Start-ups: sustainability and growth lie in diversity of capital, according to an analyst
By Shivam Bajaj, Founder and CEO of Avener Capital
As equity investors tighten their markets, start-ups seeking growth capital should explore a diverse pool of resources comprised of an optimal mix of investments from venture capital firms, family offices, HNIs and revenue-based finance companies. The best part of such a broad approach can help founders raise funds that complement their business model and avoid excessive equity dilution.
Much has already been written these days about the so-called “long winter in funding” that has cast its shadow over the start-up ecosystem. Big backers of new age tech companies – from SoftBank Vision Fund to Silicon Valley venture capital giant Sequoia Capital in different missives have warned founders of a dry spell.
The message: don’t expect us to cut the next check anytime soon and they (investors) will be thinking about new funding after portfolio companies start making profits. Investors may not be ready to shell out more equity for less money as valuations have fallen. As a result, there has been an erosion of equity flows into the startup ecosystem due to central bank policy tightening measures across the globe accompanied by rate hikes to deal with the inflationary impact. .
Headlines about private investment in the start-up space support this theory. According to a recent report, venture capital/start-up investments in April 2022 decreased by 50% year-on-year to $1.6 billion across 82 deals. The decline is mostly attributed to the lack of any big deals or new unicorns. These numbers, however, only tell part of the story.
Lean start-ups that deploy their capital cautiously and preserve it, grow at a faster rate, thereby adding value to investors, don’t have to worry about raising fresh capital. Instead of the conventional equity route, they should consider a diversified capital pool such as venture debt, family office and HNI investments, and revenue-based financing to meet their financing needs. This diverse perspective can help founders raise capital without diluting other equity.
There is already a list of start-ups that have managed to sustain their growth by adopting this strategy. For example, CureFoods Pvt Ltd cloud kitchens and online restaurants only cap chart shows that the company has secured funds from a pool of sources. Its capital providers include Chiratae Ventures and Accel Partners for equity, Alteria Capital, Blacksoil capital and Trifecta Capital for venture capital debt and HNIs such as Flipkart co-founder Binny Bansal, actor Varun Dhawan and more. as long-term individual investors.
Another such example is the startup Clensta International Pvt. ltd. which has also secured funds from a diverse pool of investors which includes an N+1 capital income based debt fund.
A closer look at a number of start-ups’ sources of capital also reveals that the founders saw the writing on the wall – “money isn’t free anymore” – well in advance and reorganized their funding strategy accordingly. This is reflected in the amount of venture capital debt deployed in the start-up space which indeed doubled to $538 million in 2021 from $271 million in 2019, according to `India Venture Debt Report 2022 ‘ from Stride Ventures’.
Similarly, many investors offer revenue-based financing, which allows the startup to live within its means. Financing providers such as N+1 Capital offer both venture capital debt and revenue-based financing solutions. Additionally, over the years, family offices and HNIs as individual investors are doubling down on high earnings visibility technology companies with their private money.
However, the central issue to be reckoned with is the fact that a one-size-fits-all approach may not work in a rapidly changing financial scenario. Every start-up has its own financing needs and should seek a source of capital that offers optimal value. Therefore, it is prudent for them to partner with experts who can effectively guide them through their funding cycle.