Is India's Startup Scene About to Explode? Discover the Shocking Role of Venture Debt!

India's startup ecosystem is currently undergoing a pivotal transformation. After years marked by aggressive equity funding and soaring valuations, the landscape is now recalibrating. A recent report by KPMG highlights that global private equity investment hit USD 537 billion in Q3 2025, a slight increase from USD 512 billion in Q3 2024. However, the total number of deals has dropped from 5,070 to 4,062 in the same period, indicating a shift in investor focus towards fewer yet higher-quality opportunities. Over the first three quarters of 2025, global investment reached USD 1.5 trillion, signaling a cautious but deliberate approach by investors.

In this evolving environment, founders are increasingly exploring alternatives to traditional funding sources. Venture debt has emerged as a significant tool in this new chapter, with India's venture debt market experiencing a compound annual growth rate of 58 percent from 2018 to 2024, culminating in a value of USD 1.23 billion last year. According to the Global Venture Debt Report 2025 by Stride Ventures in collaboration with Kearney, 52 percent of venture debt is allocated for working capital, while 44 percent is earmarked for growth and runway extension. Additionally, debt is increasingly utilized for pre-IPO bridge needs at 41 percent and for inventory and capital expenditure at 37 percent.

This maturation of the venture ecosystem indicates that debt is becoming an essential tool that allows founders to retain ownership while still accessing necessary growth capital. This shift began following the valuation reset that followed the exuberance of 2021. Founders who once prioritized rapid unicorn status are now focusing more on runway and profitability. As a result, debt has become a vital component that encourages discipline, long-term planning, and sustainable ambition, steering the narrative away from mere glamour and towards grounded growth.

Amidst this cautious environment, investors are navigating a mix of opportunities and challenges. Akshat Saxena, Principal at Alteria Capital, emphasizes that while the market is expanding, pockets of stress are present. He notes, “Around 99 percent of the primary capital raised by businesses across the world is largely debt. What we are trying to do is give early-stage founders access to some of that capital.” He adds that the cost of capital varies due to the risk profile of these businesses but adds essential time for founders to solve their challenges. Since its inception, Alteria Capital has invested over USD 900 million across 221 startups and has lost less than 1 percent of that investment, a stark contrast to traditional banks in India, which report non-performing asset (NPA) ratios between 2 to 3 percent.

Saxena further highlights that the skill lies in offering the right level of leverage, stating, “Great debt providers ensure that companies are not over-leveraged.” He points out that stress levels across Alteria’s portfolio are much lower than expected, indicating a healthy balance of debt and equity in the new normal.

The long-term trajectory of venture debt in India is expected to evolve significantly as the ecosystem matures. Ashish Gala, Co-founder and Managing Partner of VentureSoul Partners, asserts the necessity of moving away from symbolic milestones like unicorn status, describing them as “mythical.” He argues that such milestones may indicate questionable investment quality from the outset. Gala advocates for smarter credit structures in India, echoing that around 90 percent of the world’s capital is debt, in stark contrast to the current low percentage in India. He raises the question of whether the country can implement innovative banking solutions to align with global standards, particularly in instances like the acquisition of a smaller rival.

Industry data reveals changing founder behavior, with a notable shift towards revenue-based financing. Eklavya Gupta, Co-founder and CEO of Recur Club, reports a threefold increase in inquiries for revenue-based financing over the past two years, facilitating around INR 3,000 crore in non-dilutive capital. “Stronger cohorts have diversified revenues, low single-digit monthly churn, and disciplined collections,” he notes, explaining that the company underwrites stronger models with higher limits while monitoring volatile sales more closely.

Gupta highlights a growing trend where many founders are utilizing revenue-based financing as a bridging mechanism for valuations, allowing them to extend their runway by 6 to 12 months and negotiate future equity rounds from a more advantageous position. The demand for venture debt is strongest among SaaS and B2B tech companies, followed by D2C, e-commerce, AI, climate-tech, and new-age manufacturing sectors, illustrating a clear shift towards stable, revenue-driven models.

As the Indian startup landscape matures, the interplay between equity and debt will increasingly balance each other out, shifting the focus from a fixation on valuations to an obsession with efficiency. With a more sophisticated ecosystem and innovative financial instruments, venture debt is poised to play a crucial role in India's journey towards establishing a stable and globally competitive startup economy.