The venture debt market in India is steadily growing, mirroring the early days of venture capital, a Lighthouse Canton report said. Indian founders are increasingly turning to venture debt to bridge funding gaps and avoid excessive equity dilution. 

This shift -- according to a report titled 'Silent Bloom: Venture Debt’s Growing Influence' -- has been primarily driven by the scarcity of equity funding in the market and the desire to preserve ownership while accessing the capital necessary for growth. 

The survey, included in the report, indicates that 40% of founders prefer venture debt over traditional debt and equity as it is less dilutive, while 30% said the repayment schedule flexibility is a significant factor. 

"This preference shows a growing recognition of the strategic advantages venture debt provides, especially in capital-intensive and rapidly evolving industries," Lighthouse Canton added.

Getting into sector-wise dynamics of venture debt, the report said India’s fintech sector -- which is now the third-largest globally -- continues to be a major driver for the adoption of venture debt. 

"Innovations like UPI have propelled India’s fintech market forward, with venture debt playing a critical role in helping fintech startups manage cash flows, support onward lending, and fuel their growth. In particular, sectors like payment gateways and embedded finance benefit from venture debt, as traditional banks may be hesitant to lend in these areas," the report added. 

The electric vehicle sector, which is capital-intensive and faces unique challenges, has also become "heavily reliant on venture debt to drive its growth." According to the report, approximately 67% of EV startups rely on venture debt for more than half of their debt funding. 

"This underscores venture debt’s central role in helping EV companies expand production, set up charging infrastructure, and invest in battery technologies- key areas that are crucial for the sector's continued expansion. With traditional lenders like banks often viewing the EV sector as high-risk, venture debt makes for a vital alternative." 

Sanket Sinha, managing director, global head of asset management at Lighthouse Canton, said, “India's startup ecosystem holds immense potential, and the growth of venture debt funding is playing a pivotal role in driving its development. At Lighthouse Canton, we believe that venture debt can help bridge the finance gap and unlock significant economic benefits. We believe that this mode of funding will be essential to foster innovation and empower startups, which will ultimately drive sustainable growth across the nation’s dynamic and evolving business landscape."