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Start-ups opt for venture debt in funding winter

December 19, 2022

Start-ups opt for venture debt in funding winter
With a good number of startups unable to mop up equity at expected valuations in a funding winter, many have opted for venture debt to run their operations.

As Ankit Agarwal, managing partner at Alteria Capital, pointed out, a majority of the venture debt deals last year were used by startups for leveraged buyouts and to finance M&As. “However, in 2022, venture debt has been used more to fund the operations and to increase cash runways,” Agarwal told FE.

The value of venture debt has nudged $400 million in 2022 so far, a rise of nearly 14% over last year, data from private market tracker Venture Intelligence showed. So far this year, 59 deals have been struck compared to 67 deals in 2021. “As the funding winter continues, a larger number of startups are turning to debt to survive and support growth instead of using increasingly expensive equity, Blacksoil co-founder and director Ankur Bansal observed.

Gopal Agrawal, MD & head, Edelweiss Financial Services, believes value of venture debt could soon cross the $2-billion mark. “Funds can make anywhere between 10-18% annually and they are using stock as collateral. Moreover, they have the rights to the cash flows and if there is any event like an IPO, they would get their money back sooner,” Agarwal explained.

Blacksoil Ventures, Stride Ventures and Alteria Capital have all raised at least $100 million each in 2022, relatively bigger sums than in the past, on the back of strong participation from both institutional investors and HNIs. Between the three, they have cornered the lion’s share of the market.

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