Venture Debt is Becoming a Key Growth Enabler for Indian Startups Amid Funding Winter In this current environment, traditional sources of financing are less willing to invest, leaving entrepreneurs in need of assistance. Venture debt provides a viable alternative that enables startups to receive finance without reducing their ownership equity.

Due to the difficult economic environment, equity funding for growth and late-stage companies has dropped heavily, with Indian startups raising close to $800 million in venture debt last year. According to a report released by Stride Ventures, the amount of debt funding provided to Indian startups saw a considerable increase, rising by 2.6 times when compared to 2019, when the funding amount stood at roughly $281 million.

"We see a growing demand for venture debt as startups look to optimise their capital structure and preserve equity for future rounds," said Apoorva Sharma, Managing Partner at Stride Ventures. "With the launch of our third fund, we're well-positioned to meet the unique debt requirements and global ambitions of Indian startups."

On Tuesday, Stride Ventures announced the first close of its third venture debt fund at USD 100 million to make investments in startups that demonstrate robust business models, strong unit economics, and competent management teams in sectors such as consumer internet, fintech, SaaS, and B2B platforms.

By 2025, the firm estimates that the Indian venture debt market would deploy between $3 and $4 billion annually, and it asserts that it is strategically using this development potential. Through its first two funds, it invested in more than 100 firms, including SUGAR Cosmetics, The Good Glamm Group, Mensa Brands, Exotel, Yubi, MoneyView, VideoVerse, Miko, Perfios, HealthifyMe, Ace Turtle, and Waycool to name a few.

Venture debt demand typically increases or decreases in tandem with equity financing. But at times like these, the amount of venture debt that businesses are looking to raise has increased disproportionately for a number of reasons.

"One significant factor is the increasing caution among VC funds, leading to a longer timeline for closing equity rounds. During this period, as a precautionary measure, founders are turning to venture debt as a reliable and timely source of capital," shared Ankit Agrawal, Director-Venture Debt, Lighthouse Canton.

"Moreover, the subdued valuations in the market have resulted in smaller equity rounds. Founders are now seeking ways to meet their fundraising targets without diluting their ownership excessively. Venture debt, being a non-dilutive form of capital, has emerged as an excellent solution," Agrawal said.

According to Agrawal, the current financial climate has given well-funded players the chance to buy smaller businesses that have been unable to secure equity. "Venture debt is a useful instrument for acquirers in these situations. They are able to fund these purchases without considerably diminishing their equity capital, which they may rather use for activities aimed at organic growth."

Lighthouse Canton has been very active in venture debt and claims to have already invested in five companies till date. Out of a total size of INR 550 crore, the firm marked the first close of its maiden India-focused venture debt fund at INR 155.4 crore in January.

"We are looking to close 4 more transactions in this month," Agrawal highlighted.

Real Time Angel Fund (RTAF), a venture capital provider, noticed a significant uptick in demand for venture debt during the funding winter. "Our plan for the upcoming year is to assess India's current state of the venture debt industry and unlock its growth potential to support startups experiencing financial constraints," stated RTAF's Partner and CEO Pranay Mathur.

In FY22–23, deal flow increased by 1.5 times for alternative credit platform BlackSoil. It will make investments in promising companies and provide tenacious business owners with help in the future year. "We are looking for collaborations with forward-thinking businesses that provide high-quality niche goods and services to cover market gaps. Until equity raising becomes feasible, we continue to believe that venture debt is the best option for filling funding gaps," said Ankur Bansal, Co-founder and Director of BlackSoil. "Key metrics that will be considered for evaluation across sectors include the robustness of the business model, cash conservation, positive unit metrics, and longer runways."

As per the Stride's India Venture Debt report 2023, pre-Series A rounds saw the most venture financing deals in 2022, while Series D and beyond rounds raised the most. Delhi NCR received the most debt finance among cities, followed by Mumbai and Bengaluru.

Fintech has been the dominant industry with the maximum deals and the most money invested in venture debt in India in 2022. With both sectors accounting for more than 70% of venture debt transactions in India, the B2B commerce industry was behind the fintech sector in terms of money distributed.

There are a number of other firms that offer debt financing to Indian startups. These include PAG-backed Nuvama Wealth Management, Alteria Capital, Innoven Capital, Trifecta Capital, Northern Arc and BlackSoil Capital, as well as the venture debt marketplace 8vdX.