Episode 83 / September 20, 2020
Ankur Bansal of BlackSoil Capital, on Venture Debt in Startups
After having an elaborate educational and career background in finance, right from becoming a CA & CFA to working at Morgan & Stanley and Citi, Ankur decided to join BlackSoil Capital. BlackSoil, growing fast into the Venture Debt fund space, has so far disbursed over Rs.450crore+ to VC backed start-ups & growth companies.
Some of the notable startups under its portfolio are EarlySalary, Vogo, & Nearbuy among others. In this podcast, Ankur seeks to help our listeners understand the entire Venture Debt fund ecosystem and its working in a better way.
00:38 – Founding BlackSoil and initial focus areas
02:39 – How is BlackSoil and its working structure different from other VC firms?
03:30 – Value propositions which BlackSoil brings to the table while funding its portfolio companies
06:54 – What are the interest rates, loan tenure, repayment modes which they currently offer as a working capital to Startups? 09:06 – Which family-offices is BlackSoil currently backed by? How did they build that credibility?
15:57 – How is Venture Debts different from traditional Bank loans for businesses?
17:30 – How do warrants work in case of Venture Debt funding?
18:59 – How’s the future of Venture Debt in India?
Read the full transcript here:
Today I have with me Ankur Bansal, Founder of BlackSoil Capital. Ankur, welcome to the podcast.
Hi Siddhartha. Thanks for having me over.
Ankur, we love to know about BlackSoil capital, you know, the investments you have made, the structure which you invest through?
Yeah, sure. So, BlackSoil was formed almost six, seven years ago. We started off in a different Avtar and what we started doing in four years ago was very different. Earlier we were doing more of residential debt financing through our first fund back in 2013, when the guidelines were actually announced, but back in 2016, we realized that there is a lot of opportunity to do different kinds of lending not just real estate and that’s where sort of we started focusing on other business segments like venture debt, as well as structure finance. So, that is when we sort of formed our NBFC and since then, have been active in the last four years on that side, and been quite an interesting journey since when we started four years ago.
What are the 10-15 known startup names in which you have invested in?
So, We have worked with as largest companies like OYO rooms, to a lot of mid market companies which have raised between like, you know, 15 $20 million to $30 million, kind of ticket size likes of Zetwerks, Industry Buying, LetsTransport, Chumbak, Homelane. There’s other names like Holisoul and pharma companies like Koye Pharma and Benton pharma and there are businesses on the technology side like Intelligence Node again, he had sort of financed and also companies like NowFloats, which was sold to Jio. So there’ve been multiple tech businesses as well as non tech businesses that we sort of worked with. And we’d like to work with both B2C and B2B companies. And we will diversified across sectors in the last four years.
Ankur, how many total investments have you made in the startup space from 2016 till now?
We have done almost 45 deals, more than 460 odd crores, we have deployed.
It’s all on in the startup segment.
Yeah, only startup.
And the structure is a little different from other venture debt companies, would love to know the structure of BlackSoil.
Sure. So, we are NBFC unlike other venture debt funds, they have to raise money from multiple LPs and then return the capital at the end of the Fund, which could be ranging from five, seven years to 10 years. We don’t have that kind of sort of challenge. We have permanent capital, in the form of equity that we have raised from our couple of family offices who are sort of like a permanent LP with us. And sort of we can deploy capital and sort of raise also further debt on that balance sheet. And sort of, then whatever capital comes back in terms of principal repayments, and again, sort of deploy it again, right. So it’s like a permanent fund that we have as a structure, which you could lever also, and then deploy and based on our strategy allocate funds, as the sort of sector goes on, right. So and there is no pressure of exits as such. But the benefit of debt is that the capital keeps coming back, because it’s not a long term financing that we have provided to our portfolio company.
And what’s your ticket size?
We do as small as one crore, and we have gone up to like even 30 crores and then like for example, for OYO rooms, we end up to 40 crores also. But that was like one of. But generally for us, average ticket size would be 10 to 15 crores.
Got it. And you mentioned in our conversations offline that you don’t require an equity investor to be in the same round as you. Right? and you have come in as far as when the company had two months of runway.
It would be interesting to know your thought process behind these investments.
