Venture debt is growing better than venture capital deployment, says Apporva Sharma of Stride Ventures

Venture debt is a loan to an early-stage company that provides liquidity to a business for a period between equity funding rounds. Representative image

While venture capital deployment had been declining since CY21, venture debt has been consistently growing in the same period, Apporva Sharma, Managing Partner at Stride Ventures, said in the PMS & AIF Summit 6.0 held on November 3.

She said that in CY21 entire foreign direct investment (FDI) was being diverted from China into India and venture capital shot up to $36 billion in the same period. After which in the wake of the COVID-19 pandemic, it fell to $25 billion. Sharma expects venture capital deployment this year to be around $11-$12 billion and to grow at sustainable rates from here. "However, venture debt in the same period has been growing and it has grown every year," said Sharma.

Venture debt is a loan to an early-stage company that provides liquidity to a business for a period between equity funding rounds. Venture debt is rarely used as a long-term financing solution.

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However, even when one is growing and the other is not, Sharma says that both of them are a married asset class and venture capital deployment has to grow for venture debt to grow.  "It can't keep growing in silos," she said.

Venture capital deployment is about 7-8 years old in India and is at a very mature stage. While venture debt in terms of penetration is 5 percent of the total venture capital money. "Venture debt is entering into new-age businesses without taking a lot of risks," said Sharma.

Sharma stated the criteria for selecting companies for venture debt investment. Venture debt investing starts after a company at an early stage has raised over $5 million from venture capital and when the company generates Rs 2-3 crore per month in revenues, said Sharma. The next criteria for selecting companies is to see whether it is in a product market fit stage and if the company is a leader in its category, she added.

Sharma said that she stays away from companies where there is a regulatory overhang, like cryptocurrency, gaming, and others.