B2B could be India's top sector for venture debt funding in 2023: Report

71% of founders of early-stage companies plan to raise venture debt this year

B2B (business to business) this year could potentially replace fintech as the most attractive sector for venture debt funding in India, said a report on Friday.

Consumer and electric vehicle (EV) sectors could become the second popular sector for such funding, said the India Venture Debt Report by Stride Ventures. The second-such survey was conducted among 150 start-up founders and venture capital (VC) firms.

B2B commerce is now behind fintech in amount disbursed, and the two sectors account for more than 70 per cent of venture debt transactions in India.

The survey said 82 per cent of start-up founders said in 2023 they are working for profitability and expanding business. About 79 per cent of VC firms said their focus is on profitability, and 21 per cent want growth. Last year, 55 per cent of VCs and 68 per cent of founders said they were focused on growth rather than profitability.

“Venture debt has become one of the key growth enablers for Indian start-ups,” said Ishpreet Singh Gandhi, founder and managing partner, Stride Ventures. “The rising awareness of this asset class and positive investor outlook has enabled Venture debt to more effectively showcase its non-dilutive characteristics and capacity to unlock growth.”

The survey found that 71 per cent of founders of early-stage companies plan to raise venture debt in 2023, compared to 50 per cent of late-stage founders and 20 per cent of growth-stage founders. As many as 74 per cent of venture capitalists would recommend their portfolio companies to take on venture debt in 2023. Last year, 100 per cent of growth-stage founders were certain of raising venture debt, compared to 86 per cent of early-stage founders and 67 per cent of late-stage founders.

The survey results found that 62 per cent of founders and 44 per cent of VCs consider "engaging with bank limits" as the most important value-added service offered by a venture debt fund. The "advisory on corporate financial services" is the second-most preferred service for 28 per cent of founders and 33 per cent of VCs. This is a change from 2022, where advisory on corporate financial services was considered the most important value-added service, followed by “engaging with bank limits”.

Agriculture technology, health technology, and SaaS sectors are receiving less venture debt prospects, founders and VC firms told the survey. These findings suggest that founders and venture capitalists in India are prioritizing profitability and seeking venture debt as a means of achieving growth, while also valuing value-added services from venture debt funds.

The report said that the venture debt ecosystem in India is thriving, with a 2.6 times increase in the debt amount disbursed from 2019 to 2022. The report indicates that Series D and start-ups beyond that stage raised the most debt in 2022, while pre-Series A stage start-ups completed the highest number of debt deals.

The Stride report said Delhi-NCR was the most active location for venture debt deals in 2022, followed by Bengaluru and Mumbai. Out of a total of 170-180 venture debt deals recorded in 2022, fintech was the leading sector with 31 per cent of the share.