So, we have tried to differentiate ourselves from the typical venture debt players who sort of come alongside of a new equity round. That space, we feel a little bit crowded and getting competitive. So for us, we wanted to sort of differentiate ourselves provide debt when the company really needs it. So, at the beginning of the first two years of NBFC financing, the sort of the value proposition was to work with companies who were sort of going to hit the market for a new fundraise, or they had some kind of runway like a nine month runway or a seven month runway and would go to be having our another sort of debt funding coming and extend the runway by three to four months. So that gives you the kind of buffer that you need when you’re in the on the road because fundraising in the last few years is taking only longer it’s not taking shorter, right unless there are some of the larger unicorn kind of companies different but for some, most of the largest startup companies, it’s requires enough capital in the bank to be able to sort of continue on negotiations and do not get hit on valuations. That’s where people thought, it’s a good thing to have the kind of capital because even if you’re growing well, this money sort of extends the runway, and you can show good growth also on the back of it. But if you have less capital in your bank, then you’re always on the defensive side, and you may not get the right valuation. And people may sort of take you for certain some kind of ride, which may not be at the terms that you’re really looking for. So, that was the value proposition first two years when it began, like more like a bridge funding, you could say. But as we sort of started doing, sort of evolved our business and we looked at more companies, we realized that the companies really need a lot of funding for working capital. They really need funding for the kind of business assets they are creating a lot of sectors, especially if you’re on the B2B side, you need sort of financial receivables. And like for example, if you’re on the pharma side, you need to even financial inventory to such kind of businesses, it makes sense to sort of have a Working Capital partner. And that’s how we started positioning ourselves on that the debt side to become your working capital partner and use the money for a creation of assets. Whether that is business assets, capex assets, or even your working capital, and use your equity money for burn. And you also use your equity money for any kind of marketing spend that you need to do. So, then sort of you have two different pools of capital to help you grow to the next level. That’s all sort of we have been looking at it. And that’s the reason some of the larger funded companies have started working with us because they want to create a credit history with us they want to have us as a partner to help us become the person who can help them bridge and go to the next round of debt funding, which can be maybe a more traditional bank or nbfc. Especially if these companies are heading toward the direction of a better breakeven.
Ankur, also would like to know from you that what’s the interest rates that you come in for for a startup? What are the repayment cycles, like For how long let’s say few deploy 40 crores in OYO. At what point in time do you fully receive your principal and interest back.
So, for us, we have been a bit flexible on that part of it. So, our interest rates range between 14 to 18% then that is one, second is our loan tenure can range and we have done transactions as short as four months also at one of and we are done transaction as one of us five years also. But if you look at average tenure, it will be between like 24 to 36 months. And in terms of the when the money starts coming back is the interest servicing starts from day one, right. So, the moment money goes the next day itself we start getting our interest accrual. And when you look at the principal part of it, generally It can range from average duration of principal moratorium that we give is three to six months and post that on an EMI basis on a monthly basis we start getting up into the back
So roughly within your most of the Capital deployed as for let’s say, two years, you get it back? I would assume.
Then whenever a company needs, again, they can reach back to you with the credit history, which they have built. Correct?
That’s actually the beauty of debt, right? Because once you have done one transaction, if you spend six, nine months with that person, you can, if you see the business growing well, you can give another line of debt, right? So you can sort of grow your relationship with the same company, we only need to really go out in the market look for another place. If your existing portfolio is doing well, you can keep taking care of their debt requirements. And that’s why we say we become a debt partner for them. So it’s not necessarily a one time relationship. You can sort of keep doing multiple debt rounds, as long as you know, the company is performing well.
And Ankur, would be great to know from you that you mentioned, you know, in our offline conversations, that yours NBFC is backed by a few family offices. Who are they? And how did you build that credibility with them?
