Welcome to our ‘Fund in Focus’ series where we profile our member VC funds, underscore their investment philosophy, and highlight some of their interesting work. Today we speak to Rahul Khanna, Co-Founder and Managing Partner, Trifecta Capital – who delves into the strategic importance of venture debt in India's burgeoning startup ecosystem. Founded in 2015, Trifecta identified a critical gap for non-dilutive financing, enabling startups to scale without excessive equity dilution. Rahul highlights the key advantages of venture debt, such as preserving ownership and providing flexible funding. With securing INR, 2000 Cr for fourth fund, Trifecta shares lessons from managing multiple funds, and further supporting high-growth companies through equity.
Fund In Focus: From BigBasket to ixigo-Trifecta Capital'sRole in Scaling India's Top Startups
Rahul Khanna, Co- Founder and Managing Partner,Trifecta Capital
Spokesperson: Rahul Khanna, Co- Founder and Managing Partner,Trifecta Capital
1. How did Trifecta Capital identify venture debt as a strategic need in the Indian startup ecosystem?
We started Trifecta Capital in 2015, a time when the Indian startup ecosystem was truly beginning to break out. Companies like Flipkart, InMobi, and Freshworks were not only catching the eyes of Indian investors but also attracting significant global attention. The first generation of Indian startups was thriving, backed by substantial equity funding. However, we noticed a big issue: with no debt financing available for startups, founders were becoming overly reliant on equity, leading to significant dilution of their ownership stakes. We also realised as these companies grow in the next 2-5 years, founders won’t be left with much equity to dilute further.
Traditional banks and NBFCs were not viable options for these young companies. These institutions were heavily regulated and risk-averse, making them unwilling or unable to lend to startups, especially those led by first-generation founders with businesses that were just a few years old. There was a clear whitespace in the ecosystem for an alternative form of non-dilutive financing and having seen venture debt as a relatively large asset class in the US, we believed that it was a good time to build this in India. By offering non-dilutive capital, we could provide founders with the necessary funds to scale their businesses while allowing them to retain more control and ownership.
2. What are the key advantages venture debt offers startups compared to traditional equity financing?
Venture debt offers several key advantages over traditional equity financing. First and foremost, it provides non-dilutive capital, meaning that founders can secure the funds they need without giving up additional equity. This is crucial for preserving ownership stakes and control within the company. Additionally, the cost of venture debt is often lower than the cost of equity, especially when you consider the long-term value of retained equity.
Another significant advantage is the flexibility in how the funds can be used. Venture debt can be deployed for specific purposes such as working capital, capital expenditure, and acquisitions. This allows startups to use their equity capital for strategic investments and growth initiatives rather than spending it on operational needs. Moreover, by supplementing equity with debt, startups can extend their financial runway. This helps them delay the need for subsequent equity rounds and potentially achieve higher valuations.
Venture debt is particularly useful at later stages, like Series B and beyond when companies have already established their product-market fit and are generating revenue. At this point, founders often want to minimise incremental dilution for existing shareholders while still securing the capital necessary for scaling operations. By opting for venture debt, they can achieve this balance effectively.
3. Can you elaborate on specific examples of how Trifecta Capital's debt solutions have helped portfolio companies achieve milestones?
One of our recent success stories is ixigo. Our relationship with the company began in 2021 through our debt fund, and seeing its promising potential, we later doubled down on the company via our growth equity fund. ixigo went public on June 18th this year, and the IPO was a resounding success, opening at a 48% premium and reaching a 78% premium before hitting the upper circuit on the opening day.
ixigo is the poster child of long-term sustainable growth. As the country and the company were emerging from the first wave of the pandemic, travel traffic had started to recover but remained below pre-COVID levels. The founders, anticipating a significant post-pandemic travel boom due to lockdown fatigue, were looking to expand. They saw an opportunity to broaden their market by acquiring bus booking services, with additional capital. However, the equity valuations available at the time were not meeting their expectations, as VC-backed companies focused on sustainable growth were not in fashion in 2021, everyone wanted companies to blitzscale.
After the pandemic, ixigo demonstrated robust growth, achieving a ~92% revenue CAGR between FY21-23 and 35% growth in the first nine months of FY24. The company has been EBITDA profitable for the last three financial years since FY21, reporting a 7.8% EBITDA margin in the first nine months of FY24. This consistent EBITDA profitability and growth including in the bus segment were an integral part of the success of ixigo’s IPO.
4. Trifecta Capital boasts an impressive portfolio with unicorns like BigBasket and Cars24. Can you share your investment thesis when selecting startups for venture debt?
We typically target companies that have moved past the initial concept stage are revenue-generating and have established product-market fit. These are usually Series A or B-stage companies and beyond, which are looking to scale rapidly. We also ensure that there is a strong use case for venture debt as well as security in the form of current assets, brand, or IP to secure ourselves. Our due diligence process involves a thorough assessment of the company's management, business model, cash flows and overall financial health. We also assess the quality of the company’s cap table as well as the likelihood of raising the next round of equity financing.
