Venture Debt: The Strategic Lifeline Shaping Startups in Resilient Ecosystem

The Indian startup ecosystem, one of the fastest-growing globally, has made remarkable strides in recent years. However, only a fraction of startups survive beyond five years, often succumbing to challenges like cash flow constraints and limited access to tailored financing solutions.

Venture debt emerges as a critical lifeline, providing startups with innovative, non-dilutive capital to navigate these hurdles and sustain growth. Globally valued at $50 billion, this asset class ensures startups can scale sustainably, providing the financial flexibility needed to navigate growth and innovation without equity dilution.

Globally, the venture debt market stands at close to $50 billion in 2023, with the United States accounting for over half the volume. Comparatively, India’s venture debt (VD) market was estimated at 1.4 billion, India’s venture debt market, while growing, represents only ~2-3% of global VD funding, highlighting significant untapped potential.

As 2025 unfolds, VD is poised to become an even more essential element of the startup financing landscape, particularly as the ecosystem rebounds with improved market conditions, policy support, matured ecosystem and the improved pedigree of entrepreneurs.

Unlike equity financing, which often demands significant ownership dilution, venture debt provides startups with capital while preserving founder equity. This allows entrepreneurs to retain control over their companies, enabling them to focus on innovation and scaling operations without the looming pressure of frequent fundraising and equity dilution.

This feature of VD is particularly valuable in a challenging funding environment. In 2024, Global VC investments totaled approximately 314 billion in 2024, marking a 3% increase from 2023. However, this figure remains 55% below the peak observed in 2021.

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Meanwhile venture debt proved to be a reliable alternative. Not only did it withstand market volatility, but it also posted the highest returns among all private asset classes globally, solidifying its position as a preferred choice for startups and investors alike. Venture debt’s low loss ratio—estimated at less than 1.5% globally—combined with its ability to generate fixed returns of 13-14% over a 2-3 year repayment period, makes it particularly attractive to institutional investors such as insurance companies, pension funds, and family offices

Despite the overall decline in equity funding, which saw fintech equity funding drop by 38% year-on-year (from 2.6 billion to 1.6 billion in 2023), venture debt stepped in to bridge the gap. Fintech startups, one of the most resilient and growing Indian startup categories, raised 671.1 million across 49 venture debt rounds in 2023, a sharp increase from 307.2 million in 2022. For startups navigating critical growth phases, VD provides tailored solutions to meet diverse capital needs, such as: Runway Extension, Receivables Financing, CAPEX Financing, Global Expansion.

By addressing these needs, VD has become more than just a funding instrument; it is a strategic enabler of sustainable and resilient growth. As India’s startup ecosystem rebounds in 2025, venture debt (VD) is set to play a vital role in driving growth. Emerging sectors like AI, fintech, and marketplaces present opportunities for startups to scale without equity dilution. VD is also crucial for startups in Tier 2 and Tier 3 cities, providing accessible growth capital where equity funding is limited.

As investors become more selective, VD complements capital structures, offering a financial buffer during downturns and enabling long-term sustainability. By providing purpose-driven funding, VD empowers startups to focus on innovation and problem-solving without the constant pressure of raising equity rounds.

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Challenges and the Road Ahead

Despite its promise, venture debt in India faces challenges like limited awareness in Tier 2 and 3 cities and a fragmented ecosystem. Addressing these requires targeted awareness campaigns, developing a Venture debt focused policy framework, and collaboration between VD funds, VCs, and institutions to unlock its potential and build a resilient funding environment.

Indian VD funds are actively working with the government and key stakeholders to raise awareness and create a robust ecosystem for this asset class. Recent strategic initiatives, including MOUs with government bodies, focus on streamlining access to debt funding and providing growth capital.

These efforts aim to drive adoption of venture debt across various startup categories, support initiatives like "Make in India," and enable the global expansion of new-age domestic businesses. Such partnerships underscore the shared commitment of the government and policy enablers to foster innovation and empower India’s entrepreneurial aspirations As India’s startup ecosystem continues to evolve, venture debt will remain a strategic enabler, driving the next wave of entrepreneurial success and ensuring the long-term resilience of the innovation economy.

(The author is the Founder and Managing Partner at Stride Ventures)