Bengaluru: Online furniture store Urban Ladder Home Décor Solutions Pvt. Ltd has raised $3 million in venture debt from Trifecta Capital, joining a growing breed of start-ups which, after raising substantial funds during the funding boom last year, are seeking venture debt to meet their working capital requirements amid the current slowdown in funding.
According to documents filed with the Registrar of Companies, the latest tranche of cash came in June against the issue of non-convertible debentures and compulsorily convertible preference shares.
Compulsorily convertible preference shares are those that have to be converted into ordinary shares after a predetermined date, while non-convertible debentures are unsecured bonds that cannot be converted into stock or equity, but have a higher interest rate than convertible debentures.
“Debt capital makes sense given the cost of capital is lower. Every time you raise equity, you dilute stake and you can’t recoup that ever. Debt is far cheaper. Only thing about debt is, you have to be confident of your repayment ability. It will give the company an additional runway of three to four months. Now, will that additional runway of four months help the company grow the business by an additional 30%? If that additional growth helps improve your valuation and avoid dilution of stake, that is a good enough value you have generated," said one person aware of the development, on the condition of anonymity.
Urban Ladder declined to comment.
Urban Ladder is one of the most well-capitalized online furniture businesses, backed by TR Capital, Sequoia Capital, Steadview Capital, SAIF Partners and Kalaari Capital. The company has raised about $77 million so far, the last being a $50 million round in April 2015. Urban Ladder competes with Pepperfry (Trendsutra Platform Services Pvt. Ltd), which has so far raised $128 million from Goldman Sachs, Norwest Venture Partners and Bertelsmann India Investments, among others.
Both companies are striving to stave off competition from younger rivals such as Homelane (Homevista Décor and Furnishing Pvt. Ltd) and Livspace (Home Interior Design E-commerce Pvt. Ltd), which are enticing shoppers with customized end-to-end home interior services.
Venture debt is becoming popular among start-ups, as venture capital firms are tightening their purses, raising questions over unproven business models of start-ups.
Investors are wielding strong control over portfolio companies, as a funding slowdown helps shift power back to them after more than a year, when start-ups were spoilt for choice given the number of backers. Apart from demanding that start-ups slow expansion, slash costs and cut discounts, many venture capital firms are setting performance milestones; some investors are only releasing funds in instalments, Mint reported on 15 January.
Venture debt providers lend $1-5 million at an interest rate of 15-17% to start-ups.
They usually invest in companies that have already raised series A funding or they come along with an equity investor while lending to these firms. In some cases, the lenders have the option to convert a portion of their warrants into equity.
Of late, early stage start-ups as well as more mature ones have opted for venture debt.
For instance, InnoVen Capital India, a venture debt firm backed by Singapore’s sovereign wealth fund Temasek Holdings Pvt. Ltd, has given loans to companies such as doctor discovery portal Practo and online marketplace Snapdeal, which have raised $124 million and $1.5 billion, respectively.
InnoVen is also close to investing about $5 million in budget hotel aggregator Oyo, said two people aware of the development, who did not want to be named.