(Saturday Deep Dive) - Debt Financing in Indian Startups

In today's deep-dive, we will cover the evolving landscape of debt financing in India's startup ecosystem, a powerful yet often understated tool driving growth and innovation.

As startups navigate the challenges of securing capital without diluting ownership, debt financing has emerged as a strategic option, balancing financial stability with operational flexibility. This report explores its rise as a viable alternative to equity financing, delves into the transformative role of venture debt, and highlights key players, challenges, and success stories.

Debt Financing in India

In the world of Indian startups, the word ‘funding’ usually brings up images of equity investments—glamorous pitch meetings, term sheets, and headline-grabbing valuations. But there’s another, less flashy financial tool that has been quietly fueling the growth of many startups: debt financing.

At its core, debt financing is straightforward. Startups borrow money—either from banks, non-banking financial companies (NBFCs), venture debt funds, or other institutional lenders—and agree to pay it back over time, usually with interest. Unlike equity funding, where investors take a slice of the company in exchange for their capital, debt financing keeps ownership intact. It’s like taking a business loan tailored to startups' unique needs and risks.

Debt financing wasn’t always a go-to option for Indian startups. However, lenders recognized an opportunity as India’s startup ecosystem matured and companies began showing more stable growth metrics. Today, debt financing has carved out a significant space in the Indian startup funding landscape.

Startups often turn to debt for a few key reasons. Sometimes, they need quick capital to meet short-term operational needs, like buying inventory or managing cash flow gaps. Other times, they want to avoid dilution—especially if the founders believe their company’s valuation will skyrocket shortly. In such cases, taking on debt can be a strategic move.

However, debt isn’t free money. It comes with obligations—timely repayments and interest costs that limit how startups use the borrowed funds. And if things go south, failing to repay debt can push a startup into financial distress.

Rise of Venture Debt as an Asset Class

Over the past few years, India has witnessed a sharp rise in non-performing assets (NPAs), amounting to thousands of crores, causing significant distress to the fintech, banking sectors, and the overall economy. While measures such as the Insolvency and Bankruptcy Code (IBC) of 2016 have helped curb the NPA crisis, they have also made traditional banking institutions increasingly cautious about lending to businesses. This cautious approach has left Indian startups seeking alternative financing solutions, leading to the meteoric rise of venture debt as a preferred asset class.

In the early 2000s, equity financing—through venture capital and angel investors—dominated the Indian startup funding landscape. Debt financing was largely limited to traditional businesses with stable cash flows. Startups, especially those in their early stages or operating with high burn rates, were considered too risky for debt funding. However, the tide began to turn with the emergence of pioneering firms like Innoven Capital (formerly Silicon Valley Bank India) and Trifecta Capital, which identified the untapped potential of venture debt in India. These firms recognized that startups needed non-dilutive capital to bridge funding gaps, optimize working capital, and scale efficiently without constantly diluting ownership.

The Indian venture debt market has grown exponentially, reaching a record-high $1.2 billion in CY2023, a 50% increase from the previous year. Since 2017, the sector has witnessed a compound annual growth rate (CAGR) of around 34%—a testament to its growing importance in the financial ecosystem. In the early 2010s, annual venture debt disbursements in India barely touched ₹100 crore, with only a handful of players testing the waters. By 2020, this figure had surged past ₹2,000 crore, reflecting increasing confidence in this asset class.

The pandemic years (2020–2022) marked a defining moment for venture debt. As equity rounds were delayed and startup valuations took a hit, venture debt emerged as a lifeline. Startups leveraged non-dilutive funding to weather market disruptions, maintain operations, and extend their runway during a period of unprecedented uncertainty. The rise of firms like Alteria Capital and Stride Ventures further intensified competition in the venture debt space.

According to the Stride Ventures India Venture Debt Report 2024, sectors such as cleantech, consumer goods, and fintech are expected to attract the largest share of venture debt funding in 2024, while agritech and edtech currently lag behind in venture debt investments.

Comparative Overview: Equity Financing vs. Debt Financing

When it comes to funding, startups primarily rely on two avenues: Equity Financing and Debt Financing. Both have their advantages, limitations, and ideal use cases. Here’s a quick comparison:

Smart startups often use a mix of equity and debt to optimize their capital structure, balancing growth, risk, and control.