Sure. So, we unlike other most of the players in the market, we were able to get support from two large family offices. One is Mr. Shashi Kiran Shetty, who’s a promoter of a listed company called Allcargo Logistics. This company was one point of time had Blackstone as their investor. So they, in the personal capacity, having been the big supporters of BlackSoil. The other family who sort of supported us is Gala family, which is the promoters of a company called Navneet education, which is one of the largest listed education players in the country on the private side, and very profitable as well. So, these two sort of families came together and started supporting us back in 2013, as I mentioned about our real estate debt fund. But quickly as we sort of progressed to our nbfc structure, they were happy to sort of come in and provide us the capital to begin our operations. And since then they have topped up over the last three, four years, and given for the funding to sort of reach where we are right now, and continued to support us in various ways through their network and expertise in various parts of our business. So, the common link for both of them was actually my father, who sort of, is sitting on the board of these two companies for over a decade and the relationship with them, it’s been over two decades, I would say. So that’s where the sort of comfort came in, because they knew the people they were working with. Otherwise, it was a very large kind of capital and very, sort of, I would say riskier kind of assets that they were going into, but that was only possible because of the comfort they had built with us. And the management also sort of showed the strategy working out and that’s the benefit of that because you can see your capital coming back quickly. And like for example, in venture debt space itself, though, we have given 450 Crores to date, we have already got more than 250 Crores already back in terms of you know, repayments on the principal side. So, that gives a lot of comfort that, you know, you’re not just giving money, but also getting back capital and that also on time. So that’s very critical for to establish, you know, comfort with any investor. It is not not just to show your performance in terms of deployment, but also see how the capital is coming back on time or not.
So, you mentioned that the entire 460 crores is just by two family offices in the company that actually have deployed now.
Yeah, there are two and there’s another gentleman who is our thord investor has a smaller stake called Mr. Virendra Gala. He is also an investor in the company not related to the Navneet family but he’s also an investor but he sort of plays a more active role on the real estate side. He does not play active role on our financing side.
Understood and Ankur, for these investors, what would be their exit cycle like when would they get their principal back and what would be their expectation, you know?
So, they have invested in this company more like a nbfcs, right. So you have to earn a good return on equity, a good ROI on your business, and good return on assets on the business. So, that’s been their focuse is to sort of create this into a big credit platform and not just sort of look at a very short term horizon of getting capital back. That’s how this business is, it’s too early to sort of think about exits now. Because the business is now getting really transformed. And we’re really getting our act together. And business is really sort of falling into place, especially, you know, the current times after COVID debt has become more important for companies to sort of fund. So that’s where it’s sort of, we are feeling that there is no real an exit price. It’s all about growth right now, and how we can take the advantage of a first mover.And try and build the business out further. So, our exit will happen I think that only sort of Time will tell possibly it could be another strategic investor coming in will be for the funds that we may end up raising, because for them this is not like they really need the capital tomorrow, this is from their personal side. So, they are not really having such any exit expectation at this point.
But but they would have, you know, some IRR calculation for the allocated money in your business since you have been doing it for the last many years. So, what is the IRR that you plan to give it to your investors.
So, I think anybody would like to make at least 20% IRR on their investments that I think is the bare minimum.
But you yourself mentioned that the current interest you charge to a company is between 14 to 18% to these startups, considering one one or two faculties among you know, let’s say 50 to 100 companies you invest in. So how would a 20% IRR accrue for a 14 to 8% interest on the capital you have given.
So, what happens is that is the interest, the IRR on those transactions is much higher because you also have fees etc on it and your principal also starts coming back. So the IRR can range from 16% to 21% plus in some cases you will get warrants so that will give you further IRR. And what we do on our balance sheet level as I was mentioning offline is that we leverage it right so we are able to leverage it 1:1. So that sort of debt is borrowed at a much lower cost right so we are borrowing that at maybe 11% or 12% so that provides you further upside to your IRR when you sort of looking at it so obviously right now we’re only able to leverage 1:1 because of current credit market situation. But if you’re able to leverage it 1:2 and that money is at a lower boring cost. Then, our IRR will shift and once our IRR also improves you’re able to get a higher valuation for the company.
For our listeners who are new to venture debt, would you please explain what does 1:1 and 1:2 mean?
I’m talking about a debt to equity at the NBFC level. So, if we have like a 200, right now book our assets under management at our NBFC level is 400 crores. 200-250 Cr is equity side, 150 corrodes is on the debt side. So, if you take from 1:1 if you’re able to one is to two, so, if we are able to take a debt from 150 corrodes to almost 500 crores that will sort of be able to give us an extreme, improving our ROE, right, because we will be able to leverage it up, they will lever it up and get interesting returns on it,
Understood and Ankur for the listeners who are new to venture debt. Can you explain what warrants are and in which transactions do you do get a warrant and what’s your return on those warrants?
