In recent times, Indian startup founders have more and more turned to enterprise debt (VD) as a strategic fundraising instrument.
This financing method is gaining prominence, significantly in sectors like fintech, the place founders are prioritizing preserving possession whereas accessing important development capital, a brand new report by Lighthouse Canton, a Singapore-based funding establishment specializing in wealth and asset administration, says.
The report, launched in November and titled “Silent Bloom: VD’s Rising Affect”, explores the rising adoption of VD in India’s startup ecosystem.
VD is a strategic monetary instruments for startups and early-stage firms which can be sometimes backed by enterprise capital (VC). It usually serves as a complement to fairness financing and is designed to offer working capital or capital for development with out diluting possession as considerably as fairness financing does.
In India, the VD market is steadily rising, mirroring the early days of VC. The fintech sector, specifically, is rising as a number one adopter of VD, permitting startups to extra successfully handle cashflows, assist onward lending and gas development.
An trade survey carried out for the report discovered that 67% of fintech founders in India want VD, neck-and-neck with financial institution loans, with 80% stating that VD constitutes greater than 11% of their raised debt capital. Key causes for this desire embody lowered dilution for present shareholders (86%), entry to capital (57%), and adaptability in compensation schedules and fund utilization.
Fintech leads VD market
Whereas fintech firms from all verticals can profit from the final benefits of VD, lending firms are at present the highest adopters of the financing instrument in India.
One distinguished use case is in onward lending fashions. In these fashions, banks lend funds to intermediaries like fintech firms or non-banking monetary firms (NBFCs), which then present loans to underserved sectors comparable to agriculture, small companies and reasonably priced housing.
On this state of affairs, VD supplies the liquidity wanted by fintech firms to handle their onward lending operations, enabling them to succeed in these precedence sectors effectively whereas preserving their cashflow.
One other use of VD is first mortgage default assure (FLDG) financing. FLDG is a risk-sharing association by which a fintech firm ensures to cowl a small portion of any mortgage defaults in co-lending partnerships with banks. Basically, the fintech startup locations a deposit with the financial institution, which acts as a security web to soak up preliminary borrower defaults.
VD is commonly used to fund these FLDG deposits, permitting fintech startups to take part in such partnerships with out utilizing their very own fairness or money reserves.
Lighthouse Canton highlights Rupeek and LoanTap, two of its portfolio firms working within the lending vertical, as examples of startups benefiting from VD. Rupeek, which focuses on gold loans, has utilized VD to increase its monetary runway and assist mortgage e-book development.
Equally, LoanTap, which focuses on loans for micro, small and medium-sized enterprises (MSMEs), has leveraged VD to develop its lending operations, but additionally to boost its expertise stack and pursue strategic acquisitions.
Along with lending fintech startups, VD can also be utilized by fintech firms in verticals comparable to funds and embedded finance. For cost gateways, VD is utilized to bridge cashflow gaps between when funds are processed and when settlement happens. This guarantee liquidity and helps transaction development.
For embedded finance startups, VD is employed to fund tech growth and scaling, comparable to software programming interfaces (APIs) and platform integrations. This helps them develop business-to-business (B2B) partnerships and generate regular revenues from monetary service charges.
India’s booming VD market
India’s VD market has grown persistently over the previous 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% enhance between 2020 and 2023.
Regardless of this development, India’s VD market stays in an early stage in comparison with extra mature markets. Within the US, VD has turn into a essential element of the startup financing ecosystem, representing roughly 15-20% of complete VC funding every year.
Featured picture credit score: edited from freepik
