Profile: Trifecta's Rahul Khanna

An odyssey across India, the US, several distinct industries, and circling back to India again, has given Rahul Khanna an uncommon sensitivity to the needs of LPs, fund managers and start-ups. As a result, his groundbreaking venture debt business has been able to play an increasingly important role in a domestic market where well-meaning players on both sides of the investment table are still struggling to connect the dots.

Khanna says the timing of his venture company - Trifecta Capital - could not have been more ideal. When raising equity starts to look like an expensive and time-consuming process, debt makes for an attractive alternative or stop-gap. The challenge, however, is getting the VC community comfortable with this emerging asset class while balancing the expectations of investors and entrepreneurs.

Trifecta won approval to operate as a fund from the Securities and Exchange Board of India (SEBI) in April last year, putting in place a business model that allows start-ups without access to traditional lenders to be supported by a structure comprising a loan with limited equity investment rights. "When we went to SEBI, they were not familiar with the asset class," Khanna says. "Nobody had ever gone to them to register a venture debt fund. They said, ‘We've seen this in a textbook but we've never really seen it in the real world.'"

So there I was, in the Valley, a year into it and in the middle of the dotcom meltdown. I was two jobs down, bank balance dwindling, getting close to zero, and $100,000 in debt. That builds character, I can tell you that

In less than a year, Trifecta has raised INR2 billion ($29.7 million) of the INR5 billion targeted for its first fund and provided INR850 million ($12.6 million) in financing for seven companies. Recipients include kidney care clinic NephroPlus, logistics player Rivigo and messaging platform HelpChat. It has been a whirlwind journey, but as Khanna observes, sometimes overnight successes can take decades to unfold.

Into the valley

After earning a bachelor's degree in economics at St Xavier's College in Mumbai in the early 1990s, Khanna started his career with a brief stint in advertising, managing accounts for Contract Advertising and JWT. This experience quickly precipitated marketing work in the technology sector, where he formed part of the team that launched Hutchinson Telecom as one of India's first mobile operators. At Hutchison, Khanna began to fuse his passions for high-tech innovation and building early-stage companies.

A subsequent move to the US in order to take a marketing and strategy MBA at Kellogg Graduate School of Management outside of Chicago would eventually lead back to India, although not before a string of precarious, nerve-testing crossroads. Khanna describes his post-MBA days as a tipping point, when he decided against a career in management consulting - more than half his class at Kellogg took that route - and went looking for a job in Silicon Valley.

"It came with a sense of saying, I'm putting it all on the line," he recalls. "Rather than work for a large consulting firm - which would have paid back my business school loan - let me take a leap of faith and find something more meaningful to do with my life that draws towards entrepreneurship. And in some ways, taking that risk was a pivot point for me personally."

After about six months in Silicon Valley, the first company Khanna joined got acquired and let go about half of its employees. Six more months later, his second company, Yahoo, decided to shut down the division in which Khanna worked. "So there I was, in the Valley, a year into it and in the middle of the dotcom meltdown. I was two jobs down, bank balance dwindling, getting close to zero, and $100,000 in debt," he says. "That builds character, I can tell you that."

By 2005, Khanna was working for his third company, an archetypical start-up-in-a-garage in San Jose, when a stirring economic emergence back home inspired another leap of faith. He convinced his wife to walk away from a job as a textile specialist for Levi Strauss & Co. and move to India.

Although he was not able to jumpstart any of his initial ideas upon his return, Khanna contributed to the explosion of the country's VC industry from a valuation of only $100 million in 2005 to more than $5 billion last year. When some friends starting a VC fund in California needed an insider for their Indian portfolio, Khanna saw an opportunity to write much-needed checks for a wave of newly repatriated entrepreneurs keen to exploit their home country's untapped start-up potential.

"Change in the US is incremental," he says. "You build a better mousetrap, and if you get it right, maybe you build a Facebook. But most people end up just improving things by 5%, which is fine because that's what you can do in a mature market. In India, you can build zero-to-one businesses and that's what I like."

A door opens

Khanna worked for his Californian friends as director of Indian deployments at Clearstone Venture Partners, supporting the growth of companies such as BillDesk, now the country's largest payments technology provider. During this period, the necessity behind Trifecta's invention began to come to light. Domestic venture capital flow was accelerating rapidly, but entrepreneurs where still unable to take on debt for working capital, funding receivables, making small acquisitions or just extending their runway before raising another round.

"The only capital that was available to start-ups was highly dilutive equity capital," Khanna says. "Part of what you learn in venture is pattern watching, and so I started to see the pattern in this gap - this is the white space of venture debt."

The underdeveloped nature of the venture market Khanna observed during this work, however, necessitated a kind of innovation and marketing expertise outside of his own experience. He needed a foil from a more traditional risk management background and Nilesh Kothari, formerly a managing director responsible for ventures and acquisitions at Accenture, duly came in as co-founder. The Khanna-Kothari partnership was designed to bring together skill sets in the decidedly disparate disciplines of venture capital raising and lending and underwriting.

Khanna acknowledges the groundwork laid in this field by SVB India Finance (now InnoVen Capital), which pioneered Indian venture debt in a non-fund structure without the need to raise money from LPs. But with many start-ups clamoring for an alternative to SVB and conservative LPs preferring the risk profile of venture debt, he identified an opportunity to resolve a seemingly intractable situation in the local VC scene.

Most of India's top-tier VC firms were raising capital internationally, which meant that many domestic LPs were not participating in the asset class. Leveraging his understanding of various investors' risk-reward profiles, Khanna moved strategically within the LP space, sometimes targeting players altogether unfamiliar with venture debt products.

"The journey has been as much about discovering the needs of the market as it has been about fine tuning the fund proposition for investors," he says. "We see a lot of folks trying to raise venture capital funds but with limited appreciation for what LPs want. People either focus very much on supply or demand, and aligning the two mid-way through a fundraise becomes hard."

This appreciation for the nuances that can make or break a deal may be best crystalized by the entrepreneur's hard-won ability to embrace the unknown. "A lot of investing is about being comfortable with uncertain outcomes, and that only comes from being in those experiences - you cannot learn that in school," he says. "You can only control the inputs; the outputs will be what they will be. And I think that that is philosophically how we've gotten to this point."

Bits and atoms

While Khanna's immediate imperative to stay ahead of the competition and do justice to recently raised money fuels a familiar tunnel vision among entrepreneurs, he contemplates Trifecta's success beyond the concept of a mere fund, company or industry. As such, it's no surprise that the mission statement for Trifecta envisions bridging a gap between the old manufacturing-based India and the country's new technology-driven economy. Khanna characterizes this juxtaposition as the worlds of bits and atoms.

"I see an interesting role for us to play in connecting the world of bits and the world of atoms," he says. "We've become a unique vehicle through which our investors, who represent a lot of old India and legacy capital, can connect to new India. One of the real motivations here is not capital. It's really about building Trifecta into an institution that lives beyond us, so that 10 years from now, I can gracefully fade away knowing well that the values we instilled and the model we've created will live on."

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• Topics
• South Asia
• Venture
• Financing
• GPs
• Technology
• Trifecta
• Structured finance
• India