A Comprehensive Guide to Venture Debt Funds in India

India's venture debt market has grown significantly, highlighting its rising importance in its vibrant startup ecosystem. In 2023, venture debt financing reached a new peak of $1.2 billion, marking a substantial 50% increase over the previous year despite broader economic disruptions. 

As venture debt adoption continues to grow, the sector is poised to expand further, with projections placing the market at $1.8–2 billion by 2026. This trajectory signals a broader shift in financing preferences, positioning venture debt as an essential tool in the startup financing landscape. 

Investors and startups embrace venture debt as a strategic, non-dilutive financing option, aligning with India's innovation push and propelling Indian startups onto the global stage.

This article discusses the evolution of venture debt funds in India, exploring its pros and cons, the factors fueling this growth and the leading debt funds in the Indian market.

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What is Venture Debt?

Venture debt is a specialized form of financing available to startups that have received venture capital backing. While it functions like a loan, venture debt is unique in its structure and collateral requirements, designed to align with the needs of high-growth, early-stage companies.

Venture debt loans are typically secured against a startup’s intellectual property, anticipated revenue, or equity warrants. This makes it an accessible financing choice for companies lacking traditional collateral or stable cash flow. 

Venture debt leverages intangible assets, offering a flexible funding option for startups that aim to scale without immediately achieving profitability.

How Venture Debt is Reshaping Startup Funding in India?

As traditional financing methods like equity financing become more competitive, venture debt has become an attractive alternative. It allows startups to access growth capital while preserving their equity stakes. 

Venture debt supports expansion and enables founders to retain greater control over their business, a compelling advantage in today’s startup landscape.

Venture debt solutions simplify capital-raising by offering integrated support and streamlined processes. This shift towards one-stop debt financing reflects the increased sophistication and maturity of debt products available to startups today, catering to their unique growth needs. 

Key Trends from the 2024 Venture Debt Market Report

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Source: Statista 

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• Investors perceive venture debt as a strategic tool to balance risk while supporting startups. According to the report, 68% of investors expressed optimism in venture debt due to its higher returns, reflecting a robust appetite for this asset class. 
• This market surge reflects a 34% compound annual growth rate (CAGR) since 2017, with an estimated 175-190 venture debt deals closed in 2023 alone. This highlights venture debt’s rapid ascent as a favored financing tool for Indian startups.
• The consumer and fintech sectors have emerged as the leading areas for venture debt financing in India, with fintech accounting for over 55% of total investments.
• The report indicates a notable increase in investor confidence in the venture debt market, with 78% of Limited Partners expressing a positive outlook on the Indian startup ecosystem. 
• Founders are increasingly leveraging venture debt for strategic purposes beyond mere operational funding. This includes mergers and acquisitions (M&A) financing and growth initiatives, showcasing the versatility of venture debt as a financial tool.

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How Does Venture Debt Work: Step-by-Step Process 

The venture debt process involves a structured approach to secure growth capital, from identifying suitable lenders and negotiating terms to finalizing agreements and managing repayments. Here’s a step-by-step guide:

1. Find Lenders: Research lenders specializing in startups at your stage, such as venture debt funds or certain banks.
2. Start Discussions & Due Diligence: Engage with selected lenders to understand terms and undergo their due diligence, which assesses your financials and growth potential.
3. Negotiate Terms: Settle the loan’s principal, interest, terms, and conditions like equity warrants.
4. Finalize Agreement & Get Funds: Sign the contract, formalize terms, and receive funds, either in one go or in stages.
5. Deploy & Repay: Use the funds for growth and repay according to the schedule. If warrants are included, the lender may exercise warrants during or after the loan term.

The venture debt agreement is concluded once all repayments are completed and any equity warrants have been exercised or expired.

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Venture Debt Eligibility and Interest Rates

To qualify for venture debt, startups generally need to meet specific criteria reflecting their growth potential and financial stability:

• Institutional Backing: Most venture debt lenders require that the startup raise at least one round of institutional venture capital, which validates the business’s credibility and investor interest.
• Market Traction: Demonstrable revenue growth and market traction are essential to signal the startup’s viability and future earning potential.
• Experienced Leadership: A strong management team with a proven track record can boost lender confidence, suggesting the startup can navigate growth and challenges.
• Scalable Business Model: The startup’s business model should be designed for scalability with clear paths to profitability. This enhances its appeal to lenders who look for long-term growth potential.
• Collateral or Asset Security: While venture debt doesn’t typically rely on extensive collateral, some level of assets or potential security supports the financing terms.

Venture debt providers evaluate these factors to assess a startup’s creditworthiness and gauge its growth outlook before committing to financing.

Venture Debt Interest Rates

Venture debt interest rates in India typically range between 10% and 18% per annum, although rates may fluctuate depending on economic conditions, the lender, and the startup’s risk profile. 

These rates are higher than traditional bank loans, reflecting the added risk of lending to early-stage companies with less stable revenue streams.

