Venture debt bites as startups struggle to repay
When the fund-raising route began drying up for startups a couple of years ago, several turned to venture debt. But with the macroeconomic environment getting tougher, some of those startups, including the Good Glamm Group, are now negotiating extensions for repaying those loans.
Venture debt backers, typically loath to accept such requests, are in a quandary: which one to honour, based on which startups are more likely to survive.
The Good Glamm Group, backed by venture debt firms such as Stride Ventures, and Trifecta Capital, has aligned equity fund-raises in line with its venture debt.
Over the past three years, as the content-to-commerce platform repaid its existing debt, it also simultaneously raised fresh venture debt at better terms whenever it raised equity, said a person aware of the developments.
Supply chain startup Reshamandi and retail-tech startup Arzooo, too, are among startups that have sought concessions for their debt repay-* ments, 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 a 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 continuing funding winter.
Reshamandi, which raised about $6.2 million from Stride Ventures, has asked for a oneyear extension as it struggles to pay vendors, one of the people cited earlier 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 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.
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 citing 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 realize 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 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 firms that have potential to bounce back and need debt to navigate an interim liquidity situation. The prerequisite for making allowances is also how readily equity investors, existing or new, are willing to invest in a company.
“In general, 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 prioritize reducing fixed costs, among other things, Khanna said.
Companies that are stretched for capital should first prioritize reducing fixed costs, said experts