Obtaining it is easier and quicker than venture capital, and it stems dilution of equity stake
As venture capitalists (VCs) become increasingly chary of investing in an environment of extreme business uncertainty due to Covid-19, start-ups are making a beeline for venture debt.
Per data sourced from start-up tracker and business intelligence firm Tracxn, 16-18 start-ups including Bounce, ZipLoan, Cuemath, MFine, Stellapps, Blowhorn, LetsTransport, BlackBuck and CredR have raised venture debt since the outbreak of the pandemic from venture debt firms such as BlackSoil, Trifecta Capital, InnoVen Capital, Stride Ventures and Alteria Capital.
Venture debt is a type of debt financing provided to venture capital-backed start-ups along with Series A or after Series A funding but not before Series A. Venture debt deals can start at a couple of crores and go up to over ₹100 crore.
Google-backed hyperlocal services start-up Dunzo raised $11 million in venture debt from Alteria Capital earlier this year. In August, online home interiors start-up HomeLane raised ₹60 crore in a bridge round led by Stride Ventures. Last month, consumer electronics start-up BoAt Lifestyle raised ₹25 crore in venture debt from InnoVen Capital, and Melorra, an online fine gold jewellery start-up, raised $12.5 million in funding, a part of which came from venture debt firm Alteria.
Why are start-ups choosing to raise venture debt?
“Normal debt is hard to come by, especially because we don’t have any collateral to offer in the form of assets. However, venture debt is an attractive option even though it comes with 1-2 per cent more interest than a bank loan, because it is collateral free,” Srikanth Iyer, founder and CEO, HomeLane.com told BusinessLine. “Also, the speed of execution — we can raise venture debt in eight weeks vs bank loans, which take about six months.”
A start-up typically becomes eligible to take on debt post the first round (Series A) of equity raise as it will aim to grow in top line and show repayment abilities, said Ishpreet Singh Gandhi, founder and Managing Partner, Stride Ventures. “Debt can be raised repetitively to save on dilution of stake and especially for specific use cases such as working capital requirements,” he added. Over the past four months, Stride has closed four venture debt deals ranging from $1 million to $3 million.
Venture debt has always been a huge value proposition for start-ups, even more so during Covid, in an era where preservation of capital is paramount if start-ups want to retain the ability to survive and stay in the game, observed Ajay Hattangdi, co-founder and Managing Partner at Alteria Capital.
Smaller, fewer VC deals
“Seed rounds and Series A deals have gotten much smaller and fewer because investors are reluctant to put money to work in this uncertain environment,” he said. “So, if a start-up founder raised $5 million last year, he may be able to raise the same amount this year but will have to put in a lot more work and effort for a VC to part with that money. The fundamental reason why venture debt works is because it leverages the equity capital in order for the company to increase valuations between equity rounds, reduces dilution of stake and enhances returns for both the investor and start-up founder.”
Kabeer Biswas, co-founder and CEO, Dunzo, summed up why he chose to raise venture debt. “From the early stages of Dunzo, we have always focussed on building a sustainable business model. Profitability has always been the barometer of success and we are seeing it manifest across several of our micro-markets. As we deploy this playbook into other cities, we are extremely conscious of what our customers want. In this journey, we are able to fuel our growth with venture debt while having a significantly higher return on investment for customers and stakeholders,” he said.