Equally importantly, at a portfolio level, we believe that a fund must be highly diversified and so we ensure that we limit our exposure to any sector based on predefined limits.
5. Beyond established sectors like e-commerce and logistics, are there any emerging areas where Trifecta Capital sees potential for venture debt deployment?
Absolutely, we see immense potential in several emerging areas. The fintech sector is one such area where companies often use venture debt for onward lending and managing their balance sheet needs. In the SaaS and enterprise tech sectors, the long gestation periods for contracts make venture debt an ideal solution for bridging cash flow gaps until revenues start coming in. We're also excited about the healthcare, manufacturing, and industrial sectors. These industries often require substantial upfront investment in R&D and infrastructure, which can be efficiently financed through venture debt.
Another promising area is EV, clean energy, and sustainability. With the global shift towards EV, and clean energy, companies in this sector need significant capital for technology development and infrastructure. Venture debt provides a viable funding solution that aligns well with their long-term goals. Additionally, as more companies prepare for IPOs, we're seeing unique use cases for venture debt, such as financing share buybacks and funding expenses related to the reverse flipping of entities.
6. Trifecta Capital successfully closed its third fund at ₹1,777 crore in 2023 and deployed a sizeable portion. Can you discuss the learnings and experiences from managing multiple funds?
Managing multiple funds has been an incredible learning experience. One of the biggest lessons has been the importance of portfolio diversification. We've learned to balance high-growth companies with more stable, cash-generating businesses to mitigate risks and maximise returns. Over time, our due diligence processes have evolved to take into account lessons learned through financing this ecosystem through cycles.
Building strong relationships with our portfolio companies has also been crucial. We provide not just capital, but also strategic guidance, leveraging our expertise to help founders navigate growth challenges. Another key learning has been the need to continually adapt our underwriting and risk management practices to align with market trends and external factors like regulation and geopolitics. The dynamic nature of the startup ecosystem requires us to stay flexible and proactive in our approach.
7. With plans to launch Trifecta Leaders Fund-II, how will Trifecta Capital expand its offerings beyond venture debt and cater to the growth stage through equity?
The Trifecta Leaders Fund strategy is a natural extension of our mission to support high-growth companies through their lifecycle as private companies. Our venture debt investments have given us deep insights into the performance and potential of many sector-leading companies. This positions us uniquely to provide growth-stage equity, especially for companies transitioning from startup to more established growth stages, typically at Series C or D stages where historically fewer VCs have operated.
We've built strong relationships with these companies and have a wealth of data on their growth trajectories and capital needs. This data-driven approach guides our equity investments, ensuring we back companies with strong fundamentals and scalable business models. Additionally, our experience will be very valuable to these companies as they navigate the complexities of scaling operations and eventually giving investors an exit by way of IPO or M&A, something that our team is well-equipped to support. Essentially, our venture debt fund has created a robust pipeline for our growth equity fund, allowing us to seamlessly expand our offerings and continue supporting the ecosystem.
8. As a pioneer in the Indian venture debt landscape, how does Trifecta Capital contribute to the overall growth and maturity of this asset class?
Since our inception, Trifecta Capital has been at the forefront of the venture debt market in India. We've deployed over INR 6,000 crore through our three venture debt funds, capturing between 25% and 30% of this asset class. Our disciplined approach has kept write-offs below 1%, demonstrating the viability and stability of venture debt.
Our impact extends beyond just funding. By providing non-dilutive capital, we've helped numerous startups scale effectively, contributing significantly to the overall growth and maturity of the Indian startup ecosystem. We actively educate founders and investors about the benefits of venture debt, fostering a deeper understanding and wider acceptance of this financing option. Our successful fundraises and investment performance have encouraged other players to enter the market, enhancing the overall ecosystem and providing more options for founders.
Lastly, Trifecta Capital has played a key role in expanding the participation of domestic institutional investors like Insurance Companies as well as Family Offices into the AIF ecosystem starting with venture debt and now more broadly across different asset classes.
9. Recently Trifecta Capital launched Venture Debt Fund IV. Can you share any insights into the target corpus and investment strategy for this upcoming fund?
On the back of the success of its previous three venture debt Funds, Trifecta Capital has recently launched Venture Debt Fund IV with a target size of INR 2,000 crores (including a greenshoe of INR 500 crores) and is seeing a good response from existing and new investors. The firm expects continued investment from its onshore and offshore investors given the attractive returns to date and the consistent track record of prior funds.
Looking ahead, our strategy will be to continue backing market leaders and high-potential startups. The target corpus will reflect our ambition to further solidify our market position and support a broader array of companies.
Our investment strategy will emphasise backing companies that prioritise profitability and sustainable growth. We'll maintain our sector-agnostic approach, exploring opportunities across various industries while also venturing into emerging sectors. Additionally, we'll continue providing not just capital, but also strategic and operational support to help our portfolio companies achieve their milestones and scale successfully. Our goal is to build on our existing success and contribute even more significantly to the ecosystem.