Between the equity round that dilutes you and the bank that won't touch a loss-making startup sits venture debt: loans built for VC-backed companies, priced on the strength of your investors and runway rather than your profits. Used at the right moments it is the cheapest growth capital a funded startup can add; used to postpone hard truths it converts a struggling company into a defaulting one. Here is how the instrument actually works in India and the judgment calls around it.
What venture debt actually is
- Term loans (typically 12–36 months) to startups that have raised institutional equity — the lender is underwriting your investors' commitment and your runway math, not your EBITDA
- Ticket sizes commonly 10–30% of your last equity round; disbursed lump-sum or in tranches
- Pricing: interest at ~13–17% plus the equity kicker — warrants giving the lender rights to subscribe to shares (usually 8–20% of the loan value's worth) at the last/next round price
- Providers: dedicated funds (the Alteria/Stride/Trifecta ecosystem), venture-debt arms of NBFCs, and select banks' startup desks
- Security: typically a charge on assets/receivables and sometimes brand IP; personal guarantees are rare and worth resisting
When it genuinely makes sense
The canonical good uses: runway extension between rounds — 6 extra months of runway bought at interest instead of a bridge round's dilution, letting you hit the metrics that price the next round up; capex and working capital with visible payback — inventory for proven demand, delivery fleets, revenue-generating equipment, where matching debt to assets is just good finance; complementing a round — raising ₹20 crore equity + ₹6 crore debt instead of ₹26 crore equity saves real founder percentage at moderate cost; and bridging known receivables/milestones — enterprise contracts signed, government receivables due. The common thread: debt against visibility. Venture debt against pure hope is equity risk at debt's unforgiving repayment schedule.
Compare honestly: ₹5 crore of venture debt at 15% with 12% warrant coverage costs roughly ₹1.2–1.5 crore over two years (interest + warrant dilution at exit values). The same ₹5 crore as equity at a ₹50 crore valuation costs 10% of the company — worth ₹10 crore+ if you 3x. Debt wins when you will grow into a higher valuation; equity 'wins' only when the company might not repay — which is exactly when you shouldn't borrow.
The covenants that matter
- Repayment starts fast: most structures amortise monthly after short moratoriums — model the EMI against your burn honestly
- MACs and investor-abandonment triggers: clauses accelerating repayment if investors write you down/off — negotiate the language
- Financial covenants and information rights: minimum cash/runway covenants are common; breach mechanics matter more than headline rates
- Prepayment penalties, end-of-term fees and warrant terms (validity, strike, transferability) — the yield hides in these
- Charge stacking: how the security interacts with future lenders and rounds — your next investors will read these documents
Process and readiness
Venture debt moves faster than equity — term sheet in weeks, closing in 4–8 — but underwriting is real: lenders read your last round's docs, investor references (they will call your board), unit economics, cohort data and the runway model. The best moment to raise it is alongside or just after an equity round (maximum lender confidence, best terms); the worst is at month-three of runway (pricing punishes desperation, if terms come at all). Keep the relationship warm even when unused — approved-undrawn lines and repeat facilities are how mature startups treat the instrument.
How Aidwish helps
Aidwish advises funded startups on debt structuring — lender mapping, term-sheet economics (the real cost with warrants), covenant negotiation support and the runway models lenders underwrite — so leverage amplifies the equity story instead of endangering it.