Venture debt turns favourable, as equity funding dries up

Chennai: As funding winter sets in for startups and equity venture investors tighten their purses, venture debt — debt financing for new-age ventures/startups — has started occupying mindshare of founders and is seeing brisk deal activity.
As macro conditions led to drying up of venture capital investments in the last few months, it has left startup founders in shock, and many startup employees without a job. In such a situation, investors and founders TOI spoke to say more founders are exploring debt options as compared with before the downturn, and investors too are advising portfolio startups to go for a round of debt to sustain operations.
Data from research firm Venture Intelligence shows that venture debt as an asset class has been steadily gaining importance, and the first five months of 2022 (as of May 23) has recorded 29 deals worth $190 million in venture debt, compared to 33 deals of $136 million in the same half year 2021.
Venture debt typically suits any startup (early or growth stage) that needs money to meet its working capital needs, to grow and gain metrics to project sound position to investors for an equity fundraise, to finance acquisitions / M&As, or for companies that do not want to dilute stake but need funds to extend runways and reduce burns.
“There is a visible growth trend in the preference for venture debt. As raising capital gets tougher beyond Series B, founders who raised last year, now hesitate to price their company in this climate and are looking at venture debt for buffer,” Vinod Murali, managing partner, Alteria Capital, said. “Even in early stages, founders are trying to extend their runway by a few more months or quarters in order to be attractive and healthy to raise an equity round when things get better, and are looking at venture debt for such extension,” he added. Alteria Capital has already drawn down around 75% from their second fund of Rs 1,820 crore raised last year and Murali says the pipeline is getting better.
Venture debt marketplace 8vdX co-founder Vijay Lavhale says various new business models have started tapping venture debt post the slowdown in the ecosystem starting March. “For instance, biotech is one sector that had not looked at venture debt earlier and we are seeing demand from there,” Lavhale said. “With VCs investing at a lower valuation in this environment, founders are also going for venture debt to avoid diluting too large a stake,” he added.
Stride Ventures has observed many late stage companies that were comfortably funded at high valuations now going in for venture debt for the very first time in their lifecycle. “Companies that have deferred their IPOs are seeking venture debt to a bridge the gap between now to the IPO,” Apoorva Sharma, partner , Stride Ventures said.
Venture debt firm BlackSoil has noted an increase in inbound queries. “We received 60+ leads cumulatively over Apr & May’22, which is a 100% jump in our quarterly leads generation as compared to the previous quarters,” Ankur Bansal, co-founder, BlackSoil, said. “Having said that, we are being cautiously optimistic on the deals we want to further evaluate. Robustness of underlying business model, path to profitability, positive unit metrics and longer runways are some of the metrics we are currently evaluating before taking our investment decision,” he added.