In the latest sign of financial stress that the novel coronavirus is having across industries, over a dozen startups have asked venture debt firms for a longer time to pay back their debt than originally agreed, three people aware of the matter said.
Venture debt firms- specialised providers of loans to startups- are currently discussing internally on which companies they should extend relief to, considering their own challenges amid questions from their investors (limited partners), etc.
The venture debt market is dominated by three firms — InnoVen Capital, Alteria Capital, and Trifecta Capital — which collectively deployed about $300 million (or ₹2,100-2,200 crore) in startups in 2019, according to a Moneycontrol analysis, growing about 20 percent year-on-year.
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Startups have raised venture capital (equity) worth $10 billion, $9.6 billion and $9.2 billion in the last three calendar years respectively, according to data from Venture Intelligence, a startup data tracker. In mature markets like the US, venture debt is about 4-5 percent of equity funding.
Startups in sectors worst hit from the pandemic - such as travel, hospitality, transportation, and even delivery firms, have asked for 3-6 months more than originally planned. Firms that raise venture debt, generally pay back the loan in 2-3 years, although it may vary in some cases.
“Some companies in our portfolio have sought relief on payments for up to 3 months but keeping in mind that we are neither a bank or an NBFC and we don’t get any liquidity relief ourselves, we are evaluating this on a case by case basis as we have a fiduciary responsibility to our investors as well,” said Vinod Murali, managing partner at Alteria Capital.
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While about a dozen firms are currently having discussions, more could ask for an extension if the lockdown continues and their services remain suspended.
“This is a risky business and a difficult case. Medically speaking, companies which would have been in the OPD are coming to the ICU, and ones in the ICU are already dead,” said a senior venture debt investor, requesting anonymity.
“A lot of companies have asked us to extend the payback period by 3-6 months and more, but we can extend it only for the ones who really need it. Our business is under stress as well,” the person added.
The debt firms have been reviewing their portfolio companies over the last two weeks and have not made a decision yet in most cases. The possible amount of relief expected for startups is still unknown.
Venture debt has become mainstream in India over the last few years, with founders taking debt to postpone a fundraise by a few months, avoiding equity dilution and helping with cash flow.
However, debt funds tend to follow their equity counterparts - VC funds - which are clamping down on fresh deals and even pulling out term sheets -an offer for investment - in some cases, according to the people cited above.
The COVID-19 pandemic has triggered a 21-day lockdown in India which is supposed to end on April 14.
So far, startups defaulting on venture debt payments has been a rare event, with most companies ponying up the cash from the equity they have raised - where surplus capital has been available for most founders.
However, compared to equity, debt investors get a smaller upside (return) and hence take less risk as well. When a startup defaults, lenders are the first ones to be paid, before other investors and the founders themselves. The company’s assets are pledged to the lenders, who try to recover residual value.
In the event that the startup shuts down and there is no value remaining, all investors and lenders book a loss, the people cited above said.
Five investors Moneycontrol spoke to, confirmed that debt funding for the next few months will be minimal beyond what these funds already committed.
“The bar will definitely be very high for new deals and currently our focus is on our existing portfolio. We are not stopping fresh deployment as there are some deals that are further along in our process but we will be extremely cautious and understand the modified plans of companies to arrive at our appetite accordingly. Fresh deal flow is likely to improve only after 3-6 months,” said Alteria’s Murali.
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