Amid extended funding winter, debt funds keep Indian startups warm

With no ebb in the ongoing funding winter, Indian startups increasingly are opting for debt funds in search of money. According to the APAC Q2 2023: Preqin Quarterly Update, venture debt strategy appears to be gaining some traction in India, with four funds launched in 2023 already reaching interim closure.

According to Inc42’s Indian Tech Startup Funding Report H1 2023, there were nine debt fund deals involving late-stage startups in the last stage, against just five in the H1CY22. Late-stage startups would be companies in series C, D, and E categories.

Also, in the top investor ranking for H1CY23 of the top 10 players, four were debt venture players.

Against the backdrop, it is crucial to highlight the fast-paced fund closures that some debt venture players are witnessing. According to Preqin, four funds -- Nuvama Asset Management (Edelweiss Crossover Yield Opportunities Fund), Kotak Private Credit Fund, Stride Ventures III, and LC Venture Debt Fund -- are already reaching interim closure.

Pranav Parikh, managing partner-private equity, Nuvama Asset Management, said: “Over the past year, valuations have fallen, making raising funds through equity costlier. As expenses get rationalised and become stable, companies are looking at debt as a replacement for some parts of equity to reduce the dilutive impact.” The firm is looking to raise funds of Rs. 2,500-3,000 crore.

He pointed out that financing through debt venture funds comes at a lower cost than through traditional equity. “Venture debt is giving more comfort in improving shareholder value, providing the much-needed extra runway and saving on the valuable equity for the long term,” said Parikh.

Venture debt is still in a nascent stage in the Indian startup ecosystem. But amid the extended funding winter, companies have been hard-pressed for funds and debt appears to be a better option.

“Venture debt has emerged as a favourable option, effectively bridging the financial gap for entrepreneurs as they progress towards their next funding round. This trend is evident across the spectrum of start-up stages, with even late-stage ventures, previously hesitant, now embracing venture debt as a viable option. Overall, demand for debt financing is currently at its peak, reaching unprecedented levels over the past 3-4 years,” shared Apoorva Sharma, managing partner, Stride Ventures.

Stride had announced the Stride Venture III fund with a corpus of $200 million. The company already closed $100 million in the first phase.

Asked how investors are responding to the venture debt category, Sharma said: “The appeal of venture debt lies in its ability to deliver recurring, tangible, and predictable returns akin to fixed-income investments. This attractive characteristic has led to substantial interest from various investor types, including domestic investment offices, family treasuries, and home offices.”

The rise of debt ventures is of significance when one looks at the venture capital segment.

Indian PEs and VCs are sitting on unallocated capital worth $15.64 billion as on March 31, 2023, against $12.88 billion at the end of 2022 -- the highest unallocated capital since 2016, according to investment data firm Preqin. Still, according to Tracxn, the total funding declined by 24 per cent in H1CY23 vis à vis H2CY22 and by more than 72 per cent vis à vis H1CY22.

Bucking the Trend 

• Four of top 10 investors in H1CY23 were debt venture players, according to a report
• Four funds are already reaching interim closure, according to Preqin
• Venture debt is still in a nascent stage in the Indian startup ecosystem