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 B2B 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 coming their 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.
Sharp fall in equity funding
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.
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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 big-ticket 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) confidence to pull off an (equity) round in the next one year or so and discount the notes in that funding round,” said Ashwin Damera, cofounder at edtech startup Eruditus, whose company has signed a $350 million debt financing round from Canada Pension Plan Investment Board (CPPIB).
“It’s a good bridge and it saves you from taking a down round as well as diluting further equity —which is expensive,” he added. Eruditus — which is valued at 3.2 billion — counts SoftBank among its investors.
Further, convertible notes are regarded as a good option for startups “as they don’t have to service interest at regular intervals”, at a time when they are “focusing on reducing burn, showing profits or a clear roadmap for it”, said another founder of a unicorn startup.
Venture debt also in demand
ET reported on October 11 quoting Silicon Valley-based fund Tribe Capital’s Arjun Sethi that around 50% of the companies will have to s