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What is venture debt? How Indian startups borrow

By · Startup Decoded

Venture debt is a loan made to a startup that already has venture capital backing, usually alongside or between equity rounds. It lets founders raise money without selling as many shares.

What is venture debt?

Venture debt is a loan for startups that investors have already backed. Banks rarely lend to young companies that lose money and own few assets they could sell to recover a loan. Venture debt lenders do, because the startup's equity investors make further funding likely, and because the lender prices in the extra risk.

The loan is usually repaid over two to four years in monthly instalments, sometimes after an initial period in which only interest is paid. It is separate from the equity: the lender is a creditor, not an owner, and does not take a board seat in the normal case.

How does it work?

The lender looks at the startup's investors, its revenue and its cash position, and offers a loan sized as a fraction of the last equity round or of recurring revenue. The company signs a loan agreement or issues non-convertible debentures, which are debt certificates that do not turn into shares. The lender usually takes security over the company's assets and sometimes a guarantee.

The lender also tracks the company through covenants: promises about cash balance, reporting and the sale of assets. If the startup breaks a covenant, the lender can ask for early repayment or renegotiate terms. Founders should read this part as closely as the interest rate.

Lenders usually ask for the latest financial statements, a monthly cash forecast, the cap table, the investor agreements and a list of existing debts. They speak to the equity investors, since their support is a key part of the decision. They also ask about the plan for the next round and what happens if it is delayed.

Having these ready speeds up the process. A founder who can show a clear forecast, with a realistic downside case, builds the lender's confidence and often gets better terms.

What are warrants?

Many venture debt deals give the lender a warrant: a right to buy a small number of shares in the future at a price fixed today. The warrant is the lender's extra reward for lending to a risky company. If the startup does well, the warrant becomes valuable. If it fails, the warrant is worth nothing and the lender relies on repayment.

Warrants give the lender a small amount of dilution to the founders, usually far less than an equity round of the same size. In India, a warrant must follow the Companies Act and, for any foreign lender, the foreign exchange pricing rules for the shares it can buy.

Why do startups use it?

The main reason is less dilution. Selling shares gives up a slice of the company for ever. A loan is repaid and then gone. Startups use venture debt to stretch their runway, the time until cash runs out, to reach a better valuation at the next round, or to fund equipment, vehicles or inventory.

It also helps with working capital. A company that sells to large customers who pay after 60 or 90 days may need cash to cover the gap. Venture debt suits businesses with predictable revenue, such as software subscriptions, or with assets that give comfort to the lender, such as electric vehicles or lending books.

Who lends in India?

A group of dedicated funds, many registered with SEBI as Category II alternative investment funds, lend to startups. Alteria Capital, Trifecta Capital, InnoVen Capital and Stride Ventures are among the active names. Non-bank lenders (NBFCs) and some banks with startup desks also lend. Some venture capital funds lend through their own debt funds.

The mix changes over time. Lenders often focus on a sector, such as consumer, software or climate. A founder should talk to several and compare the full package, not only the headline rate.

A bank loan looks at assets, profits and collateral. A venture debt lender looks at the startup's investors, its growth and its next funding round. Banks move slowly and ask for security that early companies often do not have, while venture debt funds specialise in startups and move faster.

In exchange, venture debt costs more and brings warrants. A startup that can qualify for a bank loan at a lower rate should compare. Some banks now run startup desks, and government-backed credit guarantee schemes for startups exist, so a founder should check all options before choosing.

What does venture debt cost?

The cost has several parts. There is the interest rate, which is higher than a bank loan because of the risk. There may be an upfront processing fee and a fee for repaying early. There are the warrants. Add them together to see the real cost, which is often estimated as an annual percentage including fees, and compare it with the cost of equity, which is the share of the company you give up.

Because rates and market conditions move, we do not give a single figure here. Ask each lender for a term sheet, and ask a chartered accountant to work out the total cost under your own cash flow.

What are the risks?

A loan must be repaid whether or not the business does well. If revenue falls short, instalments can drain cash just when the company needs it. Breaking a covenant can allow the lender to demand money early. Security over assets may put the company's most important property at risk.

Venture debt also complicates the next equity round. New investors will look at how much has been borrowed and may worry that their money is repaying a lender. A startup that borrows too early or too much can find it hard to raise equity. It works best as a top-up for a company that already has a path to the next round.

When does venture debt make sense and when not?

It makes sense when a company has steady revenue, a clear path to its next round and a short-term need, such as buying inventory or covering a gap before a large customer pays. It also makes sense soon after an equity round, when the company is strongest and lenders are most comfortable.

It makes little sense for a company that has no clear way to repay, whose revenue swings widely, or that is raising debt only to cover losses with no plan to fix them. In that case the loan postpones the problem and adds a creditor to it. Founders should ask their investors for a view, since the lender will usually speak to them anyway.

Is venture debt counted as a funding round?

Venture debt is funding, but it is not equity. On StopDown, rounds marked as debt are left out of the monthly funding totals, so the numbers show equity raised and are not mixed with loans. Founders and investors often announce debt together with equity: a company might say it raised ₹200 crore, made up of equity and a debt part.

This guide is general information. Loan terms, security and tax treatment vary, so please check with a lawyer or chartered accountant before borrowing.

Recent examples on StopDown

Questions people ask

Is venture debt equity or a loan?

It is a loan. The lender is repaid with interest over time and does not become an owner, apart from any warrants that give a right to buy a small number of shares.

What are warrants in venture debt?

A warrant gives the lender the right to buy a small number of shares later at a set price. It is a reward for lending to a risky company, and it causes limited dilution.

Who can get venture debt in India?

Mostly startups that already have venture capital backing and some revenue. Lenders look at the quality of the investors, recurring revenue and cash runway.

Why not just raise more equity?

Equity gives up ownership permanently. Debt is repaid and then ends. Founders use debt to delay dilution when they expect a better valuation later, but they must be able to repay.

Does venture debt count in funding totals?

Not on StopDown. Rounds marked as debt are excluded from the monthly funding totals, so equity figures stay comparable.

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