Startups, tired of chasing angel investors, are now simply borrowing money to make ends meet

Startups are no more interested in wooing investors. They are now applying a new method to get funds. They are borrowing money to meet working capital needs as their eye-popping valuations are finally beginning to taper off.

This is a radical departure from just a few months ago when they collected money by selling stakes to venture capital firms, hedge funds and deep-pocketed businessmen all vying for a piece of India's rapidly growing e-Commerce market.

Take an example of Zoomcar, a car rental company. It has borrowed Rs 12 crore in two tranches from Innoven Capital, a debt venture fund, to meet its working capital needs rather than approaching investors again. It had raised equity capital worth $11 million from Sequoia Capital and a few other investors last year.

Debt venture funds like Innoven raise money from institutional investors and lend to startups. Innoven has loaned money to established enterprises such as Snapdeal, Myntra, Practo, Freecharge, Yatra.com and Firstcry recently.

Besides Zoomcar, other startups such as mobile wallet MobiKwik, memorabilia e-retailer Collectabillia, edu-tech firm Embibe, transportation venture MoveInSync, food chain Faasos and app maker AppsDaily, among others, have shifted to debt funding since April this year.

While entrepreneurs see venture debt as an additional source of capital, the shift points to a growing wariness among investors about startup valuations. Many investors have begun to question the sustainability of the business model of e-Commerce companies, which is centred on the idea of gaining market share at any cost often with scant regard to the possibility of making real profits.

"There's definitely a higher intensity of discussion around valuation these days as the fund-raising environment is showing signs of cooling off," said Vinod Murali, managing director, InnoVen Capital. Startups have taken note. Rahul Khanna, managing director, Trifecta Capital, said people are expecting a correction in the valuation of startups and promoters, therefore, want to retain more capital now. "It's like buying insurance; if the next round of funding is delayed, they'll still have enough money to run the company," he said.

Trifecta is the latest venture debt fund to join the likes of Innoven, Intellegrow and Capital Float, among other unorganised NBFCs, which are complementing the shift in strategy of startups.

Trifecta said it has a pipeline of deals with more than 60 companies. Innoven said it has funded more than Rs 760 crore in India through 90 deals across 60 companies.

This new strategy is enticing for startups. A good capital mix gives entrepreneurs more time to grow the business — and avoid the rat race — while a lower equity dilution allows them to retain control of their companies.

In recent years, startups have raised debt of over Rs 1,500 crore, according to fund managers. There is actually a pent-up demand for debt funding, according to Khanna.

Venture debt funds, which lend money to startups at rates of 15-21% a year, are not strictly debt funds. They are structured in a way to allow the lender a minor equity participation as well. While lending money to startups, most venture debt funds demand an equity kicker, usually 1-2% of the loan. An equity kicker allows the fund to partake future profits, a right that must be exercised either during the life of the fund or the tenure of loan.

(Image: Indiatimes)