritable. Uh, whether this is lending risk we're taking or equity risk. Now see in some situations where, for example, there's a binary element to the company. So for example, there's a situation in the past when we were pursuing a deal and we called the VC to ask whether this is something that they would like us to do. And the investor basically said, look, uh, you know, we're waiting for a license to come through of the company. And if that license comes through, then it's a, you know, it's a deal that you should certainly look at. But if the license doesn't happen, then, uh, may not be the right Risk for you to take. And so for us in that instance, it didn't make sense for us to get in. And then we re-engaged with the company subsequently a few months later when the license did come through. So there are lots of situations where it makes a lot of sense for an investor to make an investment in that company, but it may not stack up from a debt perspective and vice versa.

AI assessment note: “there's a situation in the past when we were pursuing a deal”

Q So let's say in India every year, at least 50 to a hundred companies reach series A, if not more. And among them, if most have tier one investors, how do you pick and choose which one has going to be, or which one has the timing right?

A See, that is always difficult to tell. And, uh, for us on the debt side, uh, it's not so important to be able to see, look out five years and pick the winners. Uh, that's not how we would underwrite. How we would underwrite is, uh, we need to necessarily be more short term in how we think about the next round coming together. Uh, we need to think about whether this business, given this in these sets of investors and this business plan and this founding team is likely to get the next round of capital within the next 1215 months before it runs out of capital today. And if it doesn't raise the next round of capital, what are the alternative sources of capital? Uh, it could be the existing investors. So, uh, for us, um, my Primary risk mitigation strategy is to look at the loan and look at the ways out in that loan. Uh, if a company does become the next successful sort of a hundred X, uh, bagger, then I get an additional pickup on the equity kicker. Uh, but for me, I am at the end of the day, a lender. I have to think about this business as a lender does and not as an equity investor does.

AI assessment note: “How we would underwrite is, uh, we need to necessarily be more short term”

Q How does deal flow work for you? When a startup raises pre-Series A or Series A, then the VC refers you to the startup, or is it You reach out to your startups yourself.

A I think it's a combination of all of those. Um, in many cases, it is the VC who picks up a call, you know, picks up the phone and calls us and, you know, lets us know that there's a deal happening and whether we'd like to look at some debt. We also have, you know, our own outreach program where all of the transactors in our, in our firm are reaching out actively to companies that we think are interesting. Um, these are also some of these companies that we reach out through Uh, our activate program. And, um, in some cases, you know, people do reach out to us on their own, uh, especially as our circle of sort of portfolio companies grows and people have an experience in what venture debt is about, what gets around and people end up calling us. So it's really a combination of, uh, several sources that we have to tap into to get, uh, you know, get deal flow going.

AI assessment note: “I think it's a combination of all of those.”

Q Ajay, with fifty million sitting in your bank and having no ecosystem or deals to put that money into, were you thinking, let's go mainstream VC and leave this venture debt aside?

A You know, the, the venture debt business for me was, uh, a perfect combination of my skill set as a lender with my interest in working with, uh, startups. And to me, therefore, venture debt was never something that I questioned. I think, uh, right from the start, it's been something I really passionately wanted to do. Um, and, um, You know, I'm, I think there were initially, of course, questions around how soon and how fast would this industry grow, uh, because 2006, 2007, 2008 is when the bulk of the VC investors started coming in, but things were, you know, obviously not picking up quite as fast as we expected them to. Uh, so there were questions initially on how soon and how fast we would get to being at scale. Uh, but I don't think any of us doubted that this industry would be big at some point. And, um, I think that for me was a given I think from the very start in even going back in 2004, 2005, I always felt that the venture capital industry in India would be big. And therefore venture debt as a sub segment of the industry will also be big. Um, so I think for me, it was not questioning the business itself. Uh, and there was no reason to, and it also brought together, you know, my interests and my capabilities.

AI assessment note: “venture debt was never something that I questioned”

Q And besides the money, the loan which you give, what kind of value do you bring to a startup?

