As October approached in 2020, a year that only took a turn for the worse, start-ups set out onto more hopeful paths by raising venture debt funding to continue business operations. A whopping $849 mn was raised by Indian start-ups, including some popular names like BigBasket, Gaana.com, and Livspace.
The sudden spike in venture debt funding led us to look further into the reason behind the surge. In the recent past, it has been normal for start-ups to seek Venture capital. A start-up favourite funding scheme for some time now, Venture capital does come with its limitations. It restricts the owners’ rights and causes equity dilution, which are not especially pleasing for business founders.
The March-August period in 2020 was a particularly difficult one for all businesses. Employee lay-offs, furloughs, working from home, cost-cutting, a general atmosphere of chaos was born out of the COVID-19 pandemic. Companies grappled to make ends meet and fuel everyday life with whatever revenue they could make.
In desperation, start-ups resorted to a more promising and relieving venture debt funding to keep operations running, extend the cash runway and also involves no equity dilution.Trifecta Capital, Alteria Capital & InnoVen capital were the three major venture debt funding providers that made news through startup funding during the pandemic.
COVID-19 Pandemic – A disguised opportunity for startup funding
The strong prevalence of a pandemic that crashed all markets did not deter financers or even cause scepticism while engaging in startup funding. Besides, start-ups seemed to be more profitable and promising ventures to fund. Keen observation of the market trend revealed that a fast-paced digital expansion is impending, and investors found this worth putting their money on. Newer and innovative Digital tech tools, Fintech & EdTech platforms are proof of the fact that digital is the new form of business, leading the world in a new direction.
Although venture debt funding has enforced hope in most start-ups, it has drawn attention to the acute lack of contingency plans. Since start-ups run only on short term revenue in the incubation stage, teams dedicated to contingency planning are almost nil as they fail to envision a highly volatile situation; In this case, a pandemic. In a never-before witnessed black swan event, companies have turned weak in their knees but more importantly, the need for a solid contingency plan has been felt.
Multi-national corporations and many start-ups have been functional even in work home setups, with some experiencing little to no impact on their revenue streams. This has contributed to the continuance of the market even when the pandemic was at its peak. So long as the start-ups churn out a constant stream of revenue, venture debt funding companies trying to penetrate the market will show confidence in funding businesses.
But are start-ups pleased with venture debt funding only because desperate times called for desperate measures? Or does venture debt funding have a future that will not fade off?
We believe that Venture debt funding is going to take off well in India for reasons that complement startup funding processes – they involve lesser equity dilution, fixed interest rates and extended cash runways to sustain a little longer. Key industry players project a growth of 25-30% for venture debt funding based on its increased popularity in India in the last three years and due to the overwhelming response it has received, paving the way for new financers to charge into the Indian market.
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