Even though venture debt deals saw a surge last year, crossing the $1 billion mark in India amid an equity crunch, the growth in deployment of venture debt this year will largely depend on any uptick in venture capital rounds, said Apoorva Sharma, managing partner at venture debt firm Stride Ventures.
“There is a very strong correlation between venture capital and venture debt as an asset class. So it can’t happen that venture debt keeps growing in a silo without venture capital increasing. If venture capital does not grow, then I think the annual number of deployments in venture debt is not going to change much,” Sharma told Fe in an interaction.
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, where the interest rate averages between 12-15% on a repayment period of 2-3 years. Stride Ventures has backed companies such as Sugar Cosmetics, MyGlamm, Mensa Brands, HomeLane, and BluSmart Mobility, among others.
2023 had recorded around 175-190 venture debt deals, expanding the market by 50% year-on-year to $1.25 billion, as per a recent report by the firm. This surge was primarily because of a small base in India, where venture debt is only about 5% of the venture capital market, and also the increasing awareness about the asset class among founders, who are unwilling to dilute equity for capex, acquisition capital, or working capital needs.
“Founders who have raised series D or series E, realize that if they start diluting themselves by raising equity for reasons like working capital, capex, and acquisition, they are reduced to single-digit shareholding, which limits their capability of raising further equity rounds and hence is a sub-optimal outcome for the founders as well as the company,” Sharma said.
For Stride Ventures, consumer and financial services companies together contribute about 60% of its portfolio. Both of these sectors have a debt use case – an inherent requirement for working capital, either to build an inventory or to park it at a higher interest rate to generate a net interest margin.
Besides these sectors, Sharma added that electric mobility companies across the supply chain – battery manufacturers, battery swapping solutions providers, original equipment manufacturers, and ride-hailing platforms – have an intense capex requirement, that makes them suitable companies to raise venture debt.