A new venture-debt model

A new venture-debt model

Unlike other debt financial institutions, which review the past performance of a company to take funding decisions, IntelleGrow evaluates the future profitability and scalability of a business, before funding it. Until now, it has lent US $13 million to 40 companies across six states in India

MADHUMITA PRABHAKAR

The entrepreneurial streak in Sanjib Jha, Director and CEO of IntelleGrow Finance Pvt. Ltd (IntelleGrow), kicked in, when ATS Services Pvt. Ltd., a BPO he was employed in earlier, faced a major financial turmoil.  “My founder was trying to setup a domestic BPO in the country and when it initially failed, the senior management stepped down. I believed in his idea and took up the opportunity to join him in re-building the business,” he recalls. Within three years, the company went from an employee base of 80 to 2,500, building a profitable business in the process.

After pursuing several other professional assignments, Jha’s passion for entrepreneurship was re-born in 2009, during his tenure at Intellecap, a social-sector advisory firm. There were specifically two observations that provided the impetus to setup IntelleGrow. First, Intellecap’s founder had setup Aavishkar, an impact-venture capital fund, which helped him understand the many different challenges faced by early-stage companies. Second, when Intellecap won a contract from International Finance Corporation (IFC) to study the credit gap in India, the team found that the SME space faced a gap of US $8 billion, with the biggest challenge being the lack of adequate and timely finance.

“We asked ourselves, if the gap is so huge and if equity is the primary source of funding, can we find a model where our equity investing skills can be put to use, and we can still earn the same internal rate of return (IRR) as an equity investor would?” he shares. Thus, his team piloted this idea of venture debt in 2010-2011. It gave three month to six month loans, in bridge funding, to companies such as Vortex Engineering, a company that manufactures solar powered ATM machines. When it started gaining good returns, the team, with support from Intellecap and Shell Foundation, decided to form a separate balance sheet. In 2012, they formed IntelleGrow as a full-fledged business.

Unlike banks and other financial institutions, which review a company’s performance in the past three years to determine funding decisions, IntelleGrow evaluates businesses from a futuristic perspective. “Despite the contribution of SMEs to the overall GDP, over 37 per cent of the overall debt required for them cannot be serviced by the existing financial institutions. Thus, through this approach, we are trying to create a new thought process, and a new asset class in the country,” says Jha.

Raising funds

Initially, IntelleGrow raised seed capital of around Rs. 8 crore from its parent company, Intellecap. Over time, the parent company invested further, taking the total investments (from Intellecap, its founders and Jha) to Rs. 15 crore. In February 2013, it raised Series A to the tune of Rs. 100 million, from Michael and Susan Dell Foundation (MSD), and in March 2014, raised Series B to the tune of Rs. 28 crore, led by Omidyar Network (which invested Rs. 25 crore), and existing investor, MSD (which invested Rs. 3 crore). “We also raised Rs. 35 crore to Rs. 40 crore from other external lenders, thus marking our balance sheet at Rs. 80 to Rs. 85 crore. We plan to take this number to Rs. 250 crore in FY15, and are already in talks with several banks, investors and lenders,” indicates Jha.

Parameters to determine future of a business

IntelleGrow has established three pillars to best evaluate the future prospects of a business. Firstly, it determines the entrepreneur’s ability to scale up the business, his/her past experience, confidence and knowledge of the business. In fact, all the companies it has funded till now are managed by first generation entrepreneurs, of which 45 per cent are startups. “While this was by default, going forward it might become a design, because, I believe the chances of them going wrong is comparatively lesser than a second or a third generation entrepreneur doing so,” believes Jha.

The second pillar is to evaluate the viability of the business. “When I say viable, I mean businesses which stand a chance of being profitable in future,” he says. He further adds, “For instance, if I fund a hospital chain, I know it will take eight years to break even. But, if I wait that long to fund him, the entrepreneur’s stake itself would have diluted to an insignificant minority. So, I need to invest early, and find out ways in which I can get the money back,” explains he. The third and last pillar is to determine the scalability of the business.

IntelleGrow adopts two approaches to determine the interest rate to be charged on loans; first is the cost plus model, where it determines the interest rate by taking into consideration the cost of doing business, and the interest rate on debt it has raised from external investors. Second is based on the score a company receives, on the parameters (for evaluating a company) it has laid out. “If a company scores less, we charge a higher interest and vice versa. Ultimately, the funding is uncollateralised and risky, so, if we want to achieve our goal of boosting entrepreneurship, and at the same time, prove to our investors that our business is viable, we need to operate in the 18 per cent to 20 per cent range,” reasons Jha.

Overcoming challenges

Jha’s primary concern is in raising adequate funds to sustain the business, going forward. “While my investors appreciate the fact that there is a huge credit gap that needs to be resolved, they need to be convinced that this business model makes sense and will make money in future,” he says.  He goes on to indicate that, in the past year, though it received funding from two equity investors and six lenders, to take the company to the next level, it needs the support of many more investors.  Secondly, as is the case with any startup, Jha’s challenge lies in identifying and hiring the right employees, who fully understand the business and are willing to undertake risk-taking roles. Thirdly, as he justifiably puts it, as the company grows bigger and secures more funding, it shouldn’t compromise on the discipline and caution with which it evaluates potential companies to be funded.

The market needs more such players

A close competitor to IntelleGrow in this space is SVB India Finance, the speciality-lending bank of Silicon Valley Bank. Founded in 2008, it provides collateral-free debt financing for startups in India. “Though SVB India Finance operates in the same space, it only does bridge funding (along with an equity investor) for companies which are at least five-years-old. Whereas, we fund companies that are 18 to 24 months old,” says Jha. He is quick to add that both companies and many more should co-exist because the market is huge and IntelleGrow alone cannot sustain it.

In FY15, the company plans to raise Rs. 250 crore, and offer debt to several companies across India. “Ideally, in course of time, we hope to solve the capital gap for a large majority of SMEs in the country and make sure they build up a great credit history,” states Jha, and signs off.


Knowledge Partner:

Altacit Global is a boutique legal firm specialising in Intellectual Property and Corporate Legal Matters. Altacit Global has partnered with The Smart CEO, to present a series of articles on Impact Ventures. Please visit www.altacit.com for more details.

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