Role of Policy and Regulation in Shaping Debt Financing

The growth of debt financing in India’s startup ecosystem has been deeply influenced by evolving policy frameworks and regulatory clarity. The regulatory environment for debt financing in startups is primarily governed by RBI (Reserve Bank of India) and SEBI (Securities and Exchange Board of India), along with directives from FEMA (Foreign Exchange Management Act) for overseas funding. Let’s look at some of the policies and regulations-

1. Startup India Initiative

Launched by the Government of India, the initiative aims to promote entrepreneurship by offering tax benefits, simplified compliance norms, and funding support. Key schemes under this initiative include the Standup India Scheme and the Startup India Seed Fund Scheme, which are designed to assist early-stage startups.

2. Relaxation of External Commercial Borrowing (ECB) Norms

• The Reserve Bank of India (RBI) relaxed ECB norms, allowing Indian startups to raise debt from foreign lenders more easily.

• This move provided access to global debt markets and improved liquidity options for growth-stage startups.

3. Introduction of Priority Sector Lending (PSL) Guidelines

• Banks were encouraged to allocate a portion of their lending to critical sectors such as agriculture, education, housing, and small industries under the Priority Sector Lending framework.

• This pushed financial institutions to recognize startups as a viable borrowing segment.

4. Credit Guarantee Schemes for Startups

• The Credit Guarantee Scheme for Startups (CGSS) was launched to provide collateral-free loans backed by a government guarantee.

• This reduced the risk for lenders and encouraged traditional banks and NBFCs to engage more actively with startups.

5. Insolvency and Bankruptcy Code (IBC) Implementation (2016)

• The introduction of the IBC provided clarity on debt recovery mechanisms.

• This increased confidence among lenders, ensuring more predictable outcomes in case of defaults.

6. The Finance Act 2024

The act has extended the tax holiday for startups by another year. Startups incorporated until March 31, 2025, are eligible for tax incentives for three consecutive years within the first ten years of their incorporation.

Why Startups Need Debt Financing Alongside Venture Capital

While venture capital (VC) fuels growth and innovation, debt financing provides stability, flexibility, and financial efficiency. Startups increasingly recognize the importance of balancing both funding avenues for sustainable growth.

1. Minimize Equity Dilution

Debt allows startups to raise capital without giving away ownership, enabling founders to retain control and protect long-term value.

2. Optimize Capital Structure

A mix of equity and debt creates a balanced financial strategy, reducing over-reliance on equity funding.

3. Support Working Capital Needs

Debt financing helps manage short-term expenses like inventory, salaries, and operational costs without waiting for the next equity round.

4. Bridge Funding Gaps

Debt acts as a bridge between funding rounds, allowing startups to maintain momentum without sacrificing valuation during equity negotiations.

5. Faster Access to Capital

Debt deals are often quicker to close compared to equity funding, offering timely access to capital during critical growth phases.

The Role of Debt in Startup Scalability and CAPEX Management

For startups eyeing rapid scalability and substantial Capital Expenditure (CAPEX), debt financing serves as a strategic financial tool, enabling focused growth without unnecessary dilution of ownership or dependence on slower equity cycles.

1. Bridging CAPEX-Heavy Growth Phases

Startups often face significant upfront costs for infrastructure, manufacturing facilities, equipment, or technology systems. Debt financing allows them to fund these capital-intensive requirements upfront while generating returns gradually over time.

2. Cash Flow Management

With debt, startups can manage short-term cash flow, while still funding long-term objectives.

3. Operational Stability

Investing in infrastructure, upgraded technology, or streamlined supply chains through debt financing helps startups achieve long-term cost efficiencies and operational stability.

4. Building Financial Discipline

Repaying debt fosters financial discipline and a structured approach to cash flow management, preparing startups for larger financial responsibilities as they scale.

5. Positive Credit Rating

If a startup pays its debt installments on time, it can improve its credit rating, potentially lowering the cost of borrowing in the future.

