Inside Trifecta Capital’s Evolution from Venture Capital Debt to Seed Equity Financing

Change is the only constant. As overused as it sounds, it seems very fitting for the vibrant Indian startup ecosystem, where the stage is set for initial public offerings (IPOs) and large-scale mergers and acquisitions (M&A).

And seeking to exploit this huge investment opportunity in high growth Indian startups, is Trifecta Capital, a company that pioneered the venture credit business model in the country.

In April of this year, the company launched its first equity fund, Trifecta Leaders Fund-I, to invest in new economy companies with the potential to pursue an IPO over the next three years.

While Trifecta Capital has traditionally been a strong point of providing risky debt to startups, its foray into equity financing is not surprising, given the investment opportunities in the final stages and before the IPO in high growth Indian startups.

“Trifecta Capital sees itself as a growth partner every step of the way in a startup’s journey,” says Rahul Khanna, co-founder of Trifecta Capital, in an interview with Your story.

Next step

Rahul believes that a significant number of startups in India are about to take the next step, where they can access funding beyond venture capital firms.

That would mean raising a larger pool of capital as part of their growth plans, but not necessarily with the right expertise.

This is the void that Trifecta Capital wants to fill, by being a bridge for high growth startups who want to raise capital from large private equity players, consider an IPO or even a significant merger and acquisition.

Trifecta Capital was launched in 2015 with a fund of Rs 500 crore. It has unicorns such as Pharmeasy, BigBasket, Cars24, Vedantu, ShareChat and Infra.Market as holding companies.

There is no doubt that being a leading and passionate participant in the Indian startup ecosystem over the past six years has given Trifecta an edge when it comes to moving from debt to risk. equity financing.

Founded in 2014 by Rahul Khanna and Nilesh Kothari, with offices now in Gurugram, Mumbai and Bengaluru, the company has closed two funds so far, raising around 2,000 crore rupees and providing venture capital debt of around 75 startups.

Experience with risky debt

Rahul, who has been in the venture capital investing world for 16 years, describes this time as an exciting journey.

Being involved with startups in their early stages and stages of growth means that Trifecta has been at the forefront of their growth journey and witnessed their entry into the unicorn club.

“We started Trifecta Capital when other modes of venture capital finance in India were underdeveloped. We have been a companion to many high quality companies that are well known today, ”says Rahul.

This means that Trifecta Capital has expanded into areas that were corollary to venture debt financing. One of them was providing sophisticated financial advice to startups by adding a consulting vertical to the company.

“Managing all the money doesn’t mean having fixed deposits or stable income instruments. Startups need advice on how to manage their finances, ”explains Rahul.

And towards this, Trifecta has also added other financial advisory services such as dynamic discounting, accounts payable or receivable, expense management, etc. This meant that startups could look for more efficient ways to manage their capital earned through fundraising or income from their operations.

Rahul is convinced that these services have not only reduced the burden on CFOs, but also opened up credit opportunities.

Likewise, the company now sees strong equity investment opportunities at an advanced stage as many startups have started to mature as businesses.

“They (the startups) told us about the challenges of a complicated captable, of managing ESOPs or providing liquidity to early stage investors,” confirms Rahul.

Equity financing plans

The co-founder is certain that the knowledge accumulated over the years, the relationships cultivated and a deep understanding of high growth startups has given them a greater conviction in late stage equity financing.

Lavanya Ashok, Partner – Equities at Trifecta Capital, leads the company’s equity financing. A former Managing Director of Goldman Sachs, she brings with her her vast experience of nearly a decade in private equity management.

Lavanya says his experience over the years has been littered with examples where entrepreneurs are considering funding for $ 20 million to $ 30 million, but the company’s partners are talking about a check for $ 100 million.

“We need to bridge that gap with private equity, and we can provide this specialized service with late stage equity financing,” says Lavanya.

The Indian startup ecosystem has various types of capital pool, starting with angel investors, early stage, early stage finance, and growth capital. Although the gaps have been widely observed at stages beyond C, participants in this category are rare.

“In late stage financing, the risk profile is different and you need a specialized skill set,” Rahul suggests.

Scale is the name

However, that doesn’t necessarily mean that startups that have grown to a reasonably large size in India are only looking for IPOs or exits. They might also be targeting a different type of capital that looks at the scale on a completely different level.

“We’re starting to see this critical scale. There are at least a dozen companies in our portfolio that will go public in the next 12 to 36 months. The real opportunity is to overtake and support them on their last leg of their journey, ”says Rahul.

The seasoned investor believes India’s startup sector could be at a tipping point, with $ 150 billion in private valuation of new economy or digital economy companies waiting to be unlocked over the next five years. coming years.

Today, many category defining startups have become market leaders in their respective fields like Swiggy, Zomato, BYJU’S, Urban Company, BigBasket, and Paytm to name a few.

Need for new skills

This fast-growing environment calls for new and different skills and functions. Lack of skills in startups can threaten growth potential, so aligning skills and capabilities of teams should be part of a startup’s growth strategy. These include teams responsible for business development, investor relations, to name a few.

“Private and public investors look at a business from a completely different perspective, unlike a VC. Our ability to make that connection will be very critical for these startups, ”says Rahul.

Future

On how Trifecta plans to leverage equity funds, Rahul says the focus will be on existing companies in their portfolio, as familiarity gives them an edge.

More and more companies have raised debt funds in the wake of the COVID-19 pandemic. Rahul attributes this to the fact that digital businesses and startups themselves are becoming more disciplined about how they invest or spend their capital.

“The demand for risky debt continues to grow and this has accelerated our activity to launch our third fund,” said Rahul.

He adds that startups being more capital wise have also resulted in stronger balance sheets with healthy margins. This, in turn, has in fact led to more equity financing entering the ecosystem.

The very nature of risky debt is such that it is based on long-standing relationships between lenders and venture capitalists. “We work closely with a dozen VCs and have a good idea of ​​trends while allocating capital,” says Rahul.

Regarding the risky debt scenario in the country, Rahul believes he is only beginning to dive deep into the startup ecosystem, with the evolution of different financial instruments. Many more players are expected to enter the segment.

As for the future, Trifecta Capital is clear on its vision – to build a financial institution focused on the new economy.

The objective is to support the needs of startups either through debt, equity or advice. This would mean a shift in growth from a startup to an established business.

“The best companies see Trifecta as a growth partner, and we want to serve the big companies of tomorrow,” concludes Rahul.