Start-ups tap venture debt to stay afloat amid funding winter, say experts

The venture debt market is becoming popular within the start-up ecosystem with a lot of new funds coming up and limited partners also showing their interest in financing such investments

At a time when India is currently experiencing a funding winter, start-ups are looking at different fundraising avenues such as venture debt to stay afloat, according to experts. The funding winter is expected to continue for the next 12-18 months and the country has witnessed a series of layoffs and start-up and unicorn valuations are under stress.

Experts said that India's Venture debt market has started becoming popular in recent times with a lot of new funds coming up and limited partners are also showing their interest in financing such investments.

“In the current market conditions where the funding is going down significantly, start-ups are forced to look for alternatives to equity funding to stay afloat,” said Neha Singh, co-founder, Tracxn, the market intelligence platform. “Investors in both the public and private markets have grown more cautious, this has also affected the average ticket size in late-stage funding which has come down by 70 per cent in Q3 2022 as compared to Q3 2021.”

The valuation multiples for both large tech companies and early-stage start-ups have dropped. As a result, growth and late-stage start-ups may be less inclined to raise funding at a lower valuation.

“Start-ups are looking for new methods of financing their operations until the market conditions stabilise,” said Singh of Tracxn. “In this situation venture debt is emerging as a viable alternative, giving start-ups an option to obtain funding without having their valuations and ownership stakes affected.”

One such fund that is gaining a lot of traction is Mumbai-based alternative credit platform, BlackSoil. It recently successfully raised Rs 250 crore through its diverse financial products from reputed family offices, notable high-net-worth individuals and marquee institutions.

“Start-ups have taken proactive measures to rationalise costs which includes manpower reduction and a reduction in marketing spends,” said Ankur Bansal, co-founder and director, BlackSoil. “While this has positive results, it is imperative for start-ups to either carry out a fundraise at reduced valuations or look at alternative sources of financing such as venture debt that would help them extend runways and weather the current situation.”

For BlackSoil, deployment of funds during the financial year 2021-22 stood at a record high of over $90 million, comprising a meticulously curated portfolio of 30 companies across a broad array of emerging growth sectors.  There are over 20 Family Offices and HNIs who have invested in Blacksoil's various debt products.

Over the past six years, BlackSoil has deployed upwards of $300 million, across over 130 transactions. “Over the past six months we have disbursed in excess of Rs 680 crore,” said Bansal of BlackSoil.

BlackSoil's alternative investment fund (AIF) grew nearly 150 per cent in deal numbers and 2.25x in deal value year-on-year in the first quarter of FY23.

In August, digital payment solutions provider, MobiKwik, raised debt of Rs 35 crore from Blacksoil Capital, amid an IPO delay. The Gurugram-based firm raised the amount after more than 12 months of filing its Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (Sebi).

“Companies are deferring their primary capital raise in expectation of better valuation multiples in the next couple of months,” said Apoorva Sharma, Partner, Stride Ventures, a venture debt firm. “The interim capital requirement is being filled in with debt,” said Apoorva Sharma, Partner, Stride Ventures, a venture debt firm.

In August, Stride Ventures announced the close of its second flagship fund -- Stride Ventures India Fund II -- at $200 million. The fund saw the first close back in August 2021. The second fund, like the first one, witnessed participation from leading banks, marquee family offices, corporate treasuries, sovereign funds, PE funds, insurance firms, and high net-worth individuals contributing to its success.

Byju Raveendran, founder and CEO of Byju's, was also in talks with various international and domestic banks in April to raise $400 million as a loan to fund 50 per cent of the $800 million (about Rs 6,000 crore) funding round of the ed-tech giant, said people familiar with the development. This year, Microsoft joined the convertible note funding round of e-commerce firm Udaan, which reached $275 million via convertible notes and debt. Healthtech firm GOQii, also raised $50 million in a Series C funding round in 2022, led by Sumeru Ventures. The company raised funds across equity, preference shares, notes, and debt. Cloud kitchen unicorn Rebel Foods recently raised Rs 75 crore  venture debt from Alteria Capital. Trifecta Capital, an alternate financing platform, was among the most active private equity investors with 13 investments in Q3 of this year, according to a Tracxn report.

Kanwaljit Singh, Managing Partner, Fireside Ventures, said that for businesses, which have well-defined unit economics and strong business models, lending is becoming a very viable option, especially for working capital. He said a lot more similar channels have opened including the ‘Credit Guarantee Scheme for Start-ups (CGSS) approved by the government.

“The government is incentivising a lot of public sector banks to provide more collateral-free debt funding,” said Singh of Fireside Venture
 

For instance, as of August 31, 2022, Small Industries Development Bank of India (Sidbi) has committed Rs 7,385.45 crore to 88 AIFs. A further Rs 2,899.48 crore has been distributed to 63 AIFs (alternative investment funds). A total of Rs 11,206 crore has been injected to boost 720 start-ups.

Indian start-ups raised $3 billion in Q3 2022 (July-September), 57 per cent lower than the previous quarter, according to the Tracxn report. This is 80 per cent lower than the peak funding of $14.9 billion received in the same quarter last year. Late-stage funding has been impacted the most, with an 88 per cent decline from Q3 2021 and a 64 per cent drop from Q2 2022.

Experts said that going public is another alternative for unicorns and late-stage companies to raise capital.

“Almost 23 Indian start-ups and unicorns are planning to go public in the coming quarters,” said Singh of Tracxn. “This includes companies like Flipkart, PhonePe, Byju’s, Swiggy and OYO, with a combined valuation standing at $111.5 billion.”