Benefits of Venture Debt for Startups

Venture debt has emerged as a strategic funding tool offering distinct advantages that complement traditional equity financing. It’s not just an alternative but a powerful addition to a startup’s financial toolkit.

1. Non-Dilutive Financing

Venture debt provides access to capital without requiring startups to give up ownership stakes. Founders and early investors can retain control and protect their share of future upside while still securing essential funding.

2. Faster Access to Funds

Compared to equity fundraising, venture debt deals are typically quicker to close. The reduced dependence on exhaustive due diligence and negotiations helps startups access funds in a shorter timeframe.

Interest on debt finance often qualifies as tax-deductible expense, therefore, reducing overall tax liability.

3. Tax Benefits

Interest on debt finance often qualifies as tax-deductible expense, therefore, reducing overall tax liability.

4. Flexible Agreements

Venture debt often comes with tailored repayment terms aligned with a startup's cash flow cycles.

5. Enhancing Creditworthiness for Future Financing

Successfully managing venture debt builds credibility with financial institutions. This track record makes it easier for startups to secure larger credit facilities or better loan terms in the future.

6. Lower Cost Compared to Equity Financing (mostly)

While venture debt does come with interest costs, it is still generally less expensive than equity financing, where founders part with significant ownership stakes.

7. Creative Freedom

Debt investors have no control over the startup’s decisions. Their role is limited to lending and repayment, allowing founders to maintain full control over business operations.

8. A Green-Flag for Well Performing Startups

Debt financing is not just a tool for new startups to fuel its growth, successful startups are using venture debt to extend their runway, achieve milestones, and secure better equity deals in the future.

Financial Metrics in Debt Financing for Startups

When considering debt financing, startups should evaluate key financial metrics to ensure sustainable borrowing:

1. Debt-to-Equity Ratio: This measures the proportion of debt to shareholders' equity. A high ratio may indicate over-leverage, increasing financial risk.

2. Interest Coverage Ratio: Calculated as EBIT (Earnings Before Interest and Taxes) divided by interest expenses, this ratio assesses a startup's ability to meet interest obligations. A low ratio suggests potential difficulties in servicing debt.

3. Cash Flow Projections: Accurate forecasts of future cash flows are essential to ensure that the startup can meet debt repayments without compromising operational needs.

4. Burn Rate: The rate at which a startup consumes its capital. A high burn rate may concern lenders about the startup's ability to sustain operations and repay debt.

5. Current Ratio: This liquidity ratio, calculated as current assets divided by current liabilities, indicates the startup's ability to cover short-term obligations. A ratio below 1 may signal liquidity issues.

What’s in For the VCs?

1. First reason for VCs to involve in debt financing is to extend the cash runway of the companies in their portfolio, which in turn improves the valuation of the company for coming rounds or acquisition.

2. Another reason to give debt is to instill financial discipline and portray financial stability of the company ahead of next rounds.

3. Infusing capital in a company at the right time can do wonders- for both investors and the startup.

4. Debt financing also brings in the freedom for VCs to make a small bet, without going all-in at any stage.

Challenges and Risks in Venture Debt

While venture debt offers significant benefits, it is not without its challenges and risks. Startups must carefully evaluate these aspects before opting for debt financing to avoid financial strain.

1. High Interest Rates and Repayment Obligations

Venture debt typically comes with higher interest rates than traditional bank loans due to the increased risk profile of startups and fixed repayment schedules can create cash flow pressures for companies.

2. Risk management

Venture debt is inherently riskier than traditional debt financing due to the nature of startups’ uncertain cash flows and profitability timelines.

3. Restrictive Covenants and Conditions

Venture debt agreements often come with covenants (financial and operational restrictions) that startups must adhere to.

4. Dependency on Predictable Cash Flows

Lenders sometimes expect startups to demonstrate steady cash flow visibility for debt repayment, therefore, startups with inconsistent revenue streams may struggle to meet these expectations, limiting their ability to secure debt financing.

5. Risk of Over-leveraging

Startups may sometimes take on excessive debt in the pursuit of rapid growth, and this overleveraging can lead to financial instability and even insolvency if revenue targets are not met.

