With a good number of startups unable to mop up equity at expected valuations in a funding winter, many have opted for venture debt to run their operations. As Ankit Agarwal, managing partner at Alteria Capital, pointed out, 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 the operations and to increase cash runways,”Agarwal told FE.

The value of venture debt has nudged $400 million in 2022 so far, a rise of nearly 14% over last year, data from private market tracker Venture Intelligence showed. So far this year, 59 deals have been struck compared to 67 deals in 2021. “As the funding winter continues, a larger number of startups are turning to debt to survive and support growth instead of using increasingly expensive equity, Blacksoil co-founder and director Ankur Bansal observed.

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Gopal Agrawal, MD & Head of Investment Banking, Edelweiss Financial Services, believes value of venture debt could soon cross the $2-billion mark. “Funds can make anywhere between 10-18% annually and they are using stock as collateral. Moreover, they have the rights to the cash flows and if there is any event like an IPO, they would get their money back sooner,” Agarwal explained.

Blacksoil Ventures, Stride Ventures and Alteria Capital have all raised at least $100 million each in 2022, 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.

Blacksoil’s Bansal pointed out that venture debt deals have stringent covenants in place around expenses, payout obligations and profitability, which protect their rights. On occasion, there is also option to buy convertible shares, if the fund managers see an upside in future funding rounds or other large liquidity events. “But these deals also come with a fair amount of assumed risk, even though debt providers get a first payment priority in event of liquidity or a shutdown,” Bansal said.

Stride Ventures closed its second flagship fund at $200 million in August, while Alteria Capital announced the close of its third fund at $120 million in October.

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Ishpreet Singh Gandhi, founder and managing partner at Stride Ventures, said funds were being closed in barely six months due to a strong demand from institutional investors. In 2019, institutional money accounted for just a fourth of the total amount raised, but subsequently, this share has gone up to 45%.

“Lately, apart from financial institutions, HNIs and family offices have also been participating because they see it as a way of diversifying their investments,” Gandhi told FE.

With startup valuations taking a knock, Raja Lahiri, partner at Grant Thornton Bharat, expects many more venture debt transactions in the next two-three years. This would be possible even though some loans were being given without collateral, he said. “Venture debt is given in the hope the company will continue to grow, raise equity and be able to pay back the loans. You can’t have a model where you’re picking up only venture debt without any past history of equity funding, they have to co-exist,” Lahiri said.