Startup Funding Reset: Why Venture Debt Is Powering India's Next Growth Wave Venture debt gains momentum nationwide as founders seek non dilutive capital and stronger financial guardrails for sustainable scale.

India's startup landscape is moving through one of its most significant shifts yet. After years of aggressive equity funding and soaring valuations, the ecosystem is slowing down and recalibrating. Global private equity investment reached USD 537 billion in Q3 2025, slightly higher than the USD 512 billion recorded during Q3 2024, even though the total number of deals fell to 4,062 from 5,070 in the same period. According to KPMG, global investment for the first three quarters of 2025 already stands at USD 1.5 trillion, showing that investors are now focusing on fewer but higher quality opportunities.

This cautious environment has pushed founders to explore alternatives, and venture debt has emerged as one of the most important tools in this new chapter. India's venture debt market has grown at a compound annual growth rate of 58 percent between 2018 and 2024, reaching USD 1.23 billion last year.

The latest Global Venture Debt Report 2025 by Stride Ventures in collaboration with Kearney notes that 52 percent of venture debt is being used for working capital, while 44 percent each is being used for growth and runway extension. A rising share of founders is also using debt for pre IPO bridge needs at 41 percent and for inventory and capital expenditure at 37 percent.

As venture ecosystems mature worldwide, debt is becoming an essential tool that helps founders retain ownership while still accessing growth capital.

India's path to this turning point began after the valuation reset that followed the exuberance of 2021. Founders who once chased rapid unicorn status are increasingly prioritising runway and profitability. Debt has become a complementary layer that supports discipline, long term planning and more sustainable ambition. The shift signals a move away from glamour and towards grounded growth.

In the present environment, investors see a mix of opportunity and caution. Akshat Saxena, Principal at Alteria Capital, believes that the market is expanding even as pockets of stress appear. "Around 99 percent of the primary capital raised by businesses across the world is largely debt. What we are trying to do is give early stage founders access to some of that capital. Given the risk profile of these businesses, the cost of capital is different from traditional debt, but it adds time for founders to solve challenges," he explained during a discussion in Entrepreneur India event in New Delhi.

"At Alteria Capital we have invested more than USD 900 billion across 221 startups since our inception and we have lost less than 1 percent of that. If you compare this with traditional banks in India whose NPA ratios are between 2 to 3 percent, the difference is significant," Saxena noted.

He added that the real skill lies in offering the right level of leverage. "Great debt providers ensure that companies are not over leveraged. There is a good amount of debt and there is a great amount of debt. Experience helps in figuring out the right balance, and we are already seeing this play out. Stress levels across our portfolio are much lower than expected."

Long term thinking will shape the role of venture debt in India's growth towards 2047. Ashish Gala, Co-founder and Managing Partner of VentureSoul Partners, believes that the ecosystem must move away from symbolic milestones. "Personally, I have never believed in the word unicorn. They were mythical and they remain mythical. That only tells me that the quality of investments at the start is probably questionable," he said in the event discussion.

He explained that India needs smarter credit structures to match global standards. "We are a debt fund and we set up last year as ex bankers. Around 90 percent of the world's capital is debt but in India that number is profoundly low. The question is whether we can bring smarter banking solutions to the new economy. If a new age company is acquiring a smaller rival, can you structure non recourse financing the way it is done globally. If you provide smart capital with the right guardrails, disciplined growth naturally follows."

Industry data also reflects changing founder behaviour. Eklavya Gupta, Co-founder and CEO of Recur Club, observed a strong shift towards revenue based financing. "Demand has accelerated sharply. Over the last 24 months we have seen almost a 3 times rise in enquiries and we have already facilitated about INR 3,000 crore in non dilutive capital," he said.

He highlighted the rise of disciplined business models. "Stronger cohorts have diversified subscriptions like revenues, low single digit monthly churn and disciplined collections. We underwrite them with higher limits while volatile, discount led sales receive lower leverage and tighter monitoring."

Founder intent is also evolving. "Many founders use revenue based financing as a valuation bridge. Around two thirds of our customers extend their runway by 6 to 12 months and negotiate equity rounds from a stronger position," he noted.

"We're seeing the strongest and most consistent venture debt demand from SaaS and B2B tech, followed by D2C, e-commerce, AI, climate-tech and new-age manufacturing, reflecting a clear shift toward stable, revenue-driven models," Gupta highlighted.

"Over the last 12 to 18 months, credit discipline has strengthened as founders prioritise unit economics, collections and cash cycles. We underwrite strictly on ARR thresholds, revenue growth and minimum runway to filter weak models," he stated.

India is entering a phase where equity and debt are balancing each other. The focus is shifting from valuation obsession to efficiency obsession. With a maturing ecosystem and more sophisticated financial instruments, venture debt has become a vital part of India's journey toward a stable and globally competitive startup economy.