Caspian Debt Aims To Allocate Over Rs750cr In FY24: CEO Avishek Gupta

In an interview with BW Businessworld, Avishek Gupta, MD and CEO at Caspian Debt, talks about the challenges startups face while raising funds in the initial stage and how debt financing could be an alternative

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Here is an excerpt from our conversation with Avishek.

How do you evaluate bootstrapped and venture capital-backed startups?

Venture equity-backed companies can be classified into two categories. The first category comprises companies with breakthrough innovations but unclear business models or products. They rely on equity funding to develop their product and determine their business model. The second category consists of startups with clear business models and products. They raise venture capital to accelerate their growth.

As a lender, our focus is on providing loans to these companies. Unlike equity investors, we cannot take on excessive risk. We have a capped upside and require companies to have sufficient cash flows to repay the loan.

Our financing is targeted towards startups with clear business models and consistent revenue streams. In the case of bootstrap companies, we prioritise profitability since they lack institutional investors to provide additional cash when needed. Therefore, a bootstrap company must be capable of generating cash flow to repay the loan.

The key distinction between a bootstrap company and a venture-backed company lies in profitability. A bootstrap company must be profitable, while a venture-backed company can operate at a loss as long as it has institutional equity investors supporting it.

According to you, what is the best channel to fund a startup? How can the ecosystem address challenges like the lack of traditional collateral or high interest rates?

It depends on the type of startup you're building and your personal preferences. For innovative startups with uncertainties, raising equity capital is necessary. Debt can be used later once you have established traction. Entrepreneurs who want full control may choose to bootstrap their business and grow slower. On the other hand, venture-backed startups can raise equity to grow faster but may also face the risk of failure. Debt should be raised when the business model is clear and there is a need for working capital or expansion. Equity is generally more expensive than debt. Ultimately, it comes down to the nature of your business and your own personality. If you can generate sufficient customer revenues, you may not even need debt or equity financing to grow.

When approving and lending money to a bootstrapped company, there are certain metrics you must consider to assess its profitability and investment potential. Could you please share which specific metrics you look for?

When considering funding opportunities, we primarily collaborate with First Generation Entrepreneurs. We require both profitable companies and bootstrap companies to have a clear product or customer base and a certain level of sales. Our loans range from Rs 50 lakh to Rs 15 crore, and we are interested in funding service companies with annual revenues of at least Rs 1 to Rs 2 crore, and product companies with revenues of Rs 4 to 5 crore.

We prioritise transparent ownership structures and discourage multiple interconnected entities. It is important for the promoter of the funded company to be fully dedicated to their specific business. Transactions involving related companies should have legitimate justifications, and the inclusion of an independent board can provide reassurance.

While recruiting independent board members may be a challenge for small companies, it is advantageous to have transactions approved and monitored by the board. Otherwise, it is advisable to avoid multiple related entities and business dealings between them. We also assess the quality of management, their background and expertise, the implementation of robust processes and systems, and compliance with tax, GST, and CPF obligations.

Solid internal controls, adherence to regulations, and effective governance are crucial for the success of any business. We base our evaluations on factors such as legal compliance, timely submission of necessary returns, establishment of appropriate policies, and overall management effectiveness. We do not rely on mortgage collateral for early-stage companies.

Do you cater to companies or startups in tier II or tier III cities that have no collateral. How do you assess the risk in these cases? And what is the success rate of these startups in recovering their loans? Lastly, what is the average amount of the loans given to them?

Most of the companies we work with are located in rural areas, specifically tier II and tier III cities. Although their headquarters may be in Bangalore or Delhi, these companies have operations all across the country. They choose to be based in these metro cities to have better access to talent and capital. We actually prefer working with companies in these rural areas, especially those in economically disadvantaged states. If a company is based or operating in such areas, we are even willing to take on more risk. Apart from these specific criteria, our evaluation process is similar to what I mentioned in response to the previous question.

In FY23, how much did you lend out to women-led startups?

In the last financial year, 50 per cent of our funding went to companies led by women or companies that provide products or services for women. This is a significant number considering the low funding generally available for women-led startups. Over the past nine years, about 30 per cent of our funding has gone to women-led companies. We have two main focus areas: supporting women-led companies and companies with a positive impact on the climate. 

Our team also has a good gender balance, with leadership positions evenly split between men and women. In fact, our client-facing team has more than 50 per cent women, which is rare in the financial industry. We consider the participation of women in both our funding and team composition to be important. We have found that targeting and supporting women-led companies also improves client retention. Overall, we understand that funding for women-led startups is still a challenge, but we are committed to pushing for more funding and creating opportunities for women in the industry.

What is your annualised run rate of loan disbursement for FY 2023? And what are you targeting for the current fiscal year?

Last year, we allocated about Rs 600 crore and this year we plan to allocate between Rs 750 crore to Rs 800 crore. We funded around 150 companies in the past and each year we bring on board a new batch of companies. Last year, we brought on board about 35 companies and this year we hope to bring on board around 40 to 45 companies.

We provide repeat loans to companies based on their growth, with some companies in our portfolio taking up to 13 or 14 loans from us over the years. Additionally, we offer additional funding to existing portfolio companies to support their growth. Over 60 per cent of the companies have taken at least two loans from us, with a significant number taking five or more loans. Despite lending to a high-risk segment, our gross non-performing assets (NPAs) last year were around 1.2 per cent to 1.25 per cent. Our net write-offs have been relatively low compared to the total disbursed amount.

What are the unexplored sectors you are aiming at?

In the next six months to a year, we want to focus on funding companies that operate at the intersection of agriculture and climate technology. These companies could be involved in organic food production, cold chain solutions, solar-powered equipment, reducing the use of chemical fertilisers and pesticides, improving farmer income through energy-efficient processing, or enhancing farm productivity. 

Our goal is to have a positive impact on the environment and farmers' income. Additionally, we are interested in projects that convert agricultural and food waste into renewable energy sources. We have already funded several companies in these areas, but we are looking to support more companies with proven business models that are operating at the intersection of agriculture and climate technology. This is a significant area of focus for us as we believe there are many untapped opportunities in this field.

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