Venture debt funding hits 25-quarter high in Q1 2021

The amount of funding raised through venture debt hit a 25-quarter high in the January to March quarter of 2021. According to data from Venture Intelligence, a firm that tracks private companies’ investments, financials, and valuations, venture debt funding raised by Indian companies in the first quarter of the 2021 calendar year shot up to $91 million.

Debt investments led by Alteria Capital, Trifecta Capital, Stride Ventures, BlackSoil Capital, Anicut Capital, and InnoVen Capital have been considered here for the analysis.

Higher funding amount

“ Founders have started understanding the benefits of having debt on one’s balance sheet and utilising the same to build assets.

“At the same time, start-ups which showcased their resilience during the pandemic, pivoted their business models if required, and maintained sustainable unit economics have found it easier to gain a higher ticket size of venture debt funding before going for the next equity round,” said Ankur Bansal, Co-founder and Director, BlackSoil. Early-stage start-ups and growth-stage companies avail of venture debt financing — primarily between equity rounds — to reduce equity dilution, and at the same time to extend their cash runway, amplify growth rate, and reach profitability to get better valuations.

Fewer deals

The number of firms that availed venture debt funding in Q1 2021, however, stood at 11, vis-à-vis 15 firms that availed it during the same period last year, per data from Venture Intelligence.

Bansal said that this is because, in the January to March quarter this year, as the economy began to get back on track, start-ups started availing venture debt as a long-term funding option rather than bridge financing, which led to the increase in deal sizes.

Even venture debt investors are looking to allocate larger capital to a few start-ups that have emerged as winners in the pandemic and are more likely to go for a bigger equity round in the near future, Bansal added.

Benefits

Funding for working capital, acquisitions, capital expenditure (capex)/order book financing are among the various use cases for venture debt funding these days, experts said.

There are some obvious benefits of raising venture debt, said Anil Joshi, Managing Partner, Unicorn India Ventures, adding that since it is like a loan, founders don’t have to part with a large chunk of their stakes; it is serviced out of the revenues just like an EMI along with an interest component and venture debt funds always get paid first.

With the second wave of Covid infections more deadly than the first, most firms are better prepared for a cash crunch this year than last time. Investors have already identified sectors that performed well during the first wave and will be looking to invest in them, Bansal noted.

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