So, basically venture debt typically is where there is a venture, which a company which has raised actually institutional backed capital from a VC or generally PE not necessarily from angel investors, at least in the country, most of them are focused on having a large marquee and institutional investor in the company. And they sort of are able to give around 10 to 20% of the equity as debt, right. So, the benefit of it is that it is non dilutive. And you can get the money obviously, alongside the equity, and then you can sort of, you have to pay it back over a period of three years, not that you have to pay it back in the next three months. And more interestingly, unlike the regular bank debt, one does not really need to provide any kind of hard collateral one does not need to provide promoter guarantee. One does not need to provide any personal guarantee or does not need to provide pledge of shares. So it is that way without any kind of collateral. So from banking parlance, it becomes literally unsecured because there is no hard asset, which is providing as debt security to the companies. For the venture debt players, they are taking comfort on the business model itself when the cash flows of the business. There’s no sort of the growth of the business that can happen, which should be the case even for the traditional bankers, but traditional bankers are more sort of focused on the security of the business that they’re providing, whether it’s plant and machinery, or why that is kind of the house of the promoter. Those are the kind of things they generally prefer to have, apart from the charge on all the business assets. That’s a venture that is very, very different from a typical debt that may one could get from a bank or nbfc. Plus, what the venture players do is because they are taking this higher risk, they sort of try to compensate that by taking a warrant alongside it. So the warrant aspect of it is sort of how it works. It’s like a right to subscribe at a certain valuation which is agreed upon at the right that right now, but one has to sort of invest Not now, it could range tenure from three to seven years, right? So that’s where sort of the upside comes in. Because if the company does well, you are getting to invest six years down the line, when the company’s valuation, which was like almost three Seven years back, right. So that’s where the upside comes in. But obviously that upside how much it can be it can grow from one to three x kind of sort of valuation, or a return that you would have done on your warrant. It could be even five x. But that is very difficult to know. Because if a company was overvalued when you did your debt round, and after that there has been a down round, then go on and warrant will be out of mone. So, it is all sorts of subjective, it depends on company to company, depends on transaction to transaction, but primarily, it sort of provides you that excess extra potential return for the kind of extra risk that you might be taking at a time of doing the debt round. Does that help?
Yes, yes. And in how many of your 45 companies you would have warrants,
I think around 15 to 20 transactions,
approximately 50%, so these would be very early stage transactions where you get a warrant also?
And, Ankur, tell me, you know what does the future of venture debt look like. Right? And for BlackSoil, what are the key advantages in the market, that even large companies will come to you tomorrow?
Correct. So venture is been a very evolving asset class and I think it is really growing well now, especially, COVID has sort of helped people to realize that one should not just depend on equity money to grow. Debt is also very, very important. And then as everybody starts focusing on a bit of profitability, that sort of debt becomes a good partner to have, because once you are EBTA, profitable, then you can service it from your cash flows of the business, you don’t really need any equity money, right. And that’s how traditional businesses have built their businesses over the period of time by really raising debt. They don’t really always, at every point of time every one year down the line to raise equity round. So, that’s how sort of everybody started realizing that debt could be a good sort of way to keep growing without having to dilute yourself. And if you’re able to be cashflow positive, then debt is a very good sort of vehicle to sort of network partner to have and sort of take you to the next level. So, what we have seen also is that because that venture debt as a market is still very small compared to what is there in the US and in US, it’s already like a 12 to 15% of the VC market size, in India that will be like almost five to 6% only. So, we have big headway on that set itself in terms of the expansion of the market, right. And as more players are entering the business, that possibility of the market growth is happening right and, and obviously the VC market still continues to grow despite you know, the pandemic we are seeing that the transactions are picking up again. And money is getting deployed as enough dry powder here is a lot of interest in the Indian market, whether you take a b2c company, or b2b company, all kinds of business models are getting really attracting capital and the ecosystem has really grown in the last six years. So no company can just keep running on equity, right? You need debt also. So, oviously, debt will take more time to catch up on the equity side. But it’s getting more and more serious as we sort of progress. So we are seeing that we are so good of time to be in for all the venture debt players, including us that you know, whoever have been in the market for last few years. And you can sort of really grow from here and establish yourself as one of the key players in the segment. And everybody has their own strategy to look at companies and there is enough number of companies out there that one has to sort of can underwrite and provide your deck financing to and create a quality portfolio around it.
Fantastic. Thank you so much, Ankur, for being on the 100x entrepreneur podcast and sharing finer details on venture debt on how you operate and how the overall market looks like.
This has been my pleasure talking to you. It’s great to having me over. I really enjoyed having this conversation.
Thanks again, Ankur.
Transcribed by https://otter.ai