Startups turned to venture debt amid funding winter. Now they’re facing the heat

Venture debt backers, typically loath to accept such requests, are faced with a quandary: which one to honour, based on which startups are more likely to survive.

The Good Glamm Group, backed by venture debt firms including Stride Ventures, Alteria Capital and Trifecta Capital, has aligned its equity fundraises in line with venture debt.

Over the last three years, as the content-to-commerce platform repaid its existing debt, it also had been simultaneously raising fresh venture debt at better terms whenever it raised equity, said a person familiar with the developments.

Supply chain startup Reshamandi and retail-tech startup Arzooo are also among startups that have sought concessions for their debt repayments, multiple people aware of the matter told Mint.

Venture debt complements equity financing and may be used by early and growth stage companies to ease liquidity concerns and make significant progress until their next fundraising round. The debt is usually underwritten by the backer for a fixed period, and involves monthly repayment structures with a coupon rate.

The requests for extended repayment timelines does India’s startup ecosystem no favour, especially given the persistence of the funding winter.

Delayed payments and salaries

Reshamandi, which raised about $6.2 million from Stride Ventures, has asked for a one-year extension as it struggles to pay vendors, one of those people said.

Arzooo raised $2.4 million from Trifecta in September and also counts Alteria and Stride among its investors. In March, Mint wrote about delayed salaries at the startup.

At the time, a spokesperson conceded a cash crunch but said “recent infusions of capital from existing investors and upcoming investment” had helped the company deal with the situation.

Last month, Mint reported that agri-tech startup Waycool Foods and Products Pvt. Ltd has also made similar requests for extended repayment timelines to its venture debt backers.

The startups and the venture debt firms did not reply to Mint’s queries on any delays in debt repayments or the extension requests.

A dilemma

Lenders do not always accept requests for repayment extensions.

A consumer-focused company that had no plans to raise equity from new or existing investors recently approached a prominent venture debt firm to restructure its debt, but the lender declined because of a lack of clarity on how the debt would be repaid, a person familiar with the matter told Mint, requesting anonymity and declining to name the company.

Lenders realise that a good performing debtor is better than a bad performing one, said Sandeep Murthy, managing director at venture capital firm Lightbox India Advisors.

“Even if you change the terms, and you extend the period, if the company exists to be able to pay back and continues to pay back with that same interest, that’s a good outcome,” said Murthy.

While such cases still make for a very small percentage of venture debt companies’ portfolio, debtors are willing to cut some slack for companies that have a great potential to bounce back and are just in need of some debt to navigate an interim liquidity situation.

The prerequisite for making allowances also depends on how readily equity investors, existing or new, are willing to invest in a company.

“In general, our approach is that if there is any kind of flexibility sought by portfolio companies, it must come with concerted effort from all stakeholders,” said Rahul Khanna, managing partner at Trifecta Capital.

“What venture lenders do in such cases depends largely on what additional support the equity investors are willing to provide, and what changes the management is making to conserve capital and reduce the operating burn,” he added.

Companies that are stretched for capital should first prioritise reducing fixed costs, among other things, Khanna said. “There are many other things that they need to do before recalibrating their debt which should ideally be their last resort.”

Green shoots in sight

Venture debt backers considering extension requests also assess if they will be compensated by way of additional warrants or coupons or any other form of security as there needs to be a greater incentive to take additional risks.

“There will always be a couple of companies in a year that may need some support so that they can cross that line of being able to clean up the debt,” said Ankur Bansal, executive director at venture debt firm Blacksoil, “but also, at the same time, come to a situation where the business starts thriving again.”

Founded in 2010, Blacksoil has deployed about $300 million over 120 transactions and backed startups including Oyo, Spinny, Udaan, Mobikwik, and Dunzo.

Khanna of Trifecta Capital said that while the pace of investments has been slow, he sees green shoots in early-stage deals and expects growth-stage investments to also pick up later this year.

Last year, India’s venture-debt market surpassed the billion-dollar mark at $1.2 billion as rising confidence from founders, venture capitalists and investors fuelled deals in the sector, according to a report published by Stride Ventures in February.

With a growing preference for one-stop debt solutions that simplify fundraising and financial packages for startups, the trend reflects the market’s maturity and the increasing sophistication of venture-debt solutions tailored to the needs of companies, the report said.