Debt financing preferred route for new age startups

Many companies which were earlier funded at high equity valuations are now going in for venture debt for the first time.



Reuters file photo
Reuters file photo

By H. P. Ranina

Published: Sat 18 Jun 2022, 3:53 PM

Last updated: Sat 18 Jun 2022, 3:56 PM

Question: Younger generation of NRIs want to set up a base in India and are planning to go into startups. However, most of the venture capital funds are reluctant for equity funding. What is the reason for this?

In recent months there is a visible preference for debt financing for new age startups. Macro conditions at present have led to drying up of equity funding in the last few months. Those entrepreneurs who thought they would raise equity capital have been left high and dry.

Data from research firms clearly indicates that venture capitalists will only invest by way of debt in a new startup. Venture debt typically suits a startup which needs money to meet its working capital needs. After their initial success, equity funds are easy to raise. Therefore, several new business models have started tapping venture debt as a preferred form of financing. In fact, the biotech sector is now virtually funded through venture debt rather than equity capital. Many companies which were earlier funded at high equity valuations are now going in for venture debt for the first time. Some companies which have deferred their IPOs are seeking venture debt to bridge the gap.

I had booked a flat with a builder and entered into an agreement which has been registered with the appropriate authorities. Thereafter there was some delay by the builder in meeting with his obligations. Certain disputes arose and a meeting was called by the builder with the flat owners. Some discussions took place at the meeting and the builder claims that the written agreement stands modified to that extent. Is he legally right?

If an agreement with the builder stipulates that possession of the constructed property would be given by a particular date, such date would be binding on the builder and would not get extended simply because there is some oral agreement or arrangement at a later point of time with the buyers of the property. In a recent decision, the Bombay High Court held that a written agreement between a builder and a buyer would not be superseded by a subsequent oral understanding. The High Court upheld the appellate tribunal’s order which directed refund of the amount paid as advance towards construction of the property by the buyer. Therefore, if the builder has given a commitment to give possession of the completed property, alongwith a certificate of completion from the municipal authorities, by a particular date, any delay in doing so would amount to breach of contract by the builder. A buyer is entitled to refund and compensation under section 18 of the Real Estate Regulation Act where there is failure on the part of the builder to give possession of the flat by the date mentioned in the agreement.

I have been working in restaurants in the Gulf for the past several years. With my experience I wish to set up a restaurant in one of the smaller cities in India. Is there scope for fine dining in such cities?

The food and online dining business has grown by leaps and bounds in the non-metro cities of India. This has happened during the pandemic period when experienced staff members were forced to leave their jobs in metros like Mumbai, Delhi, Bengaluru, etc. They went back to their smaller cities and towns and while being at home started online dining services.

This has resulted in a demand for fine dining. Further, it has been found that persons living in Tier I / Tier II cities have the same spending power as those living in metros. Continental food, South East Asian delicacies, Middle Eastern cuisine have become hot favourites.

Most of the investors who have a chain of restaurants in various cities of India have found that their outlets in the non-metro cities are more profitable than the outlets in the metros. This is on account of the growing demand for new restaurants in the smaller cities as well as the fact that the expenses by way of rent, labour, cost of food stuffs, etc. are far lower in the non-metro cities resulting in higher profitability. Hence, with your experience in the restaurant business, you should be successful in setting up a restaurant in one of the smaller cities of India.

H. P. Ranina is a practicing lawyer, specialising in tax and exchange management laws of India.


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