India’s startup ecosystem is growing rapidly, with more than 7,000 new startups established in 2020 alone. However, while venture capital (VC) funding plays a critical role in scaling high-risk, high-reward businesses, it's important to recognize that not all businesses require VC capital to grow. In fact, only a small percentage of startups - about 5% of Indian startups—receive VC funding. This highlights the fact that structured debt financing offers a compelling alternative for many businesses that need capital but are not looking for the dilution and long-term involvement that comes with VC funding.
In the boom years of 2021 and 2022, the market was heavily tilted toward growth at all costs, with many startups raising large sums to capture market share quickly without focusing on profitability. During this period, sectors that required significant customer habit changes or those creating new categories were particularly reliant on VC funding. The food delivery, e-commerce, and edtech sectors, for example, saw rapid scaling driven by VC dollars. However, times have changed, and the focus is now shifting to sustainable growth with a balanced approach - encouraging profitability alongside customer acquisition.
As we move into a more cautious market, structured debt financing is emerging as a key tool for businesses that are ready to grow but not at the expense of profitability or ownership. Here’s how different financing options work in today's environment:
Several companies have demonstrated the ability to grow profitably by using debt rather than relying on VC funding. V-Mart, known for offering affordable apparel, used debt to expand its retail network, enhance supply chain infrastructure, and manage working capital efficiently. The company took on short-term debt facilities to finance its rapid store expansions, which allowed it to enter tier 2 and tier 3 cities in India - areas previously underpenetrated by major retailers. By carefully managing its debt, V-Mart was able to fund this growth without diluting ownership, eventually leading to a successful IPO in 2013.
This model shows how SMEs can use debt not just to fund day-to-day operations, but also to build infrastructure and scale efficiently while maintaining control over the business. V-Mart’s success demonstrates that structured debt can provide the capital necessary for expansion without the pressure and equity dilution associated with venture capital. This has become an increasingly popular strategy, as the India SME IPO market grows. In fact, 2024 saw a surge in IPOs from SMEs
Not every business needs to go down the VC route. While VC funding is essential for disruptive innovations and high-risk sectors, many companies can benefit from a more strategic and stable path to growth through structured debt. This model allows businesses to scale efficiently, maintain control, and ensure financial stability. As we have seen in recent years, the market is maturing, and the emphasis is now on building sustainable businesses rather than pursuing growth at all costs.
For businesses looking to build infrastructure, expand into new geographies, and increase operational efficiencies, debt financing can be an ideal solution. For those creating groundbreaking technologies or entering new categories, equity financing can provide the necessary fuel for innovation. The right financing mix will depend on the company’s stage, goals, and long-term vision - and it’s crucial for entrepreneurs to evaluate all available options carefully.
