Ag-tech start-ups eye venture debt as quick fix to meet funding needs

As raising capital becomes tough in the prevailing economic situation triggered by Covid pandemic, more agri-tech start-ups are looking at venture debt financing to fund their working capital requirement and expansion plans.

Over the past few weeks several start-ups such as Stellapps, Milk Mantra, Waycool Foods and Clover among others have raised funds through venture debt financing to meet their funding needs.

“Venture debt round is relatively easier to raise as it is a collateral-free loan. Compared to standard working capital loan and term loan, venture debt is much more faster to source funding,” said Ranjith Mukundan, CEO and Co-Founder of Stellapps Technologies, a Bengaluru-based firm focussed on automating dairy sector. Stellapps raised an undisclosed sum from Stride Venture in its second round of venture debt recently.

However, Mukundan said the venture debt is slightly expensive compared to traditional debt lines as the interest rates are higher and also the companies may have to shed some equity as part of structured deals.

Ishpreet Singh Gandhi, Founder and Managing Partner, Stride Venture, said the demand for venture debts from start-ups is on the rise as companies beef up their war chest to expand operations. In the current scenario, where valuations have taken a hit, venture debt is far cheaper option to raise funds than diluting equity.

Strides, which has done some five venture debt transactions with an average deal of ₹15-20 crore each in sectors such as dairy tech and EdTech, is eyeing more transactions in areas such as warehousing and marketplace for farmers among others, Singh said.

Mark Kahn, managing parter of Omnivore Ventures, said more start-ups are looking at debt fund because they want to raise funding without further dilution, especially since the valuations have moderated given the crisis. Also, some agri-tech companies have reached a scale where debt makes more sense than equity, either to fund working capital or to fund lending to farmers, Kahn said.

Chennai-based WayCool Foods raised $5.5 million from IndusInd Bank through debt financing as part of its Series C round, guaranteed by US International Development Finance Corporation (DFC). Similarly, Bhubaneshwar-based dairy start-up Milk Mantra raised $10 million in structured debt from DFC.

Aman Khanna, Managing Partner, Setuka Partners LLP, who advised the Waycool deal, said the Indian ag-tech start-ups are unable to obtain suitable debt from local banks and even most NBFCs either because of the lesser track record or profitability issues, despite being well capitalised with equity from international or local PE and VCs. For ag-tech start-ups in particular, working capital debt is hard to obtain as banks typically ask for additional collateral beyond the underlying receivables and NBFCs are more expensive.

Further, Khanna said that plain vanilla debt financing is generally not suitable for start-ups if they are not well capitalised as servicing such debt can be an undue burden on already strained cash flows that are better deployed in growth and proving the model. It is for this reason that structures that provide for lower debt service in exchange for some equity-risk (venture debt) are gaining popularity, he added.