In recent years, Indian startup founders have increasingly turned to venture debt (VD) as a strategic fundraising tool.

This financing approach is gaining prominence, particularly in sectors like fintech, where founders are prioritizing preserving ownership while accessing essential growth capital, a new report by Lighthouse Canton, a Singapore-based investment institution specializing in wealth and asset management, says.

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 tools 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 steadily growing, mirroring the early days of VC. The fintech sector, in particular, is emerging as a leading adopter of VD, allowing startups to more effectively manage cashflows, support onward lending and fuel growth.

An industry survey conducted for the report found that 67% of fintech founders in India prefer VD, neck-and-neck with bank loans, with 80% stating that VD constitutes more than 11% of their raised debt capital. Key reasons for this preference include reduced dilution for existing shareholders (86%), access to capital (57%), and flexibility in repayment schedules and fund utilization.

Fintech leads VD market

While fintech companies from all verticals can benefit from the general advantages of VD, lending companies are currently the top adopters of the financing tool in India.

One prominent use case is in onward lending models. In these models, banks lend funds to intermediaries like fintech companies or non-banking financial companies (NBFCs), which then provide loans to underserved sectors such as agriculture, small businesses and affordable housing.

In this scenario, VD provides the liquidity needed by fintech companies to manage their onward lending operations, enabling them to reach these priority sectors efficiently while preserving their cashflow.

Another use of VD 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 loan defaults in co-lending partnerships with banks. Essentially, the fintech startup places a deposit with the bank, which acts as a safety net to absorb initial borrower 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 vertical, as examples of startups benefiting from VD. Rupeek, which specializes in gold loans, has utilized VD to extend its financial runway and support loan book growth.

Similarly, LoanTap, which focuses on loans for micro, small and medium-sized enterprises (MSMEs), has leveraged VD to expand its lending operations, but also to enhance its technology stack and pursue strategic acquisitions.

In addition to lending fintech startups, VD is also used by fintech companies in verticals such as payments and embedded finance. For payment gateways, VD is utilized to bridge cashflow gaps between when payments are processed and when settlement occurs. This ensure liquidity and supports transaction growth.

For embedded finance startups, VD is employed to fund tech development and scaling, such as application programming interfaces (APIs) and platform integrations. This helps them expand business-to-business (B2B) partnerships and generate steady revenues from financial service fees.

India’s booming VD market

India’s VD market has grown consistently over the past three years. In 2020, VD funding totaled US$270 million, representing a mere 0.8% of VC funding. By 2023, VD funding surged to US$800 million, representing 6.2% of VC funding. This represents a 675% increase between 2020 and 2023.

Despite this growth, India’s VD market remains in an early stage compared to more mature markets. In the US, VD has become a critical component of the startup financing ecosystem, representing approximately 15-20% of total VC funding each year.

Featured image credit: edited from freepik

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