Fintech and EV Sectors to Benefit from Growing Influence of Venture Debt: Report According to the report, founders in India are increasingly availing venture debt services to avoid excessive equity dilution and cover capital needs.

The venture debt market in India is experiencing a steady rise, "mirroring the early days of venture capital," according to a recent report titled 'Silent Bloom: Venture Debt's Growing Influence,' by Lighthouse Canton, a global asset management institution.

Venture debt is a form of non-dilutive financing tailored for fast-growing startups and growth-stage companies that are in need of funding. Unlike traditional loans, venture debt is often provided alongside or after venture capital and does not require the founders to give up additional equity.

According to the report, founders in India are increasingly availing venture debt services to avoid excessive equity dilution and cover capital needs. The report suggests that the shift is primarily being driven by limited equity funding and the necessity to preserve ownership while having access to funding.

Part of the report is a survey that indicates almost 40 per cent of founders prefer venture debt over traditional debt and equity because of its less dilutive nature, and 30 per cent of the founders prefer venture debt because of flexible repayment schedules.

Sanket Sinha, Managing Director and Global Head of Asset Management at Lighthouse Canton said that the Indian startup ecosystem holds immense potential, and venture debt funding's growth is pivotal in driving its development.

"We believe that this mode of funding will be essential to foster innovation and empower startups, which will ultimately drive sustainable growth across the nation's dynamic and evolving business landscape," said Sinha.

The country's fintech sector is one of the major drivers for the fast adoption of venture debt. The industry is now the third-largest in the world with innovations like Unified Payment Interface (UPI) and venture debt is said to be playing an important role in assisting fintechs manage cash flows and support lending. Hesitancy from traditional banks to lend in these areas is also a crucial factor in venture debt gaining prominence.

Ritesh Banka, Head of Business Finance at Rupeek said, that while the company's primary source of funding remains conventional debt, venture debt offers more to align with their business needs.

"It provides us the capital with quicker turnaround time and flexibility in structuring repayments, allowing us to extend our cash runway and maintain our growth trajectory while we prepare for larger equity rounds at potentially better valuations," said Banka.

India's fintech ecosystem has seen immense growth with close to 10,244 registered entities and is projected to reach USD 2 trillion by 2030. The country has also experienced a fintech adoption rate of 87 per cent, higher than the global average of 64 per cent.

The growing electric vehicle (EV) sector in India is said to be "capital intensive", facing challenges unique to the sector, and has reportedly become heavily reliant on venture debt. The report reveals approximately 67 per cent of EV startups use venture debt for more than half their debt funding needs, underscoring the important role in driving the sector's growth.

India's EV sector is projected to penetrate 40 per cent of the automotive market by 2030, while the current figure stands at just over 6 per cent. The projection is based on the high adoption rate since 2015 and Niti Aayog's targets of 30-70 per cent for 2030.

Ankur Surolia, Head of Investor Relations at BluSmart said, "BluSmart's preference for venture debt over traditional debt stems from our need to minimize equity dilution while funding significant growth. Since our Series A round in 2021, venture debt has been instrumental in supporting our expansion, particularly in building EV infrastructure and charging stations. As we continue to expand our EV infrastructure and fleet, venture debt provides the necessary capital while maintaining a favorable debt-to-equity ratio."

Ankit Agrawal, Executive Director and portfolio Manager for LC Venture Debt Fund at Lighthouse Canton, said that the country's venture debt market growth mirrors the maturity of the startup ecosystem.

"Increasingly, founders are turning to venture debt to meet capital needs, fuel innovation, and drive growth while maintaining control over their businesses. We foresee this trend broadening across various sectors, providing startups with a flexible financing option that supports their scaling efforts in an evolving market," added Agrawal.