The Next Big Debt Investors For Startups

Startup funding has been growing since the early onset of the pandemic and as of 2022, 900+ funding deals have been concluded just in H1 of the financial year by Indian investors for startups. This goes on to prove that capital will always be in demand for startups and to get funding for startup, founders cannot stay dependent on the conventional venture capital that is linked with equity.

For all capital requirements, big or small, founders cannot trade equity throughout the year. This is a very common scenario with D2C brands or B2C companies with seasonal inflows or unpredictable credit cycles. In such a case, founders should deploy debt capital that can either be accessed as venture capital or alternative debt linked with revenue or receivables.

Types of debt investors for startups:

1. Venture Debt

Contrary to traditional debt funding strategies (such as senior/secured lending), venture finance is not always backed by concrete, underlying collateral security. In general, many early-stage businesses and startups do not hold significant assets that may be utilised as collateral. For this additional risk, venture financing lenders are frequently given warrants on the company’s common stock as payment. Companies that have successfully completed many rounds of venture capital equity funding are often granted venture loans. These are often businesses with some operating experience but insufficiently positive cash flows to qualify for a more traditional loan. These businesses primarily use the finance to attain certain milestones or to buy the capital assets required to reach those goals.

2. Revenue Based Financing

Investment ecosystems frequently have blind spots, and in India, we believe that startup investors are ignoring a number of solid, profitable firms because of the VC sector’s focus on high growth companies. Not unicorns, but these gazelles are what we’re after. Large organizations might choose to use internal accruals, stock, or debt to fund future development when a company needs funds to expand. Even when they start to make money, entrepreneurs don’t have the same freedom of choice. Banks are reluctant to lend to them; venture capitalists (VCs) are not interested in their models since they don’t operate in a high-growth industry; and it’s still difficult to find venture financing because the pool is still so limited. Startups that wish to expand naturally realize that they are only able to use the money they make, which interferes with their ambitions. RBF, or revenue-based financing, is a new alternative that we are also actively investigating. In exchange for a combination of revenue share, stock, or warrants—the entrepreneur chooses how he wants to arrange this—we provide growth capital to successful firms. Everyone benefits from this timely inflow of cash since it can help him expand more quickly. Due to the emphasis on unit economics, startup investors like Klub provide flexible funding and can assist the founder in growing the firm economically.

3. Invoice Discounting

A firm sells an invoice to a third party, sometimes referred to as a finance company, through the process of invoice discounting. The firm receives a portion of the sum billed to the customer immediately after selling an invoice, and the finance company is in charge of obtaining the complete amount due from the buyer. Businesses can improve their working capital cycle and cash flow by selling their invoices in order to obtain rapid cash. Businesses who don’t want to or can’t wait for their customers to pay their invoices sometimes turn to invoice discounting as a source of finance. In place of more conventional financial instruments like loans and overdrafts, it is a highly well-liked substitute.

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