6. Perception for Early-Stage Startups

Debt providers prefer startups with proven revenue models and predictable cash flows, often excluding early-stage startups.

7. Collateral Requirements

Securing debt can require startups to provide assets or inventory to lender as a collateral to mitigate risks.

Impact on the Indian Startup Ecosystem

Debt financing has emerged as a critical enabler of growth and resilience within the Indian startup ecosystem. It supports capital-intensive sectors, and complements equity investments to create a more balanced financial landscape.

1. Supporting Capital-Intensive Sectors: Warehousing, Logistics, Manufacturing

• Capital-intensive sectors like warehousing, logistics, manufacturing, and hardware technology require significant upfront investments in infrastructure, machinery, and inventory.

• Debt financing has enabled startups in these sectors to scale operations without unnecessary equity dilution, thus fostering growth in these sectors.

2. Encouraging Financial Innovation

• The rise of debt financing has led to innovative financial products such as venture debt funds, revenue-based financing, and hybrid debt instruments tailored specifically for startup needs.

• These financial tools provide startups with more flexible borrowing structures and repayment options, fostering better capital management.

3. Stabilizing the Funding Ecosystem

• By balancing the dominance of equity capital, debt financing has reduced market dependency on valuation cycles and investor sentiment.

4. Strengthening Investor Confidence

• Successful integration of debt financing in a startup’s capital structure signals maturity and financial responsibility to equity investors.

• It also encourages domestic and global financial institutions to participate in India’s startup growth story.

Key Players in the Indian Venture Debt Landscape

India’s venture debt ecosystem has matured significantly over the last decade, with several key players driving its growth and establishing themselves as critical financial partners for startups across industries. These players include specialized venture debt funds, traditional financial institutions, and emerging fintech platforms.

1. Trifecta Capital

• Trifecta is known for its structured financing solutions and strategic support, it has backed companies like BigBasket, Zivame, Meesho and PharmEasy.

2. Alteria Capital

• Alteria Capital is one of India’s largest venture debt providers, known for its focus on early and growth-stage startups.

• With investments in brands like Dunzo, Licious, and Melorra, Alteria emphasizes flexible repayment structures and founder-friendly terms.

3. InnoVen Capital

• A regional leader in venture debt, InnoVen Capital operates across India, Southeast Asia, and China.

• It has supported marquee names like Swiggy, OYO, and Byju’s, offering customized debt solutions aligned with each startup’s growth stage.

4. Stride Ventures

• Stride Ventures focused on creating value-driven partnerships with startups and has provided venture debt to brands like Sugar Cosmetics, Mensa Brands, and Bluestone, emphasizing operational and financial discipline.

5. Anicut Capital

• Anicut Capital operates both equity and debt funds, catering to diverse startup needs.

• Known for its tailored financing structures, it has supported companies like Wow! Momo, Atomberg Technologies, and Lendingkart.

6. Northern Arc Capital

• Primarily focused on sectors like fintech, microfinance, and consumer lending startups.

• It bridges the gap for startups unable to access traditional bank loans, ZestMoney leveraged debt financing from Northern Arc Capital to enhance its operations.

7. SIDBI (Small Industries Development Bank of India)

• SIDBI plays a critical role in offering government-backed debt financing schemes tailored for MSMEs and startups.

• Programs like the Fund of Funds for Startups (FFS) have extended crucial support to early-stage ventures.

8. Fintech Platforms

• Emerging fintech platforms like Klub and GetVantage are revolutionizing debt financing with revenue-based financing models.

• These platforms offer non-dilutive capital with repayments tied to revenue generation rather than fixed EMIs.

• Early stage startups like The Souled Store, Sleepy Owl Coffee and BluSmart Mobility have utilized flexible financing from platforms like Klub and GetVantage.

9. International Debt Funds

• Funds like BlackSoil and Trifecta’s international arms bring global expertise and capital to Indian startups.

• Companies like BharatPe, Unacademy and Cult.Fit have leveraged debt financing from international debt funds.

Fintech's Role in Facilitating Debt Financing for Startups

Fintech platforms are revolutionizing access to debt financing for startups in India:

1. Alternative Lending Models: Fintech companies offer innovative lending solutions, such as revenue-based financing and unsecured loans, tailored to the needs of startups.

