'Are they sharks or loan sharks?' Every 3rd deal on Shark Tank India is a debt deal

The latest season of Shark Tank India has seen a rise in the number of debt deals offered to contestants. Out of the 148 pitches that were aired, 95 pitchers were offered a deal, out of which 32 deals included debt as of 3 March. This means every third deal offered was a debt deal.

Namita Thapar, the head and executive director of Emcure Pharmaceuticals, has rolled out eleven debt deals, most by a Shark on the show. Boat's Aman Gupta and Lenskart's Peyush Bansal each offered 9 debt deals. Sugar Cosmetic's Vineeta Singh offered 7 debt deals. In terms of interest rate, 18 per cent was the highest interest rate offered. This offer was made by Gupta, Bansal, and Thapar to an OTT startup Stage for Rs 1.5 crore debt amount.

But this rise in debt doled out by the Sharks has become a cause of concern for entrepreneurs appearing on the show. A start-up founder who featured on the show told Business Today on the condition of anonymity, “So many deals this season on Shark Tank India are debt deals. We go there in hopes of getting equity because that way the shark owns a piece of our business and will be proactively working with us in building it. But debt is impersonal. Debt deals just secure their money and reduce their personal risk. Are they sharks or loan sharks?"

Sharks from the American Shark Tank, including tech billionaire Mark Cuban, have criticised the practice of rolling out deals with an element of debt, but the US version of the show also has its fair share of debt deals.

So, is debt really bad for startups? Business Today spoke to experts to find out.

One of the reasons experts advise avoiding debt is because of interest payments. They say that debt forces startups to pay interest instead of reinvesting it in the business.

Yagnesh Sanjharka, co-founder and CFO of 100X.VC, a venture capital firm investing in early-stage startups, told Business Today, “Debt installments need to be repaid to the lender regularly or all at once. Interest can become difficult to service from unstable surpluses. This can endanger the entire business and potentially cause the company to shut down.”

Ankur Mittal, co-founder of Inflection Point Ventures, points out that startups borrow in comparably high interest rates due to the risk attached to their fledgling businesses.

He says, “One challenge for startups is that the rate of interest offered to them because of the risk involved is relativly high. That is why it is not recommended to take up debt in the earlier years when the business is not generating enough cash to service the debt.”

Experts also warn against debt deals because startups do not have optimum revenue streams. This risks loan defaults followed by hostile takeovers or bankruptcies.

Ruchir Lahoty, Managing Partner at MegaDelta Capital noted, “It is often super difficult for young start-ups to adhere to paying regular interest on loans, especially in their early years. A key downside of missing the regular payment of interest would be construed as default and could lead to bankruptcy as well as legal actions against the founders and/or the company.”

Lahoty also explains that often debt deals come with added conditions that might inhibit the startup.

“Debt also comes with multiple do’s and don'ts that can limit a start-up’s ability to take certain bets or risks in its scale-up journey restricting its progress,” he noted.

On the flip side, debt deals can be a boon to startups that have figured out their revenue and profit streams. These companies probably need some capital infusion to scale up or expand operations, and a debt deal ensures that their profits are not divided between multiple equity investors. But this applies only to limited startups.

Sanjharka explains, "Most startups have hardly any stable revenue streams, and taking up debt can be catastrophic for them in the long run."

Raising funds via equity results in foregoing ownership, but experts say that it comes with its added benefits. "Equity coming in from institutional sources like accelerators, VC funds, corporate innovation programs, etc also bring in learnings, guidance, and access to other investors, potential customers, and partners that can be very useful for a startup."

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