Venture debt gains ground in Indian startups amid equity fund raising dip

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Illustration: Ajay Mohanty

The Indian startup sector’s equity fund raise has nosedived for 2023. However, venture debt, a recent phenomenon, is slowly gaining acceptance. According to industry players, venture debt crossed the $1 billion mark.


Though venture debt is still small compared to the $7.5 billion, it is slowly rising in significance in the startup ecosystem.


Rahul Khanna, managing partner at Trifecta, one of the largest players in this segment, believes that the funding winter did make startups look at alternative funding sources. However, venture debt is not rescue finance or distressed financing. “Access to venture debt in 2023 was largely available to companies that had adapted to the changing market dynamics by reducing burn, raising additional equity, and generally being more conservative on growth,” he shares.


The growth in the acceptance of venture debt as an alternative source of funding is also evident in the increasing disbursements by players. Trifecta, which launched its first fund in 2015, has seen its investment grow multifold. From a hundred crore investment in 2016, the fund will end the year with Rs 1,300 crore.


For 2023 (Year-to-Date) alone, Trifecta has invested in 49 deals with a total disbursement of Rs 1,201 crore and will end the year at Rs 1,300 crore, which is 10 per cent higher than in 2022.


The dry spell in equity markets has meant entrepreneurs are knocking on the doors of venture debt players. Ankur Bansal, co-founder of BlackSoil, in an earlier interaction with Business Standard, shared that their lead generation has gone up by 20-25 per cent compared to last year. But he cautions that the conversion rate for BlackSoil has gone down to 8 from the earlier 10-12, as scrutiny of deals has become more stringent.


Apoorva Sharma, managing partner at Stride Ventures, agrees. “Even the debt players are very conservative in this market. They are focusing only on the category leaders; they don’t want to jeopardize their credit quality. There is robust demand, but not all of it is serviceable. Our guards are high and we are taking calculated calls,” said Apoorva.

Venture debt players are more focused on the firm’s strategy to reach profitability, which is a major factor in their investment decisions. Ravi Vukkadala, CEO of Northern Arc Investments, shares, “For us, if unit economics are positive and it looks like the company can turn Ebitda positive very quickly, then that is something we have looked at.

We do not have a filter that we will not support an Ebitda negative company. We are not allocating much to consumer-focused startups due to their high cash burn. Many B2B platforms are where we are focusing our investments.”


Though demand for venture debt is rising, players are becoming more cautious. Many hope that 2024 will offer good opportunities.


“Hopefully, the chill of the funding winter will start to wear off, and at least the good companies that have been building prudently for a long time, not just because it’s the flavour of the season, will be able to access capital on more reasonable terms.


The opportunity for debt, I think, will be similar to what we have been doing now. FinTech and Consumer are the biggest categories we serve, and hopefully, we will continue to do so, with B2B services coming in close third,” shares Khanna of Trifecta.

Northern Arc Investments has already allocated 40 per cent — which is about Rs 400 crores of its new fund. But Vukkadala says deployment is a little slower. “There are not as many names now because there are many which cannot attract further capital, and these are the ones finding it difficult.

A lot of the companies were afloat just because they had a lot of equity post-Covid. The ones which are growing are attracting capital. However, these are fewer in number, and the rate of deployment is slower than what we had seen earlier,” he added.


Vukkadala says that 2024 will see good activity. “We are seeing an increase and we expect that next year there will be a lot more companies coming to the market for multiple needs—growth capital or situations like acquisitions, buyouts, or trimming equity promoters. Some unique cases are also coming through when they see a larger market emerging and they want to clean up the cap table,” he added.

First Published: Dec 25 2023 | 4:29 PM IST