Bengaluru-based urban mobility start-up Bounce, for instance, recently raised $3 million in venture debt from InnoVen. This was Bounce’s second round of funding from InnoVen, taking their total debt investment to $6 million. Similarly, Alteria Capital invested ₹8 crore (via the debt route) in scooter-sharing firm Vogo as part of the startup’s Series A round led by Ola (ANI Technologies Pvt. Ltd), Stellaris Venture Partners and Matrix Partners last October. Furlenco, too, has raised up to $30 million in venture debt to date.
“When assets are involved like airplanes, hotels, furniture, you need capital to fund those assets. Since it locks in capital, you need the cheapest form of funding to fund those assets. The cheapest cost of money is through various forms of debt. It could be term loans, debentures, structured debt, asset leaseback. Furlenco uses all of these to funds its assets," said Ajith Karimpana, founder and CEO, Furlenco. “Sharing economy startups these days go through an initial equity round, and then get some assets financed via an on-balance sheet debt structures…gradually they move to more flexible off-balance sheet funding structures once they establish a track record and have credibility. Subsequently, equity capital should be used to turbo charge growth rather than flowing into asset purchase, ideally," corroborated Vinod Murali, managing partner of Alteria Capital in a phone interview.
The debt is being use to help these startups fund purchase of assets, as consumer demand picks up sharply across urban mobility and furniture rental products. Bengaluru-based vehicle rental start-up Drivezy added around 15,000 bikes in 2019 compared to just 1,574 bikes in 2018, thanks to venture debt and asset financing routes.
Furniture rental startup Furlenco claims to have amassed a gross subscription value (GMV) of $30 million till date since its launch in 2012. Drivezy, too, claims to have crossed $3.9 million in GMV when it comes to its asset size (bikes and cars).
To be sure, sharing economy startups depend heavily on asset financing and other firms or funding routes to fund the purchase of their assets (bikes, furniture, electronics, etc) when compared to other consumer Internet models.
“When we look at the sequences of sharing economy business model, there are two stakeholders. Assets originate directly from manufacturers or dealers (in case of vehicles), and a financier such as an NBFC, or a debt fund, that helps purchase this asset," Abhishek Mahajan, co-founder of Drivezy, said in a phone interview.
He added that platforms like Drivezy utilize the vehicles for a 4-5 year period and sells the asset back to the manufacturer or the OEM to salvage whatever value is left. Sometimes vehicles are also sold in the second-hand market directly after it completes its time period on a sharing economy platform.
However, return on debt investments in sharing economy space depend directly on the growth and utilization rates that the company is able to achieve.
“In debt financing, you can only end up recovering a part of the debt if the company doesn’t show sufficient growth. But rest of the unpaid amount could be repaid in collateral i.e. either the assets can be sold off to a bigger competitor, or in the second-hand market," said a top executive from a venture debt firm who requested anonymity.
When China’s Ofo, a bike sharing company shut down operations in late last year, Bounce purchased the bicycles in November 2018. While ZoomCar’s PEDL, another bike sharing service, turned to their own users to sell off their assets after PEDL was suspended in December last year.
Startups are also wary about how debt capital is managed and deployed, even though the risk factor is minimized. Drivezy announced a $100 million asset financing deal that is currently parked in a special purpose entity called Harbourfront Capital, which was established in collaboration with AnyPay in November.
“What we have done is created an SPV (Special Purpose Vehicle), which is unrelated to the parent tech company. So this additional SPV takes care of the assets on its balance sheet and gets into a revenue share agreement with the parent company. This helps Drivezy to look at different avenues to grow its usage, while the SPV will continue to focus on the primary asset financing strategies," added Mahajan of Drivezy during a phone interview.
Further, while traditional venture capital investors usually have 8-10 year outlook for a good return, venture debt investors ideally exit their investments within just 2-3 years. However, there is an inherent risk in venture debt.
"Startups with business models for which debt financing may seem like a better alternative also raise money via equity investments first because lenders in India do not finance companies that do not have the numbers...particularly in terms of cash flows and net worth. That said, it is not that these companies can go on without equity financing for long, as debt will not be available to them again if the Debt Equity Ratio is on the higher side. A higher Debt Equity Ratio indicates higher risks of bankruptcy and lenders will be wary of the same," said Vishy Vincent, Senior Associate, Dhir and Dhir associates.