Franklin Templeton India crisis: Startups feel the jitters

It seems things just can't get any worse for the fledgling startup ecosystem of the country. If crashing revenues and an uncertain investor environment were not enough, it now appears that the money they have raised also seems to be under stress.

Franklin Templeton shutting down six of its debt mutual funds has made the startup and the venture capital ecosystem jittery. The chatter from the morning among founders has centred around the need for them to withdraw from such debt funds.

"It is a very common practice among startups to park money in debt funds. They prefer them over fixed deposits mainly because of higher returns. Every investor is now asking founders to withdraw money from these funds citing uncertainty," said a founder of a startup on condition of anonymity.

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Another chief executive of a Bengaluru-based startup said that generally the board of directors approve of liquid funds where the money can be parked. And if it is for the long term, then companies park in year-long fixed deposits.

Startups raise millions of dollars from investors through multiple rounds and not all of that is put into operations. They keep the extra money parked in fixed deposits and debt mutual funds. They keep drawing from the funds as per their requirements.

The choice of fund is decided by the board of directors. In case of early stage startups, the decisions are usually taken by the investors or the accelerators that they would be part of.

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"We had done some research and our initial estimates had suggested that there would be liquidity issues in the market and debt funds were not the safest place to park the money in such an environment. Most of my portfolio companies have already withdrawn from such investments,"
said a top executive at a venture capital fund which invests in early stage startups.

Given the situation, fixed deposits will now find favour among these startups. But it is more of a sentiment than facts since there are multiple other debt funds in the market which have not faced closure.

With the economy grinding to a halt because of the pandemic and the ensuing lockdown, there has been surplus liquidity in the market. But banks are reluctant to give credit to smaller entities and instead are parking their money with the central bank at much lower interest rates. Given the lack of liquidity in the market, Franklin Templeton decided to shut down few of its mutual funds mainly to protect its investors.