In recent years, Indian startup founders have increasingly turned to venture debt (VD) as a strategic fundraising tool.
This financing approach is growing in importance, particularly in industries like fintech, where founders prioritize preserving ownership while accessing essential growth capital, according to a new report from Lighthouse Canton, a financial institution. investment based in Singapore specializing in wealth and asset management.
The report, released in November and titled “Silent Bloom: VD’s Rising Influence,” explores the growing adoption of VD in India’s startup ecosystem.
VD is a strategic financial tool for startups and early-stage companies that are typically backed by venture capital (VC). It often serves as a complement to equity financing and is designed to provide working capital or capital for growth without diluting ownership as significantly as equity financing does.
In India, the VD market is constantly growing, just like the beginnings of VC. The fintech sector, in particular, is emerging as a leading adopter of DV, enabling startups to more effectively manage cash flow, support subsequent lending, and fuel growth.
An industry survey conducted for the report found that 67% of fintech founders in India prefer DV, neck and neck with bank loans, and 80% of them say DV constitutes more than 11% of their capital loan raised. The main reasons for this preference include reduced dilution for existing shareholders (86%), access to capital (57%), and flexibility in repayment schedules and use of funds.
Fintech dominates the VD market
While fintech companies across all sectors can benefit from the general benefits of DV, lending companies are currently the main users of this financing tool in India.
An important use case is on-loan models. In these models, banks lend funds to intermediaries like fintech companies or non-bank financial companies (NBFCs), who then provide loans to underserved sectors such as agriculture, small businesses and housing affordable.
In this scenario, VD provides the liquidity necessary for fintech companies to manage their subsequent lending operations, allowing them to efficiently reach these priority sectors while preserving their cash flow.
Another use of DV is first loan default guarantee (FLDG) financing. FLDG is a risk-sharing arrangement in which a fintech company guarantees to cover a small portion of any default through co-lending partnerships with banks. Essentially, the fintech startup makes a deposit with the bank, which acts as a safety net to absorb the borrower’s initial defaults.
VD is often used to fund these FLDG deposits, allowing fintech startups to participate in such partnerships without using their own equity or cash reserves.
Lighthouse Canton highlights Rupeek and LoanTap, two of its portfolio companies operating in the lending sector, as examples of startups benefiting from DV. Rupeek, which specializes in gold loans, used VD to expand its financial runway and support loan portfolio growth.
Similarly, LoanTap, which focuses on lending to micro, small and medium enterprises (MSMEs), has leveraged VD to expand its lending operations, but also to improve its technology stack and pursue strategic acquisitions.
In addition to lending to fintech startups, VD is also used by fintech companies in verticals such as payments and embedded finance. For payment gateways, VD is used to fill cash flow gaps between when payments are processed and when settlement takes place. This ensures liquidity and supports transaction growth.
For embedded finance startups, VD is used to fund the development and scaling of technologies, such as application programming interfaces (APIs) and platform integrations. This helps them develop business-to-business (B2B) partnerships and generate stable revenue through financial services fees.
India’s booming DV market
The Indian VD market has been growing steadily over the last three years. In 2020, DV funding amounted to US$270 million, which accounted for only 0.8% of VC funding. In 2023, DV funding increased to US$800 million, accounting for 6.2% of venture capital funding. This represents an increase of 675% between 2020 and 2023.
Despite this growth, the Indian DV market remains at an early stage compared to more mature markets. In the United States, VD has become a vital part of the startup funding ecosystem, accounting for approximately 15-20% of total venture capital funding each year.
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