InvestorQ : Why are PE funds now committing funds to start-ups and then going back on it?
Sam Eswaran made post

Why are PE funds now committing funds to start-ups and then going back on it?

Moii Chavate answered.
1 month ago

You don’t often hear of PE funds and VC funds going back on their funding commitments and defaulting on their promise to start-ups. But that has suddenly become rampant now. This is a unique problem that Indian Unicorns (billion dollar start-ups) are facing today. A slew of top PE funds and venture funds have committed to infuse funds into start-ups but suddenly decided to back out. Apparently, this has a lot to do with the dodgy valuations that a lot of these funds are commanding in the market, but this is a big challenge. Start-ups are committing funds to others based on such commitments but funds are not coming in.

An array of big deals involving big companies are being cancelled at the drop of a hat. We are talking of Unicorns like Byju’s and Swiggy. Prosus NV just walked out of a $4.7 billion bid to buy out BillDesk. In December 2021, Zetwerk had raised $250 million from Iconiq Capital, valuing Zetwerk at $2.7 billion. However, the cheque just did not come in. The most notorious is Sumeru ventures. It had signed agreements to raise $800 million but never paid up. Sumeru also walked out of a funding deal with healthtech start-up, Goqii. Even in the case of Swiggy, there was a commitment of funds, which never came in.

What is the way out for such start-ups. Normally, PE Funds may walk out of deals after due diligence or even at term sheet stage, but rarely after signing binding contracts and share purchase agreements. That is what the likes of Sumeru and Prosus have done. These are troubled times and experts are asking start-ups to rely on funds wired rather than on promises, commitments and handshakes. The question is whether Indian start-ups cannot arm twist like how Twitter shareholders have pressured Elon Musk to honour his deal. But India has a different legal system. Here is why.

Most start-ups do not have the time for elaborate legal processes and steep lawyer fees whereas the PE funds are loaded and get the best of lawyers. In most countries investors cannot walk out after making a commitment. It is either capital or damages. India is a lot more liberal towards big money. The issue is that in India, most start-ups are starved for time and they rather focus on new investors than pursuing uninterested ones. The issue is not about protective clauses in the contract, but about time and financial muscle to seek legal redressal. Government must keep this mind for its start-up ecosystem.