Climate-tech and electric vehicles are likely to emerge as sectors that will benefit from venture debt, says Ankur Bansal, Co-founder and Director of Blacksoil Capital.
“We feel these [EV and climate tech] are areas where there are huge capex (capital expenditure) requirements involved, especially on the EV side, and even in climate tech new devices are coming onto the market for which investments have to be done,” Bansal said during a panel discussion at TechSparks, YourStory’s flagship tech-startup event, in Mumbai.
In 2023, venture debt emerged as a popular way to raise money among startups. The segment saw a 50% increase last calendar year to touch $1.2 billion, according to a report by Stride Ventures.
According to Ankit Agarwal, Managing Partner, Alteria Capital, companies that have grown fast have used venture debt to fund their growth.
“Since equity investing is not an event that happens [in] every six months, it happens [typically] once in two years… but sometimes a startup can’t wait for this [equity investing]… venture debt can move very fast and can help with cash inflow to the company,” he said.
While private equity has matured as a market, venture debt also continues to evolve, Pranav Parikh, Managing Partner, Private Equity and Venture Debt, Nuvama Asset Management, who was another panelist at the session, said.
“About 20 years ago, private equity came into the system… today we have matured as a private equity system. I think venture debt has become another option that has come along,” Parikh said.
Bansal cautioned startup founders against being reckless with venture debt.
“Debt is supposed to complement equity and not substitute… too much of debt can actually harm the business… you need to be careful to see how much debt to raise and if the debt is servicable,” Bansal advised.
The nature of venture debt
Typically, startups that are at Series A and beyond are eligible for venture debt, explained Bansal.
“Venture debt works in the form that it is a syndicated transaction where an equity deal is being forged for a client and debt comes along with it… the debt is typically paid in an EMI (easy monthly installment) format over [a period of time],” he said.
“For early-stage companies, you need customised capital…and I think that’s what venture debt does. Venture debt is evolving with very nuanced use cases. We are also transforming ourselves to be useful to the company,” Parikh added.
To Parikh, venture debt is applicable across sectors, and regardless of what type of company one is building. “Every company should have a capital structure that includes that includes both equity and debt,” he said. “It is a format applicable to everyone.”
Last year, fintech emerged as the top segment of startups that raised venture debt in terms of value while the consumer segment saw the most number of transactions. The average ticket size of venture debt deals was about $4 million, according to the report by Stride Ventures.
Edited by Affirunisa Kankudti
