Startups Choose Debt Row Over Death by Equity Dilution

As flood of easy money dries up, startups put a stop to equity dilution to cash in later
As private equity and venture capital investors are tightening and consolidating their investment portfolio in the startups space, an increasing number of startups are getting sensitised with the new emerging `funding climate’ and are too looking towards debt funding to avoid further equity dilution as valuations are already under pressure and most of them are preferring to dilute equity at a later stage to fetch a better valuation.Ahmedabad-based startup Lendingkart, recently raised an undisclosed debt fund from IFMR Capital instead of raising funds from a PE or VC. Backed by Mayfield Fund and Saama Capital, Lendingkart believes it will raise funds via equity dilution at a later stage when the market improves. “Venture debt finance options lets us conserve our equity holdings for future use“ said Harshvardhan Lunia, the CEO of Lendingkart.

Similarly, Mumbai-based startup Faasos which also raised $3 million via debt finance from InnoVen Capital so far, believes that most startups today, if given an opportunity, will opt for venture debt.

“Venture debt resolves two most critical elements -lesser dilution in stake and availability of funds at cheaper cost than equity. Venture debt is a good compliment to equity and it gives an additional cushion to startups and sometimes it also provides a runway between two rounds of equity funding“ says Revant Bhate, the cofounder of Faasos.

In recent months, startups like Lendingkart, Faasos, Embibe, Edusys Global, MoveInSync, Collectabillia, Capillary, PepperTap, FirstCry, Snapdeal, Manthan, Toppr, AppsDaily, MobiKwik, Pow er2SME, Practo, Portea, Byju’s Classes, Rivigo, Helpchat, NephroPlus and Industrybuying.com have raised debt fund from debt financing companies such as Innoven Capital, Trifecta Capital and IFMR Capital.

NEW FUNDING CLIMATE “Entrepreneurs and startups are now sensitised to new `funding climate’.When lots of capital was available they raised as much as they could and as they see the funding climate changing, they are trying to make sure that they adjust (to new funding climate),“ says Rahul Khanna, managing partner, Trifecta Capital, a venture debt-fund compa ny. According to him, all the under lining factors have not changed compared to last year and this year, the only thing that has changed is the fact that valuation had crept up significantly and at some point investors have said `if I come at this valuation, I am pretty not sure how would I make my money’.

“Equity is the most expen sive form of financing and everybody benefits if company raises from venture debt, fundamentally capital raised via debt is at a lower cost“ says Khanna. Trifecta has raised a Rs 200-crore fund and had already disbursed Rs 50 crore as venture debt funds to Rivigo, Helpchat, NephroPlus and Industrybuying.com. In the next six to nine months, it has set a target to raise another . 300-crore fund as it finds 2016 to be at` tractive for venture debt funding. Rising demand from startups for debt financing can be seen from the recent data of InnoVen Capital, where it has funded in total 98 transaction across 70 startups and typically one-third of its deals are repeat transactions with its existing clients.

 Source: The Economic Times
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Author:

Neeraj; an entrepreneur & a visionary in the field of Railway, Defense & Automobiles, is a graduate in commerce and a Harvard Business School Alumni. He’s an expert in govt. liasoning & contracting and has an exceptional network & connections at both local as well as global level. He’s an expert in Market Strategy & Planning and has served number of overseas companies as an advisor/consultant. He takes a profound interest in upcoming startups & is very receptive towards ground-breaking ideas & innovations. He likes to brainstorm those ideas and if the values & philosophies matches; he is even ready to invest his resources, serve as a mentor or act as an incubator to futuristic businesses.

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