2. Digital Lending Platforms: Platforms like Biz2X provide digital lending solutions that enhance loan management, servicing, and risk analytics, making the borrowing process more efficient for startups.

3. SME-Focused Fintech Startups: Companies like Lendingkart and Capital Float specialize in providing quick and flexible capital to SMEs and startups, often with customized products to suit different business needs.

4. Enhanced Accessibility: Fintech platforms leverage technology to assess creditworthiness beyond traditional metrics, enabling startups without extensive credit histories to access debt financing.

5. Speed and Efficiency: The digital nature of fintech lending allows for faster approval and disbursement of funds, which is crucial for startups needing quick access to capital.

Case Studies of Startups Leveraging Venture Debt

Case Study 1: Swiggy

Founded in 2014 by Sriharsha Majety, Nandan Reddy, and Rahul Jaimini, Swiggy is a food-delivery platform in India. With its user-friendly platform, efficient logistics network, and focus on customer experience, Swiggy became one of the largest food delivery platforms in the country, competing head-to-head with Zomato. It took Venture Debt from Innoven Capital in 2017.

Purpose of Taking Venture Debt

Swiggy opted for venture debt to:

• Enhance operational efficiency: Scale its delivery network and optimize logistics.

• Expand cloud kitchen operations: Invest in its cloud kitchen brand, Swiggy Access, to address demand in underserved areas.

• Preserve equity: Avoid diluting founder and investor stakes while raising capital for short-term operational needs.

Key Outcomes:

• Geographic Expansion: Enabled Swiggy to expand into tier-2 and tier-3 cities.

• Improved Delivery Network: Strengthened delivery infrastructure and technology to reduce delivery time.

• Diversification into New Segments: Supported initiatives like Swiggy Instamart (grocery delivery) and other adjacent business lines.

• Cash Flow Management: Allowed better management of working capital during high-growth phases.

Case Study 2: Dunzo

Founded in 2015 by Kabeer Biswas, Ankur Aggarwal, Dalvir Suri, and Mukund Jha, Dunzo started as a hyperlocal delivery platform, allowing users to get anything delivered—from groceries to electronics—within hours. Known for its quick turnaround time and versatile delivery capabilities, Dunzo became a key player in the quick-commerce space, especially in metropolitan cities. It took Venture Debt from BlackSoil in 2022.

Purpose of Taking Venture Debt

Dunzo turned to venture debt for:

• Working Capital Management: Ensuring consistent cash flow to manage day-to-day operations and delivery fleet costs.

• Scaling Delivery Network: Expanding into more neighborhoods and strengthening logistics capabilities.

• Technology Upgrades: Enhancing backend infrastructure to improve delivery accuracy and reduce operational inefficiencies.

• Mitigating Equity Dilution: Raising non-dilutive capital to avoid further equity dilution while supporting operational sustainability.

Key Outcomes:

• Operational Resilience: Venture debt provided Dunzo with the financial buffer needed to maintain operations even during funding winter scenarios.

• Expansion of Quick-Commerce Services: Enabled the launch and scaling of Dunzo Daily, a 19-minute grocery delivery service.

• Improved Cash Flow Cycles: Ensured smooth payment cycles for delivery partners and vendors.

• Technology Enhancement: Strengthened AI and data analytics to optimize delivery routes and reduce costs.

Case Study 3: Ather Energy

Founded in 2013 by Tarun Mehta and Swapnil Jain, Ather Energy is one of India's leading electric vehicle (EV) manufacturers, specializing in electric scooters. Ather is also pioneering the development of EV charging infrastructure in India through its Ather Grid network. It took Venture Debt at various intervals from Innoven Capital and Stride Ventures.

Purpose of Taking Venture Debt

Ather Energy took venture debt for:

• Scaling Production Capabilities: To increase manufacturing capacity and meet rising demand for electric scooters across India.

• Infrastructure Development: Expanding its network of charging stations under Ather Grid to ensure that customers can charge their vehicles conveniently.

