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September 03, 2005

Citigroup launches "venture lending" service in India

This week, Citigroup announced the first customer - Chennai-based Secova eServices - for its new "venture lending" service to Venture Capital-backed companies in India. Apart from providing a term loan, as part the Venture Lending transaction, Citigroup will also acquire a small pledge of stock warrants which would entitle it to invest and acquire equity shares in the customer company at a predetermined price.

The service is aimed at early- and growth-stage companies which have already raised a round of VC funding. Secova, for instance, raised its first round financing from the Tamil Nadu IT Fund (managed by IL&FS VC). By using debt financing from the Venture Lending service to finance fixed-asset purchases or working capital, entrepreneurs can employ their VC funding in areas such as accelerating product development or in making key hires. This way, entrepreneurs can achieve a better valuation for their companies before going in for the next round of equity dilution.

More from Citigroup's note about the service:

What is Venture Lending
Startup companies typically receive several rounds of equity investment prior to going public or being acquired. Each round is expected to provide sufficient capital to achieve predefined milestones. By reaching milestones, the company is able to (and typically needs to) raise a subsequent round of financing. These step-up rounds of financing serve two purposes: First, they enable entrepreneurs to minimize the amount of equity that is given up in the firm by linking further dilution with higher valuations. Second, they enable the venture capital investor to minimize investment risk by spreading the capital requirement over multiple rounds and usually a number of different investors.

There is a clear need for some amount of debt financing between VC rounds to help companies and investors ‘extend the cash runway’ of their investments. By using debt, the entrepreneur is able to have access to more capital without giving up as much equity. Put differently, venture debt enables the entrepreneur to run the company for a longer amount of time, increasing the enterprise value of the company, before raising more money. Venture Debt is an existing concept in the US accounting for over 25 years.

Benefits of Venture Lending
• Extends the “cash flow runway” for the company and makes it easier to achieve the next valuation milestone.
• Venture lending represents a less dilutive type of financing than venture capital financing since venture lenders generally require less of an ownership position.

Venture debt is typically useful for early stage and emerging venture-backed companies that are looking to build out their business through infrastructure expansion or growth capital. Venture debt is traditionally used for the purchase of hardware and infrastructure equipment, enabling emerging companies to reserve the venture capital investments for business critical activities such as research and development, marketing practices, and hiring. Additionally, venture debt can be used to finance accounts receivables, inventory, demonstration equipment and can be purely offered as growth capital.

For further details, contact Ajay Hattangdi, Vice President-Citigroup, Mumbai at ajay.hattangdi@citigroup.com or +91 22 5001 5039.