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


Nikhil Patwardhan

17 reads

Nikhil Patwardhan

17 reads

Since Udaan’s decision to go big on fundraising via convertible notes, many startups, including beleaguered Dunzo, have followed its lead. But while convertibles help safeguard valuations and are cheaper than conventional debt, is this an optimal strategy?

November 27, 2023


Key Takeaways

  • Following Udaan’s lead, a growing number of companies, even those in later stages of development, have been adopting convertible notes
  • Convertible notes—a type of short-term debt—offer a number of benefits, including allowing companies to avoid valuation markdowns
  • Investors, too, are showing greater openness to exploring this financing approach, which has gained steam in the wake of a slowdown in equity funding
  • But while convenient for both investors and startups, convertible notes might not universally suit India's diverse startup ecosystem

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.

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