Home / Companies / Start-ups /  BillDesk, Byju’s, Zetwerk, Swiggy among startups hit by defaulting investors

Mumbai: A growing number of startups have seen investors renege on binding contracts or share purchase pacts in the past few quarters, a trend that is likely to exacerbate, said several executives, as a funding winter engulfs the broader startup ecosystem.

Startups that have faced investor default over the last six to eight months include BillDesk, Byju’s, Zetwerk, Goqii and Swiggy, said the executives familiar with the potential deals, on the condition of anonymity.

On Monday, Prosus NV, the investment unit of South Africa’s Naspers, said it was walking away from buying payments service provider BillDesk in an all-cash transaction of $4.7 billion after the long stop date to close the deal expired.

Similarly, Zetwerk announced on 29 December that it had raised $250 million from several investors, including Iconiq Capital, in a deal that valued the business at $2.7 billion, but Iconiq Capital did not follow through with the capital commitment, said two people familiar with the matter. Zetwerk and Iconiq did not respond to requests for comment.

Sumeru Ventures’ share purchase pact with Swiggy was also terminated as the investment did not come through, said two people briefed on the matter. Swiggy declined to comment.

In March, Byju’s announced that it had signed agreements to raise $800 million from investors, including Oxshott Ventures and Sumeru Ventures, but in July, the edtech platform said that a sum of $250 million that was due from these two investors was never wired in.

Sumeru, which did not return a request for comment, also did not fund healthtech startup Goqii, news website Morning Context reported in July.

It is not unusual for investors to walk out of deals after conducting diligence or at the term sheet stage. But it is rare for investors to walk out after signing binding contracts and share purchase agreements.

“In 2021, as an investor, you did not want to make errors of omission. In 2022, you do not want to make errors of commission," said Kashyap Chanchani, managing partner at investment bank Rainmaker Group, which has advised tech startups on fundraising. “Handshakes don’t matter anymore. Money in the bank does. Given the volatility, this trend will continue for at least the next quarter, if not beyond," he said.

Startups are not without options, though, lawyers said, but the process would be long drawn out and would likely test contract law.

On Monday, Mint first reported that BillDesk shareholders had appointed AZB & Partners and Shardul Amarchand & Mangaldas to explore legal options that could compel Prosus to close the $4.7 billion deal.

“Strictly speaking, if an investor has decided not to proceed with the transaction after execution of definitive documents, then target and/or promoters have a right to initiate legal action against the investor and if the facts support, even claim specific performance of the contract," said Yashojit Mitra, partner, Economic Laws Practice, a law firm.

However, from a practical perspective, many of the investment agreements have condition precedents or ‘material adverse change’ clauses, which allow investors a way out. “Typically, investors would allege that some of the conditions that were agreed as conditions to be fulfilled prior to investment have not been complied with and therefore they have no obligation to invest," Mitra added.

This may happen when investors feel there has been a major deviation in the business from what was proposed at the time of the investment. It can also happen if there are capital contribution issues faced at the fund level due to global recessionary or geo-political uncertainties, Mitra said. “Many investors also negotiate a condition precedent stating that their investment will be subject to ‘investment committee’ approval, which can effectively be used by them if they take an internal decision not to invest," Mitra added.

According to multiple lawyers, there are several other instances of startups that are still to receive the promised capital. Details of such transactions have not been made public.

“We are coming across many instances of investors walking out of a binding contract," said Saurav Rajgarhia, partner, IndusLaw. Sometimes the contract may specify that a 10-20% drop in valuation because of missed growth milestones would constitute a MAC, “but there are instances when the MAC is not clearly described," he added.

Most contracts provide for a ‘specific performances’ clause, wherein a court can compel the investor to perform the obligation that was committed. Similarly, there may be a ‘damages’ clause in the contract, which the startup could invoke if the investor chooses to walk away, Rajgarhia said. According to him, it would depend on the contract in play, but there is not much that startups can do if the long stop date expires before the contract can be concluded.


“It would depend on the commentary within the contract (if it) compels both parties to “endeavour towards deal closure", if government approvals are pending," he added.

Eventually, startups may not want to invest as much time in pursuing these cases against investors legally, choosing to instead focus on the business. Sometimes, they may not have the wherewithal to pursue it quickly enough in courts before capital runs out for business operations, said Abhishek Sharman, founder and managing director of Carpediem Capital.

“Startups may have legal provisions safeguarding them in their contracts, but they might not have the money to fight the case in many instances. Legally forcing an investor to concede to disburse the capital promised may not happen in time for startups," said Sharman.

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