Convertible notes take centre stage as Indian startups adapt to funding winter

In 2022, shortly before the funding winter chilled India's startup ecosystem, B2B e-commerce startup Udaan made headlines by securing the largest-ever funding round in the country through convertible notes.

Convertible notes—a short-term debt instrument which allows investors the option to convert their debt into equity at a later date—weren’t Udaan’s first choice. The Bengaluru-based company initially explored raising straight equity, and even engaged investment banks to this end in late 2021. However, discussions faltered as investors grew more cautious about investing in companies with high burn rates amidst shifting macroeconomic dynamics, according to a source directly involved in the funding discussions. Udaan reported a loss of more than Rs 3,100 crore on operating revenues of a little under Rs 10,000 crore for the year ended March 2022.

With Udaan struggling to rein in its expenses and requiring continuous funding to sustain its growth, it finally turned to alternative funding sources, raising $350 million through convertible notes and some debt in three tranches in 2022. Udaan also had aimed for an initial public offering (IPO) in mid-2022, but the plan was deferred to 2025.