पाठशाला Pathshala · धन Dhan, Money · Lesson 17 · Build

Venture debt in India: cheaper than equity, until it is not

A venture loan costs less dilution than equity when the company keeps growing. It has to be repaid whether or not it does. Price it on covenants, warrants and timing, and take it only when you can service it.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

A large rusty ship’s anchor rests on a quay beside stacked containers. — Photograph: Robert So · Pexels

Venture debt is the only money a founder can raise in a few weeks without selling much of the company. It is also the only money in the venture world that has to be paid back on a schedule, and that one difference decides when it is clever and when it is fatal.

This lesson covers what venture debt is for, the four prices it carries, a figure that sets its cost against equity for the same money, the covenants that turn it dangerous, the Indian lenders and the government guarantee behind some of them, and a test to run before signing.

What venture debt is, and what it is for

A venture loan is lent to a company that is not yet profitable, on the strength of the equity investors behind it rather than its own cash flows. The lender is betting that the company will raise again, so the loan is underwritten on the equity round and sized against it. First Citizens, which absorbed Silicon Valley Bank’s venture lending, says in its founders’ guide that venture debt typically hovers between six and eight per cent of a company’s last post-money valuation and is meant to supplement equity, not replace it, adding three to nine months of runway.

In India it has become an ordinary part of the capital stack. A report by Stride Ventures and Kearney, summarised by Business Standard in April 2025, counted $1.23 billion of venture debt to Indian startups across a record 238 deals in 2024, almost flat on 2023, against 56 deals in 2018. The uses borrowers named were working capital (52 per cent), growth financing (44 per cent) and runway extension (43 per cent). Those three uses carry very different risks, and the lesson turns on telling them apart.

The four prices: interest, fees, warrants and covenants

A term sheet for venture debt has four prices, and founders who compare only the first are comparing the wrong thing. Interest, fixed or floating, often with an interest-only period before the principal starts to amortise. Fees: an arrangement fee on signing, sometimes a fee on each drawdown and a fee for prepaying. Warrants: the right to buy shares, usually a share of the loan amount (the coverage) at the last round’s price, which is how the lender shares in the upside it is financing. Covenants: the conditions the company must keep, whose breach lets the lender demand its money back.

Convert the first three into one number. Ask the lender for the all-in annual cost including fees, then compute the warrants separately as a share of the company. A ₹10 crore loan with ten per cent coverage at a ₹150 crore post-money gives the lender warrants over shares worth ₹1 crore at today’s price, about 0.66 per cent of the company. Raising the same ₹10 crore as equity at the same price would sell about 6.3 per cent. That gap is what makes venture debt attractive. Whether it is cheaper depends on what happens next.

Cheaper than equity: the arithmetic

The cost of equity is what the new shares gain by the next round: if the company doubles in value, equity that bought six per cent for ₹10 crore is worth ₹20 crore, and the founders have given up ₹10 crore of value. The cost of debt is the interest paid plus the gain on the warrants. When the next round is priced well above this one, debt is far cheaper. When the next round is flat, equity cost the founders nothing in value and debt still cost every rupee of interest. When the next round is down, or does not happen, equity investors share the loss and the lender does not.

Read the breakeven, the red dot. With a fifteen per cent all-in rate over thirty months and ten per cent warrant coverage, debt is cheaper than equity once the next round is priced about twenty-three per cent above today’s; at two and a half times today’s price it costs roughly a quarter of what equity would. Shorten the term or lower the rate and the breakeven falls toward one. But the figure prices a world in which the loan is repaid on schedule. Its silence about the other world is the point of the next section.

Venture debt is cheap capital for a company that will raise again on better terms, and expensive capital for every other company. The covenants decide which one you turn out to be.

Until it is not: covenants, MAC clauses and the repayment cliff

Three features turn a cheap loan into the thing that ends a company. Financial covenants: a minimum cash balance, a minimum revenue, a maximum burn. A covenant set against the plan rather than against a floor below it is breached by an ordinary bad quarter. Material adverse change clauses: Kruze Consulting describes the MAC as an event of default that lets the lender call the loan if it believes the business or its environment has changed materially, with a definition that is often vague; a separate funding MAC lets the lender refuse to release later tranches. Security and the cliff: venture debt is secured on the company’s assets, often with a charge over receivables and intellectual property, and amortisation means that cash leaves every month at exactly the stage when revenue may be slipping.

Heavy rusty chains lie intertwined in close-up. — Covenants are the links nobody notices until the load comes on. Set them well below the plan. Photograph: Alex Jackson · Pexels

Put the three together and the danger is clear. A company that took debt to extend a runway that did not reach a milestone faces, in its worst quarter, a lender with the right to accelerate, a monthly repayment that shortens its runway further, and equity investors asked to put in new money that will partly go to repay the lender. Negotiate accordingly: covenants set well below plan, with cure periods; a MAC defined narrowly, excluding general market conditions, or removed; the whole loan drawn on signing if a funding MAC is non-negotiable; and an interest-only period long enough to reach the next round.

Indian lenders and the government guarantee

Indian venture debt comes from specialist funds registered with SEBI as alternative investment funds, from non-bank lenders and increasingly from banks. The Credit Guarantee Scheme for Startups has guaranteed part of such lending to eligible startups; it was first notified on 6 October 2022. In May 2025 the government doubled the cover to ₹20 crore per borrower, guaranteeing 85 per cent of the amount in default on loans up to ₹10 crore and 75 per cent above that, with eligible lenders including scheduled banks, NBFCs and SEBI-registered AIFs; the annual guarantee fee was cut to one per cent for startups in 27 champion sectors. The guarantee protects the lender, not the borrower, but it can lower the rate or make a lender willing to lend at all. Ask any lender whether it uses the scheme. Checked on 11 October 2026.

When to take it, and when to refuse it

Take venture debt when three things are true. The company has just raised equity, so the lender is underwriting a fresh round rather than a fading one. The runway the equity provides already reaches a milestone that will support the next round, and the debt adds a cushion beyond it rather than closing a gap before it. And the company could repay the loan from its existing equity if the next round were delayed by a year. Working capital against receivables from creditworthy customers is the safest use of all, because the loan is repaid by the cash it finances.

Refuse it when the company is default dead in Paul Graham’s sense (on current growth and costs, the money runs out before profitability) and the debt is meant to postpone that. Debt cannot change a company’s trajectory, only its timing, and debt that must be repaid from a round that may not happen moves the risk from the investors, who can bear it, to the founders, who cannot.

The venture debt test, before signing

Before signing any venture loan, run five checks in one sitting. Compute the all-in rate and the warrant dilution, and put them into the figure with three next-round multiples: one, two and three times today’s price. Build the cash plan with the repayments in it and find the month cash is lowest; confirm it stays above every cash covenant by at least three months of burn. Read the events of default aloud and mark each one as within your control or not. Ask the lender for two borrowers that missed their plan and call them. Then put the covenant test dates in the calendar and review covenant headroom every month at the close, so a breach is a conversation you start rather than a notice you receive.

Nothing here is legal, tax or investment advice. The guarantee scheme details were checked on 11 October 2026; have the loan agreement and the security documents reviewed by a lawyer before signing.