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Lightspeed-backed Indian commerce Udaan raises $120 million

India's Udaan has raised $120 million in convertible notes and debt led by existing shareholders and bondholders, a top executive told employees in an email Thursday and seen by TechCrunch, as the business-to-business e-commerce startup works to be ready for the public markets in 12-18 months.

The new financing brings the startup's overall funding in convertible notes and debt in the last four quarters to over $350 million, Udaan's chief financial officer Aditya Pande wrote in an email Thursday. These financing rounds are "one of the largest structured instrument fund raises in the country," he said.

The Bengaluru-headquartered startup, which helps merchants secure inventory and working capital, has improved its unit economics by "~1,000bps with equally strong improvements in both gross margins and operating cost," Pande wrote. "The journey of right business design & unit economics has translated into a 60%+ reduction in burn. Continued focus on customer-first thinking & initiatives on strengthening our value proposition for them have resulted in monthly buyer repeat rates increasing by 500+bps in the last 2 quarters," he added.

An Udaan spokesperson confirmed the email but declined to comment.

"Despite the funding related challenges being experienced by the larger start-up ecosystem, this fund raise reflects the confidence of investors in our business model and their endorsement of the journey to unit economics, driven by great progress in evolution of our business model and cost efficiency, that we initiated last year," he wrote.

"These steps have not only helped us achieve positive unit economics last quarter, but also improved efficiency in the system, with huge cost benefits, which is key to building a sustainable business, and being public market ready in 12-18 months."

The vast majority of the business-to-business market in India remains unorganized. This means that merchants in the nation today have to travel to other cities — where all the major dealers operate — to stock up their inventory. These merchants don’t have much leverage to negotiate, so they struggle to find best-value for money and access to a wider selection of catalog.

Udaan — co-founded by former Flipkart executives Sujeet Kumar, Vaibhav Gupta and Amod Malviya — is solving this problem by connecting small retailers with wholesalers and traders. The startup today serves more than 3 million retailers and small and medium-sized businesses and it has signed up thousands of brands, including Coca-Cola, PepsiCo, Boat Lifestyle, Micromax, HP, LG, ITC, HUL and P&G. Its supply chain and logistics operations for everyday delivery span across more than 1,000 cities and 12,000 ZIP codes.

Other than the inventory problem, Udaan also helps merchants secure working capital. Small businesses, especially mom-and-pop shops, rely on money they secure from selling their existing inventory for buying their next batch. Because Udaan is able to see the engagement of different merchants on the platform, it is able to determine to whom it could safely grant working capital.

Udaan, which counts Lightspeed India Partners and GGV Capital among its backers, appointed Gupta as its chief executive last year. Prior to the move, Udaan did not have a CEO. The startup was valued at $3.1 billion in a financing round early last year.

"Over the last few years, we have taken various steps towards building udaan as a world- class institution that will last beyond our lifetime. We have made significant investments to build a tech-led solid and sustainable business, offer affordable & quality products, better services, and superb experience to our business partners. We have made significant progress in the past few years' journey and it wouldn’t have been possible without the effort put in by each of us," Pande wrote in the email.

Fundraising via convertible notes and through debt instruments has picked up pace in India this year as startup founders grow cautious about diluting their equity stakes -- or are unhappy with the valuation offered.