Venture debt agreements often include warrants and interest rates, granting lenders the option to purchase equity at a predetermined price later. 

This structure allows lenders to benefit from the startup’s growth potential, providing a balance between debt and equity exposure while giving founders access to financing with less immediate dilution.

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Common Use Cases of Venture Debt 

Some common use cases of venture debt are: 

1. Acquisition and Growth Financing: Venture debt enables startups to fund acquisitions, expand into new markets, or acquire technology assets without equity dilution, allowing founders to retain control.
2. Runway Extension and Operational Support: Venture debt helps startups extend their cash runways by enabling them to reach key growth milestones without relying on unfavorable equity financing terms, providing a buffer for operational costs.
3. CAPEX & Project-Based Financing: Ideal for significant capital expenses like equipment or infrastructure upgrades, venture debt helps startups fund essential projects that directly contribute to revenue growth and scaling.
4. Receivables and Inventory Financing: By borrowing against accounts receivable or inventory, startups can manage cash flow effectively, especially during high-demand or long billing periods.
5. Onward Lending and Credit Extension: Venture debt, common in FinTech, allows startups to extend credit to customers or smaller businesses, facilitating growth in sectors like micro-lending and improving lending capabilities.

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Pros and Cons of Venture Debt

Pros:

• Non-Dilutive: Unlike venture capital, venture debt doesn’t require equity exchange, enabling founders to retain ownership without dilution.
• Extended Runway: Offers additional capital between equity rounds, often with interest-only periods, supporting cash flow during growth phases.
• Quick Due Diligence: Venture debt’s faster due diligence makes it ideal for startups needing immediate capital to seize market opportunities.

While venture debt offers many benefits, it also includes trade-offs, such as interest costs, regular repayments, and possible future equity dilution through warrants. The following points reflect the cons of venture debt. 

Cons: 

• Higher Interest Rates: Higher interest rates (10-15% or more than traditional banks) are generally charged due to increased risk, which can strain cash flow for early-stage startups.
• Regular Payments and Covenants: Requires consistent payments and often includes financial covenants, which startups must carefully manage to avoid penalties.
• Future Equity Dilution via Warrants: Many agreements include warrants, allowing lenders potential future equity, which may dilute ownership if exercised.

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Leading Venture Debt Funds in India

India’s venture debt market has rapidly expanded; several key funds have emerged, each offering unique support to India’s thriving startup ecosystem:

India Venture Debt Report 2024

Stride Ventures
Established in 2019, Stride Ventures is based in New Delhi and has made a notable 100 investments. The fund has raised over $314 million across three funds, focusing on sectors like consumer services, eCommerce, and mobility. This demonstrates its commitment to fueling high-growth startups in diverse fields.

Trifecta Capital
Founded in 2015, Trifecta Capital provides startups with a blend of equity and debt financing alongside advisory services across industries, including consumer services, consumer brands, eCommerce, and edtech. With prominent investments in companies like BharatPe and BigBasket, Trifecta has established itself as a versatile funder in India’s venture debt landscape.

Alteria Capital
Launched in 2017 and headquartered in Mumbai, Alteria Capital focuses on startups across funding rounds from Series A to D. The fund has backed around 90 startups, with investments between $100,000 and $15 million. Alteria’s portfolio includes several high-potential companies across sectors, marking it a significant market player.

Nuvama Asset Management
Formerly known as Edelweiss Crossover Yield Opportunities Fund, Nuvama Asset Management leverages India’s increasing appetite for venture debt. With assets under management (AUM) of nearly INR 74,000 crore, Nuvama focuses on harnessing the growing venture debt market and supporting startup growth in India.

Innoven Capital
Established in 2008, Innoven Capital pioneered venture debt in India, investing over $800 million in over 200 startups. Focusing on tech and high-growth startups, Innoven’s portfolio includes notable unicorns like Myntra, OYO, and BYJU'S, underscoring its role as a substantial contributor to India’s innovation-driven sectors.

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Venture Debt Funding Vs Other Forms of Financing

The table below highlights the characteristics of venture debt along with its comparison with three prominent forms of financing: 

Also Read: Bank Loans vs. Venture Debt - Fight the Chills of the Funding Winter!

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The Bottom Line

In the current challenging fundraising landscape, venture debt is emerging as a crucial lifeline for numerous startups. This growing popularity is reflected in 80% of founders preferring venture debt out of 83.2% of founders who raised funding through VD in 2023.  

However, 94% of founders prefer a venture debt platform with a one-stop solution, which sometimes poses a challenge.

Enters Recur Club, offering just the proper support your startup requires! The fintech platform offers a fast, transparent pathway to debt capital, providing tailored financing solutions from over 125+ lenders to support diverse, growth-focused business models. 

With options designed for startups in their growth phase, Recur Club helps secure suitable financing catering to your unique business requirements.

Interested in learning more? Connect with our capital experts today!