• Technology Enhancement: Investing in R&D for product innovation, battery technology, and software upgrades to stay ahead of the competition.

• Working Capital Management: Ensuring smooth operations and supply chain continuity while minimizing equity dilution.

Key Outcomes:

• Increased Manufacturing Capacity: Venture debt allowed Ather to scale production in its factory in Hosur, Tamil Nadu, and meet the growing demand for its electric scooters.

• Expansion of Charging Infrastructure: Debt financing helped fund the installation of Ather Grid charging points across India, easing the range anxiety for users and boosting EV adoption.

• Product Innovation: The company continued to innovate with its scooters, introducing new features like fast charging, mobile app integration, and over-the-air software updates.

• Faster Market Penetration: With venture debt, Ather accelerated its entry into new cities and increased its retail presence, enhancing its brand visibility.

Case Study 4: Giva

Founded in 2019 by Gaurav Singh and Shivani Chhapparia, Giva is a direct-to-consumer (D2C) jewelry brand that offers a wide range of affordable, high-quality jewelry with a focus on contemporary designs. The brand has quickly gained traction in the Indian market by emphasizing online sales and a strong social media presence. The company took Venture Debt from Alteria Capital in 2023.

Purpose of Taking Venture Debt

Giva used venture debt for:

• Marketing and Customer Acquisition: To ramp up advertising spend and grow its brand visibility in a highly competitive market.

• Inventory Expansion: To manage and expand inventory for its growing customer base and ensure quick fulfillment of orders.

• Tech and Operations Infrastructure: To invest in its technology platform, improve the online shopping experience, and streamline supply chain operations.

• Scaling D2C Operations: To expand its reach across different regions in India and support logistical expansion.

Key Outcomes:

• Brand Growth: Debt financing enabled Giva to scale its marketing campaigns across social media, search engines, and influencer partnerships, leading to an increase in customer acquisition.

• Product Portfolio Expansion: The company could increase its inventory and introduce new product lines without the cash flow strain of raising additional equity.

• Technology Investment: Venture debt allowed Giva to enhance its website and backend technology to improve customer experience and optimize the supply chain.

• Rapid Expansion: Giva accelerated its growth trajectory, achieving quicker scalability and expanding to a wider customer base across India.

Case Study 5: UrbanClap (Urban Company)

Founded in 2014 by Abhiraj Bhal, Varun Khaitan, and Raghav Chandra, UrbanClap (now known as Urban Company) started as an on-demand home services platform connecting customers with professionals for services like cleaning, beauty treatments, plumbing, carpentry, and more. It raised Venture Debt from Trifecta Capital in 2017.

Purpose of Taking Venture Debt

UrbanClap took venture debt for:

• Scaling Operations: Expanding its operations to new cities and improving its service delivery network by onboarding more service professionals.

• Technology and Platform Upgrades: Enhancing its tech platform to improve customer experience, service professional management, and operational efficiency.

• Marketing and Customer Acquisition: Funding marketing campaigns to boost brand awareness and acquire new customers in a highly competitive market.

• Working Capital Management: Managing the cash flow for daily operations, paying service professionals on time, and maintaining business continuity.

Key Outcomes:

• Geographic Expansion: Venture debt enabled UrbanClap to expand its services to more cities in India and internationally, quickly establishing a strong presence in new markets.

• Service Professional Network: Debt financing helped scale the workforce of service professionals, enhancing the platform’s ability to handle a larger volume of bookings.

• Technology Advancements: Venture debt facilitated the development of the company’s platform, including improved algorithms for service matching, real-time tracking, and customer feedback systems.

• Increased Brand Visibility: The funds helped fuel large-scale marketing campaigns across digital and offline channels, boosting customer acquisition and retention.

Case Study 6: MobiKwik

Founded in 2009 by Bipin Preet Singh and Upasana Taku, MobiKwik is one of India’s leading digital wallets and payment solutions platforms. The company offers a wide range of services, including online and offline payments, bill payments, mobile recharges, and financial services like loans and insurance. It took Venture Debt from Trifecta Capital in 2018.

