Venture debt to be $3 bn opportunity in India in 5 years

KEY HIGHLIGHTS:

• Venture debt is cheaper than equity capital, and helps founders avoid dilution
• Serial entrepreneurs and second-time founders are looking for debt at very early stages of their journey
• Debt is also being used for acquisition financing, achieving capital efficiency and EBITDA-breakeven

The post-pandemic years have witnessed the rise of venture debt in the Indian startup ecosystem, with increased demand as well as supply. Not only are there more founders today who are looking for debt capital, but there are also many more funds that are debt providers to new economy companies. 

Speaking at the IVCA Conclave 2023 in Mumbai,  Tarana Lalwani, Partner at Innoven Capital, said, “When we started, debt wasn’t even 1 per cent of the capital market. Today, it is more like 7-8 per cent, even when overall venture capital has grown multifold.”

Echoing her, Ishpreet Gandhi, Founder & Managing Partner, Stride Ventures, said, “About $1 billion of venture debt per year is being deployed in India right now.  Venture debt is being looked upon as a thoughtful way of using capital. It can be a $3 billion opportunity within five years.”

“This [credit] product is spoken of commercially in all discussions.  Lots of businesses that have never taken debt and are now asking for it,” he added. 

Venture debt is, of course, cheaper than equity capital, and also helps founders avoid dilution, especially at early stages of their companies. But besides that, the use cases for debt have also evolved over the last few years. “Many founders feel venture debt is easy to have but then it has a lot of implications on your cash flows,” said Ankur Bansal, Co-Founder & Director of BlackSoil.

He further explained, “Startups today are using debt to reach capital efficiency and EBITDA-breakeven, which has become extremely critical. Many serial entrepreneurs are raising debt at an early stage.  They want to avoid equity dilution and hit EBITDA-breakeven not at Series C or Series D stages, but get there on Day One. Optimal debt will help you grow profitably.”

While the demand for debt from founders has gone up, especially post the pandemic, funds also need to ensure that there’s a steady supply of debt capital. 

Rahul Khanna, Co-Founder and Managing Partner, Trifecta Capital, shared, “In 2015, there were no venture debt funds in India. There was a lot of education needed for the investor community to build the supply of capital. And now the industry is absorbing a billion dollars a year. By the end of the decade, $6-$8 billion of venture debt can easily be deployed in India annually.”

“Supply has to keep pace with the demand we’re seeing,” he added.

While education and awareness building will continue, funds reckon use cases of debt seekers have evolved. “Initially, the use cases were simplistic in terms of runway extension, more fuel for companies to grow faster, etc. Now we have 3-4 iterations of how venture debt is used, and founders have better intelligence on how to use both equity and debt,” said  Vinod Murali, Managing Partner at Alteria Capital.

He added, “Companies may use it to acquire assets or invest overseas. Debt is helping them last longer, and become lean and efficient.”