Early-stage startups, rearing to grow, often hit a wall when it comes to raising money for their working capital needs. Unable to grow on their own dime, most founders are dragged into selling a part of their stake to equity investors (equity financing).
But soon after the big-ticket deals have been sealed and champagne corks popped, reality sinks in: The entrepreneurs are no longer the masters of the companies they’ve created.
This is why, increasingly, founders are opting for the venture debt route in India. Mid-stage startups are now slowly gravitating towards firms such as InnoVen Capital, Trifecta Capital, and Unicorn India. They are an alternative to equity venture capital (VC) funds like Softbank, Sequoia Capital, Accel Partners, and Nexus Venture, which have ruled the startup financing sector for long.
According to data tracking firm Tracxn, 2017 saw 27 rounds of venture-debt funding, amounting to $62.7 million (Rs439 crore), as against 26 rounds ($58 million) in 2016. Companies that raised such funds include Shopclues, BigBasket, and Swiggy. Over the past two years, other prominent startups like Snapdeal, Faasos, Portea, Freecharge, Practo, and OYO, among others, have also taken this route to expand.
Unlike regular VC investments made in return for shares in a company, debt funding is a loan that does not entail equity dilution. It typically complements equity financing and is usually structured as a three-year term loan with warrants or options for the company’s stock.
The rising popularity of such funding is good news for startups that are often not considered creditworthy by banks due to a lack of collateral or profitability. They may also not want to raise funds against equity at an early stage when their shares are worth little.
Bengaluru-based InnoVen Capital is one such source of funds. It has invested in over 110 Indian firms to date, disbursing loans of $75 million to startups in 2017. In the first half of 2018, it invested over Rs130 crore in follow-on round across 11 companies, including Power2SME, Chaipoint, Treebo, and Bizongo, a 350% jump from the previous year’s investments of Rs37 crore across four companies.