Indian startups raised $800 million in venture debt in 2022 despite a funding winter that impacted growth and late-stage companies. A report by venture debt firm Stride Ventures on Friday showed that the debt funding amount disbursed to Indian startups went up 2.6 times in 2022 compared with 2019 when startups had secured just around $281 million.
Around 30% of the venture debt raised in CY22 was disbursed to pre-Series A companies, another 27% to Series A firms, and 25% to startups in Series D and beyond. Series B and Series C startups raised 13% and 5% of the funding amount, respectively.
Startups in fintech, B2B commerce and retail tech raised the majority of the venture debt funding in terms of value in CY22, according to the report. Both fintech and B2B commerce accounted for more than 70% of venture debt transactions.
FE had reported in December that a good number of startups which were unable to mop up equity at expected valuations in a funding winter in CY22 opted for venture debt to run their operations. Experts indicated that a majority of the venture debt deals last year were used by startups for leveraged buyouts and to finance M&As. However, in 2022, venture debt has been used more to fund operations and to increase cash runways.
In CY22, venture debt firms including Blacksoil Ventures, Stride Ventures and Alteria Capital — all raised at least $100 million each, relatively bigger sums than in the past, on the back of strong participation from both institutional investors and HNIs. Between the three, they have cornered the lion’s share of the market.
“Venture debt has become one of the key growth enablers for Indian startups. The rising awareness of this asset class and positive investor outlook has enabled venture debt to more effectively showcase its non-dilutive characteristics and capacity to unlock growth,” said Ishpreet Singh Gandhi, founder and managing partner, Stride Ventures.
The report also surveyed around 150 venture capitalists (VCs) and startup founders which indicated that 71% of founders of early-stage companies plan to raise venture debt in 2023, compared with 50% of late-stage founders and 20% of growth-stage founders. Additionally, 74% of VCs surveyed would recommend their portfolio companies to take on venture debt in 2023. In 2022, 100% of growth-stage founders were certain of raising venture debt, compared to 86% of early-stage founders and 67% of late-stage founders.
The survey results also highlighted that 62% of founders and 44% of VCs consider “engaging with bank limits” as the most important value-added service offered by a venture debt fund, with “advisory on corporate financial services” being the second most preferred service for 28% of founders and 33% of VCs. This is a change from 2022, where advisory on corporate financial services was considered the most important value-added service, followed by “engaging with bank limits”.
In addition, the survey indicated that agri tech, health tech, and SaaS sectors received fewer venture debt prospects, according to founders and VCs. These findings suggest that founders and VCs in India are prioritising profitability and seeking venture debt as a means of achieving growth, while also valuing value-added services from venture debt funds.
The survey found that in CY23, 82% of founders would strive for profitability and prioritize scaling their startups, while 79% of VCs expressed a focus on profitability, and 21% want to focus on growth. This is in contrast to 2022 when 55% of VCs and 68% of founders focused on growth rather than profitability.