More investors pick convertibles for startup ride

Sequoia, India’s largest venture capital firm, and rival Accel are investing funds in startups through convertible notes. Developments reflect the changing dynamics of hyper-competitive seed-stage investments and a gradual power shift towards entrepreneurs

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By 

Madhav Chanchani

October 26, 2021

8 Min Read

Venture capital firms are now open to investing in founders who have just launched their startups without establishing a clear valuation, as they look to move fast in an increasingly competitive market and avoid missing out on the next Zomato or Freshworks. 

And convertible notes, an instrument made popular by startup accelerator Y Combinator in the US over a decade ago, have started finding more takers among top investors in India. 

The country’s largest venture capital firm, Sequoia Capital India, has begun writing convertible cheques of $250,000 to $500,000, according to people directly involved in the conversation with the firm. Some of these deals have happened over the past three to four months. 

In September, Accel launched a programme called Atoms that invests $250,000 through convertibles in startups. Venture firm Chiratae is also using convertibles for its Sonic programme, which invests up to $500,000 in startups primarily through convertibles. 

Venture firms such as Stellaris Venture Partners and Elevation Capital are already doing convertible deals on a case-by-case basis, said two people briefed on the matter. 

Why Now?

A convertible note is short-term debt that changes into equity in a startup, typically when it is pursuing the next round of financing. The mode helps prevent, or at least defer, valuation-related haggling between investors and founders, especially when the startup is still building its product or service.

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