Crowdyvest Limited, a Nigerian agritech-focused crowdfunding platform, recently disclosed that it owes 3,700 crowdfunding investors ₦7.7 billion. An internal document obtained by TechCabal confirms that the company failed to meet its payment commitments to customers in 2021. During this period, it refrained from disclosing its overall debt amount.
“We are concurrently exploring opportunities for our members to get a quarterly payout as we recover funds from project partners that are owing us,” said the CEO of Crowdyvest, Temitope Omotolani.
The company hopes to recover approximately N2 billion from some businesses it has funded within the next two years. A registered asset manager will distribute these funds to investors.
Crowdyvest Management Limited also plans to convert a major portion of its debt, approximately N5.7 billion, into equity. It effectively grants customers who are owed a 35% ownership stake in the company.
“As a business, we’re dealing with the hard truths of what is lost, what is still redeemable, and what can be done to completely solve this,” noted Omotolani. “We have come to the realization that our commitment to meeting our obligations to all stakeholders can only be legitimately fulfilled if we remain a viable and continually improving entity.”
What is Debt-to-Equity Conversion?
Debt-to-equity conversion involves converting outstanding debts owed to customers into ownership stakes in the company. Converting debt into equity can potentially deter future fundraising efforts. When a startup has a large amount of equity, it can face difficulties convincing investors to invest more funds. Equity investors typically desire a favourable return on their investments. It may lead to reluctance to invest in a company that already has a significant equity base.
Crowdyvest’s plan to convert debt-to-equity is quite similar to Patricia’s move to launch a native token, Patricia token (PTK). The Nigerian crypto exchange experienced a breach that led to the loss of funds. The company assured that no customer funds were impacted, but customers have been unable to access their funds since April. Customers met the Patricia token with doubt and distrust, assuming the startup was probably trying to scam its way out. The sentiments around Crowdyvest’s latest decision are not any different.
In January 2022, while addressing the delayed payment of returns to investors, Omotolani said Crowdyvest had initiated communication with its members and would provide investors with a precise timeline for payment after one month.
“We already engaged with our members, we sent them a mail to those who are affected and we have asked for 30 days window to come back to them with a clear-cut direction. We are hoping that within these 30 days, we will have a proper direction.”
There are many reasons why a startup might want to convert its debt into equity. One is that it helps them to buy time to turn things around. If the company converts the debt into equity, the creditors can only recoup their money if the company is profitable.
While converting customer debt to equity can be a strategy to save face for startups, it can result in not just loss of customer trust but market share and business opportunities. There will be an increase in customer churn. The change in their investment structure might dissuade customers who initially supported the startup, leading them to discontinue their engagement with the business.