Purpose of Taking Venture Debt

MobiKwik took venture debt for:

• Product and Technology Development: To enhance its payment gateway technology, improve the security features of the wallet, and develop additional financial products like MobiKwik Pay Later and lending options.

• Expanding Customer Base: To fund marketing campaigns and user acquisition strategies to drive more adoption, particularly in tier 2 and tier 3 cities.

• Strengthening the Payment Infrastructure: To scale its infrastructure to handle higher transaction volumes as the platform grew.

• Working Capital Needs: To manage operational costs, including vendor payments, without additional equity dilution.

Key Outcomes:

• Platform Enhancement: Venture debt allowed MobiKwik to make critical technological upgrades to ensure a smoother, safer, and more reliable payment experience.

• Market Expansion: The company expanded its presence across smaller cities and towns in India, contributing to a growth in its user base and transaction volume.

• Product Diversification: The funds enabled MobiKwik to diversify its offerings beyond just a digital wallet, including launching MobiKwik Pay Later, a Buy Now Pay Later (BNPL) service.

• Increased Brand Recognition: The capital helped MobiKwik boost its marketing and advertising efforts, raising awareness of the brand and expanding its customer base.

Current Momentum and Promising Future

Venture debt has emerged as a significant financing tool in India’s startup ecosystem, witnessing remarkable growth and diversification across regions and sectors. In 2023, venture debt accounted for approximately 12-15% of the total funding raised by Indian startups, marking a substantial increase compared to previous years. While major hubs like Bangalore, Delhi-NCR, and Mumbai continue to dominate the venture debt landscape, there is a notable rise in activity in Tier-2 cities such as Hyderabad, Pune, and Chennai, indicating the expanding reach of startup ecosystems across the country.

This growth isn’t limited to specific sectors, as technology, consumer goods, and fintech startups are among the key beneficiaries, showcasing the broad applicability of venture debt financing. Additionally, debt funding in India surged by an impressive 80% year-on-year in the first half of 2023, contributing 4.81% of the total $5.4 billion raised by Indian startups during this period. As venture debt cements its position as a critical funding avenue, it is projected to cross $2 billion by 2026.

Trends in Venture Debt

The "India Venture Debt Report 2024" by Stride Ventures provides comprehensive insights into this evolving market.

Sector-Wise Breakdown of Venture Debt Utilization

In 2023, the venture debt market in India reached a record high of $1.2 billion, marking a 50% increase from the previous year. This growth was distributed across approximately 175–190 deals, indicating a compound annual growth rate (CAGR) of around 34% since 2017. The consumer sector led in the number of venture debt transactions, while the fintech sector attracted the highest investment volume. Notably, startups that secured venture debt had an average age of seven years, with an average deal size of $4 million. The Delhi NCR region emerged as the leading recipient of these deals.

Emerging Trends: Green Energy, AI, and Other Sectors

The report highlights a growing interest in sectors such as green energy and artificial intelligence (AI). For instance, approximately 67% of electric vehicle (EV) startups now rely on venture debt for more than half of their debt funding, underscoring the sector's dependence on this financing model. Additionally, the AI sector has seen increased venture debt activity, reflecting the technology's expanding role in various industries.

Future Projections for Venture Debt Growth in India

Looking ahead, the venture debt market in India is poised for continued expansion. Projections suggest that the total capital raised through venture debt could reach $600 million in 2024. This anticipated growth is driven by startups' increasing preference for non-dilutive financing options and the maturation of the venture debt ecosystem. Furthermore, sectors like fintech, EV mobility, and AI are expected to remain significant contributors to this upward trajectory, as they continue to attract substantial venture debt investments.

Conclusion

In India’s rapidly evolving startup ecosystem, venture debt has emerged as a crucial financing tool, offering founders non-dilutive capital to scale operations, manage working capital, and navigate uncertain market conditions. Its growing relevance lies in its ability to complement equity financing, enabling startups to maintain control while accessing necessary funds. Striking a balance between equity and debt is essential for fostering a sustainable financial structure, mitigating risks, and optimizing capital efficiency. As the ecosystem matures, debt financing is expected to play an increasingly pivotal role, particularly in sectors like fintech, EV, and AI, driving long-term growth.