Business-to-business ecommerce platform Udaan is in advanced talks to close a fresh round of debt financing of $150-200 million through convertible notes, people in the know told ET. This will mark the second such capital infusion for the startup this year at a time when late-stage equity funding is becoming scarce in one of the world’s fastest growing startup ecosystems.
These notes, which will convert into equity at a later date, require no valuation to be ascribed to the startup currently. With desired valuations not comingtheir way, startups are resorting to these debt instruments to tide over the economic whiplash where cautious investors are demanding better unit economics and a path to profitability. Udaan was last valued at $3 billion in January 2021.
Earlier in January, the Bengaluru-based company had raised $200 million through convertible notes from a group of investors before Microsoft also pitched in, taking the total to about $225 million.
“The new tranche of funding is coming largely from existing investors while one or two new investors may also join,” people cited above said. A spokesperson for Udaan declined to comment.
Online pharmacy marketplace PharmEasy, which has scrapped its plans to go public, is also looking to raise about $100 million through convertible notes, ET reported earlier, signalling the growing difficulties for late-stage startups looking to pick up equity capital in the current environment.
Data from venture intelligence reveals that venture funding for startups fell to $2.7 billion for the September quarter this year compared with nearly $12 billion during the same period in 2021. This includes only four $100 million deals compared to 17 in the preceding quarter and 30 in the March quarter.
Several late-stage startup founders have told ET that they do not expect bigticket funding to revive before the next financial year, at least, leading them to seek alternative routes during the funding winter.
“Convertible notes (are) a good option for entrepreneurs (with) confi dence topull off an (equity) round in the next one year or so and discount the notes inthat funding round,” said Ashwin Damera , cofounder at edtech startup Eruditus , whose company has signed a $350 million debt fi nancing roundfrom Canada Pension Plan Investment Board (CPPIB).
“It’s a good bridge and it saves you from taking a down round as well asdiluting further equity —which is expensive,” he added. Eruditus — which isvalued at 3.2 billion — counts SoftBank among its investors.
Further, convertible notes are regarded as a good option for startups “as theydon’t have to service interest at regular intervals”, at a time when they are”focusing on reducing burn, showing profi ts or a clear roadmap for it”, saidanother founder of a unicorn startup.
ET reported on October 11 quoting Silicon Valley-based fund Tribe Capital’s Arjun Sethithat around 50% of the companies will have to sell or wind downglobally and in India amid the tight funding environment. “…it will be harderto raise the next rounds, unless the companies are in the top 5-10% of logosand performance; (these companies) will not have issues…” he said.
Typically, the discount in valuation through convertible notes is around 2%per month. In case a startup is able to raise equity capital within fi ve monthsafter securing the debt funding, then its subscribers will get a 10% discount forthe amount invested through convertible notes.
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