More firms raised venture debt funding in the wake of Covid-19

The pandemic caused a lot of start-ups to halt operations and run out of cash. Firms began to look for alternative modes of investments to stay afloat, one of them being venture debt.

Venture debt financing is typically availed by early- and growth-stage firms that have been operational for a while and have been backed by venture capital. Companies raise venture debt funding to avoid raising investments at a reduced valuation, prevent equity dilution and extend cash runway between equity funding rounds.

According to data from Tracxn, a firm that tracks investments and financials of private companies and start-ups, the number of companies that raised funding through venture debt during the January-November period this year stood at 34, vis-à-vis 32 firms in during the same period in 2019. This data pertains to companies that were founded since 2010.

Ploughing through

“Economic uncertainty surrounding the pandemic has heightened the focus on venture debt because it has created a need for companies to raise unplanned financings. Growth plans of several companies have been subdued or adjourned, and many are facing the arduous task of resetting targets. This has created panic amongst entrepreneurs who are now more conscious of their need for capital and are looking at strengthening their capital structure and consolidating finances,” said Ankur Bansal, Co-founder and Director, BlackSoil.

“Due to closure of businesses, equity valuations have taken a hit and so as to avoid raising funds at a down-round, well-established start-ups are now raising debt to create additional capital buffers. These companies are also not able to raise loans from banks considering the current economic climate. With equity funding becoming dearer, banks unwilling to lend and runways getting exhausted, venture debt has become the go-to option,” he added.

Easier to avail

Anup Jain, Managing Partner, Orios Venture Partners, said start-ups post-Series A are approached for venture debt funding; it is an attractive means to raise working capital financing as start-ups are not easily accepted by traditional banks and NBFCs due to their archaic approaches to debt financing. NBFC debt is usually available at 18-19 per cent interest and venture debt, at approximately14 per cent, is thus more appealing, Jain said.

Among the firms that raised funding through venture debt this year are Dunzo, Bounce, Infra.Market, LetsTransport and Rebel Foods.

Companies have essentially raised venture debt during the lockdown to tackle valuation problems relating to the current uncertainty as well as dilutive equity rounds, said BlackSoil’s Bansal.

However, now as the economy opens up and businesses move back on track, the role of venture debt has started to regain its importance in extending runways to achieve the next milestone, improve valuations ahead of the next equity round and finance working capital and capex, Bansal noted, adding: “Increased visibility on business operations have rekindled interest of venture debt players, which is bound to manifest into larger cheque sizes.”

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