Venture Funding: A Cautious Road Ahead

With venture funding falling to a 5-year low, especially post the spread of coronavirus in India, it will be interesting to evaluate the impact on and the road ahead for Venture Debt in particular.

Complimentary to Venture Capital, Venture Debt or Venture Loan is a short-term debt-like instrument used to supplement equity financing in start-ups. Regular VC funding would have an immediate effect on equity valuation. However, Venture Debt funding aids cheaper financing along with low equity dilution. The fund provided is usually calculated based on a set percentage of the last fund raised in equity. Hence, usually, start-ups having raised Seed and Series A funding are eligible for Venture Debt funding. Venture Debt terms sheet determines whether it is secured against assets or not and that determines its riskiness. In the last decade, Venture Debt funding has been growing tremendously. The top 3 Venture Debt financing firms – InnoVen Capital, Alteria Capital, and Trifecta Capital – have given out almost $300 million in venture debt to start-ups.

Venture Debt is derived from Venture Capital and hence, a trend in VC funding helps us anticipate the trend in Venture Debt financing.

The above table clearly shows that the Venture deals have fallen to a 5-year low in the January to March 2020 quarter. This quarter is also characterized by the coronavirus pandemic. It indicates that Venture Capitalists are turning very cautious.

The lack of the latest deal numbers available makes it difficult to draw the exact impact of this fall in Venture deals on Venture Debt. However, an evaluation of the steps taken by some prominent VCs comes to aid here.

Early-stage funding supports VCs in the initial phase since the first round of funding has been received from external investors and they are dedicated to the start-up’s performance.

According to Sanjay Khan Nagra, partner at Khaitan & Co., early-stage investment in ed-tech, health-tech and cybersecurity start-ups may remain active even amid this pandemic. Even Anil Joshi of Unicorn India Ventures expects a positive outlook on ed-tech, health-tech, agri-tech and fintech VC funding this year. However, Mr. Sanjay expects the overall VC deal numbers to stay low due to the spread of the pandemic.

Some of the recent deals in the above-mentioned sectors also justify their statements to a quite high probability:

1. Juspay, Recko (Fintech start-ups) raise Series B and Series A funding.
2. Akna Medical (Health-tech start-up) raised $7 million in Series A funding from LGT Lightstone Aspada.
3. Qure.ai technologies (Health-tech start-up) raised $16 million from Sequoia Capital.
4. Innovaccer Inc. (Health-tech start-up) raised Rs. 500 crores from Steadview Capital, Tiger Global, and WestBridge Capital.
5. Green Agrivolution’s start-up DeHaat (agri-tech start-up) raised $12 million in Series A funding from Sequoia Capital.
6. FarmERP (agri-tech start-up) raised Series A funding from TechnoGen IT Services India Pvt. Ltd.
7. Lido Learning (ed-tech start-up) raised $7.5 million in Series B funding from BAce Capital.
8. Camp K12 (ed-tech start-up) raised $4 million from Matrix Partners and SAIF Partners.

Venture Capitalists have capital in hand to invest. They are going to be very cautious about their investments. The investment would not stop altogether. However, some VCs may skew towards risk-aversion.

In the short-term Venture Debt deals may see a rise due to depressed valuations. However, the terms used by these executives like “raise the bar” and being “selective” of where they are investing, indicates that investments will happen, but at a slower pace. Thus, nothing can be said as to how the Venture Capital and Venture Debt funding will change because of the pandemic. However, increased caution is certain among them all.