India's venture debt (VD) market crossed the billion-dollar mark in 2023, a 50 percent surge from the previous year.
This surge, accounting for approximately 175-190 deals, reflects a Compound Annual Growth Rate (CAGR) of about 34 percent from 2017 to 2023, marking venture debt as a burgeoning asset class in India's financial landscape, a recent report by Stride Ventures highlighted.
This comes in contrast to venture capital (VC) investment in the Indian startup ecosystem, which experienced a significant funding downturn last year.
The total VC investment declined by 60 percent in 2023 from the previous year, reaching over $8 billion, a notable correction from the peak witnessed in 2021, reflecting both macroeconomic challenges and heightened investor caution
While Fintech dominated the VD landscape in India, capturing over 55% of the total investment, consumer sector stood second with approximately 25.56 percent investment.
This was, however, reversed in terms of terms of deal count with consumer sector taking the lead, followed by fintech and SaaS.
The average size of VD deal was at $ 4 million.
“This leap signals a shift towards strategic financing, propelling Indian innovation to global prominence. With the market poised to hit $1.8-2 billion by 2026, India's future in the global startup scene looks not just promising but unstoppable,” said Ishpreet Singh Gandhi, Founder & Managing Partner, Stride Ventures.
The sector-agnostic investment firm has a portfolio of over 120 startups, including the likes of Mensa, Sugar Cosmetics, Perfios, Spinny, Zetwork, Blu Smart, Jupiter and Slice, through its three funds.
Moreover, VD, which is predominantly assessed by late-stage companies, saw a shift as Pre-Series A to Series C stages receiving 79 percent of deals and 53 percent of investment volume.
“This pivot towards early to mid-stage companies indicates an evolutionary stride in the use of venture debt, showcasing a broader acceptance across various stages of company growth,” the report noted.
There's a small percentage of founders (3.6 percent) who believe VD can be pursued pre-revenue, in contrast to VCs who show zero preference for this stage.
Cleantech inclination towards debt funds
The survey indicates that among trending sectors for VD in 2024, CleanTech (EV, Renewable Energy) emerges as a frontrunner among founders and limited Partners, reflecting a heightened interest in sustainable solutions.
Conversely, VCs continue to maintain a strong belief in Consumer and B2B sectors.
Apoorva Sharma, Managing Partner, Stride Ventures added to this, saying, “This surge is fueled by thorough due diligence and the asset class's promise of resilience and returns. As both founders and VCs increasingly integrate venture debt to balance equity and growth, it becomes central to India's funding landscape, signifying a pivotal evolution in the startup ecosystem.”
41 percent of the survey respondents are considering raising VD funding in 2024 for working capital needs, optimizing equity dilution and growth financing.
Further, the report suggests that there is a strong alignment between VCs recommending venture debt, and their willingness to co-invest with VDs in 2024. This correlation suggests that VCs see venture debt not just as a viable option for their portfolio companies but also as a strategic co-investment opportunity, it added.
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