A So it's, I'm glad you asked that question because traditionally, you know, most providers of venture debt have been, um, sort of focused on providing capital as the solution. Uh, to growth and helping companies grow. What we're looking to do at Ulterior Capital actually is, uh, what we're doing is we're actually recognizing that capital is one of the several things that a company needs to, you know, succeed and grow. Um, capital is important, and it is therefore the sort of main thing that we do at the fund, which is provide venture debt. In addition to that, however, we try and provide other forms of support to a startup, um, such as connecting with either customers or vendors or other startups or technologies. Uh, through our program called Activate. So the heart of our effort is really an attempt to understand the company at a deeper level and understand its, its drivers, uh, and see what are the kinds of introductions and connects that we can help the company make that can help the company improve its odds for success going forward, right? So we have a dedicated team within our, uh, our team in Mumbai that essentially sits with every one of our portfolio companies And on a quarterly basis tries and discerns what are the kinds of connections and introductions we can make to improve that. Um, so what we want to do is, uh, try and improve the odds of success for the companies …

AI assessment note: “connecting with either customers or vendors or other startups or technologies. Uh, through our program called Activate.”

Q So there's a high risk in this business because you are lending, as you mentioned, two startups. And that's where the caveat is. What if it goes bust?

A If it goes bust, then we all go and cry in the corner. No, I think, look, ah, this is obviously, there's no getting around the fact that this is a high risk business, right? Um, and, ah, you have companies, ah, that go bust all the time around you. That is, I think, where the skill of structuring the debt comes into play, ah, and which is why we're very careful about the kinds of transactions we underwrite. We've been very selective and, um, in picking the transaction. So our, our, our, you know, underwriting really starts with looking at, you know, who the investors are and, um, you know, how much has gone into the company? Uh, how deep are the investors pockets to keep supporting the company when they need it? Uh, what is the path forward for the company given its business today? Uh, how is it expected to scale? So, you know, we look at the founding team, we look at their ability to grow the company. We look at whether the business model is something that's likely to be of interest to investors going out 1215 months, because that's when the next round of capital is expected to come in. So if you're able to read all of these signs and coalesce that into a credible sort of underwriting story, I think, ah, you know, that's, that's what you need to do to be able to create a credit package that works. So for us, it's really about, ah, it's sort of like a science. It's sort of like…

AI assessment note: “That is, I think, where the skill of structuring the debt comes into play”

Q What kind of companies have you seen give you the highest return?

A You know, um, as I think about that question, um, I think the one thing is it's a matter of timing and, um, you know, there are, I, I would rush to say good teams, but then I've also seen good teams and companies that have not scaled. Um, and I go back to this point a lot when I think about, uh, what makes a success And I think it's about serendipity. It's about the combination of preparedness as a team, uh, for the idea that you're willing to execute. It's the quality of the execution, but it's also being lucky, being in the right place at the right time with the right idea. So I think for me, the way I've seen it is that the companies that have succeeded have had people who've been visionaries. Uh, they've had very strong execution on, uh, their charted path. They've also had the ability to swivel and pivot their businesses when they needed to. But most of all, they've had businesses which have been, you know, which have just hit the timing at a sweet spot. So it's, uh, I would say it's a combination of all of those, uh, rather than, you know, any one sort of factor because execution is good, but it's of no use if the timing is off. The business model doesn't work. Um, so I'd say it's, it's a combination of a lot of things that have to come together at the right time.

AI assessment note: “the companies that have succeeded have had people who've been visionaries”

Q So coming on to what kind of businesses are the risks so much that the VC, it makes a great VC business, but not a venture-tipped business. Can you take some more examples of that?

A I think when there is, for example, like one element I said, which is the binariness of the outcome, right? The other situation is when there's, ah, the company has to be, the model has to be proved. And this typically happens in companies when there is no revenue as yet. Ah, we've typically found those situations a little bit more challenging. Um, and we've done very few deals in the past where the companies have not had revenue yet. Because I think that's an important element, and sometimes VCs do want to play, ah, in, in, in spaces where they have to explore certain models which are emerging, ah, but there is still some time to go before those models are approved, and, you know, that's not a risk that should be, ah, leveraged, in my opinion. So, in situations in the past, unless we've had some specific reason to back a company at, ah, pre-revenue, we've generally not gone to pre-revenue companies.

AI assessment note: “the model has to be proved. And this typically happens in companies when there is no revenue”