While equity financing remains the top choice for funding requirements of new-age companies, more startups are increasingly opting for alternative financing methods to raise money without diluting their captable too much. Startups have raised nearly $105 million in venture debt financing till May this year, compared with $151 million raised in the entire 2023, data from Tracxn showed. The figures include only publicly announced venture debt deals.
Venture debt is a type of loan offered to Series A-and-above startups with institutional backing, and includes equity warrants in addition to the debt component, with a repayment period of two-three years. These equity kickers are typically about 10% of the debt quantum and usually translate to less than 1% ownership in the firm on a fully diluted basis. Venture debt is typically only available to firms with institutional backing, so much of the uptick in venture debt deals hinges on the recovery in venture capital investments. “The year began on a positive note with VC investments in Indian startups doubling to $2 billion from 183 deals in comparison to $1 billion in Q3FY24, after experiencing a low not seen since Q4 2016,” Apoorva Sharma, managing partner at venture debt firm Stride Ventures, said.
“This positive VC trend as predicted by the Stride team has resulted in a clear uptick in venture debt activity as well. The venture debt landscaped already crossed the billion-dollar mark in 2023, and on the back of these positive market trends, seems ready to set new milestones in 2024,” she added. One of the largest venture debt deals this year was by Mohalla Tech, which owns vernacular social media platforms ShareChat and Moj, when it raised $49 million via convertible debentures in March. Besides this, fintechs Axio and Lendingkart and space-tech company Dhruva Space also raised venture debt funding this year.
“While working capital management, capex and asset financing, acquisition financing have been some of the common use cases for venture debt, with more companies setting themselves on the path to an IPO, unique use cases such as financing of share buybacks, funding of expenses related to reverse flipping of entities are emerging,” said Abhijit Joshi, director at Trifecta Capital, which deployed close to Rs 1,300 crore last year.
He added that sectors such as fintechs, B2B-focused platforms and consumer businesses typically show a larger appetite for venture debt financing, while EVs and cleantech firms are also showing potential. “Venture debt is a great asset class for founders looking to grow steadily while focusing on the conservation of capital. As the incentives of business align with the use cases of this asset class, we will see venture debt investment quickly become one of the most prominent forms of capital founders can rely on in the Indian ecosystem,” he added.
