Unicorns are seeing investors renege on commitments

Indian Unicorns (billion dollar start-ups) are facing a unique problem. In the last few months, several top PE funds have committed to infuse funds into start-ups and then backed out. There are two surprising aspects to this story. This is not about new-fangled start-ups but established Unicorns like Byju’s and Swiggy. The latest in the string of such cases of investors reneging is the case of BillDesk. Prosus NV had made a $4.7 billion bid to buy out BillDesk and make it a part of its unit, PayU. Now that plan has been shelved after Prosus unilaterally called off the deal due to time commitments not being met.

The development is surprising, although it is a case of investors having second thoughts about valuations. The global markets are getting more touchy about digital and new age valuations and that is making the PE funds cautious about paying top dollars. Where commitments have been made to buy start-ups at top dollar valuations, the potential buyer appears to be backing out. That is the second surprising aspect. In the past, reneging would happen at the due diligence stage or the term sheet stage. Now funds are reneging after committing to infuse capital and even after signing the share purchase agreements.

Interestingly, there have been several cases similar to BillDesk. In December last year, Zetwerk announced it had raised $250 million from a clutch of investors, including Iconiq Capital. The deal had then valued Zetwerk at $2.7 billion. However, Iconiq Capital simply did not follow through with the capital commitment, virtually putting an abrupt end to the deal. The case of BillDesk, which we had discussed in detail earlier, happened after the approval of the Competition Commission of India (CCI) was also obtained. Only the RBI approval was pending at that stage when the deal had been called off unilaterally by Prosus.

However, one fund that has been in multiple such backouts is Sumeru Ventures. In the case of Swiggy, Sumeru Ventures had signed the share purchase pact with Swiggy but then opted to terminate the contract. Byju’s also had a fairly nasty experience with Sumeru Ventures. In fact, Sumeru and Byju’s had even signed agreements to raise $800 million. Later, Byju’s admitted that the two investors who were supposed to infuse $800 million; Oxshott Ventures and Sumeru Ventures, never really got down to wiring the funds to Byju’s. That was the funds Byju’s had been relying on to pay its dues to Blackstone for Aakash stake.

Sumeru has more such deal reneging to its dubious credit. For instance, it also walked out of a funding deal with healthtech start-up, Goqii. Experts in this field contend that quite often these PE investors walk out of deals after conducting diligence. At times, they even walk out at the term sheet stage. However, it is rare for investors to walk out after signing binding contracts and share purchase agreements. That is what the likes of Sumeru, Prosus and Oxshott have done. Some consultants feel, this is normal in troubled times and so the best strategy is to rely on funds in the bank and not on agreements and handshakes alone.

Do start-ups have an option to force the investors, the way Twitter arm twisted Elon Musk to honour his commitment? That may be tough under Indian laws. Also, smaller start-ups do not have the time for elaborate legal processes and steep lawyer fees. For example, in the case of the BillDesk deal, Prosus had already appointed two of India’s top legal firms; AZB & Partners and Shardul Amarchand & Mangaldas to explore legal options to walk out of the deal. Technically, in most countries the investor cannot walk out after making a commitment. They must bring in the capital or pay huge damages. It is tough in India.

Typically such contracts provide for specific performances clause, where a court can compel the investor to discharge obligation committed. Similarly, there may be a damages clause in the contract, where the investor can be forced to pay a huge compensation for walking out of the contract. But, most start-ups are starved for time and they would rather focus on new investors than pursuing investors who are not interested. In most cases, the issue is not about protective clauses in the contract. It is about the time and the financial muscle to seek legal redressal. That is food for though as India tries hard to nurture the start-up ecosystem.