What Is Venture Debt? The AIF Asset Class Funding Indian Startups

Most investors meet India's startup boom through headlines about equity rounds and IPOs. A quieter flow runs alongside: when a startup raises equity, it often raises a loan too, from a specialist lender comfortable with a company that is growing fast and still losing money. That loan is venture debt.

The flow is no longer small. A report by Stride Ventures and Kearney found that Indian startups raised $1.23 billion of it in 2024 across a record 238 deals, up from 56 deals in 2018. The firm's 2026 edition puts 2025 at about $1.3 billion across 187 deals, with fewer but larger transactions. In the first quarter of 2026, two lenders, Stride Ventures and BlackSoil, were the two most active startup investors in the country by deal count, ahead of every equity fund.

For an investor, the interesting part is where the money comes from. Most large lenders are Category II Alternative Investment Funds (AIFs) under SEBI's AIF Regulations, so a high-net-worth investor or family office can commit capital to a fund that lends to dozens of startups, earns interest and keeps a sliver of equity upside in each.

Founders' guides to this market are plentiful. This one is written from the investor's side of the table, to help you decide whether the asset class earns a place in your portfolio.

Venture debt is a loan to a company that is backed by venture capital investors but does not yet have the steady profits or hard assets a bank would want. The lender relies on two things a bank usually ignores: the quality of the equity investors standing behind the company, and the likelihood that the company will raise more equity before the loan is due.

Because the borrower is loss-making, the loan is priced and structured differently from ordinary corporate credit:

• Higher interest. Indian lenders typically charge about 13–15% a year, with some quoting a 12–18% range.
• Short tenor. Loans usually amortise over 18 to 36 months, often after an interest-only period of three to six months.
• Security without much collateral. Lenders take charges over receivables, intellectual property or other assets, and sometimes a pledge of promoter shares or a corporate guarantee.
• An equity kicker. The lender receives warrants, a right to buy a small number of shares at a fixed price, typically worth 0.1–2% of the company on a fully diluted basis.

That last feature is what makes the product distinctive: lenders pair loans with warrants to offset the higher default risk of companies without profits or collateral. A bank loan earns only interest. Venture debt earns interest plus a call option on the startup's success.

The easiest way to place the asset class is to set it beside the two products it borrows from.

The comparison of venture debt vs venture capital explains the return profile. An equity investor needs a handful of big winners to cover many failures. A lender is paid first and gets regular cash, so it does not need home runs, and warrants give it a small share of them anyway.

Founders take venture debt for reasons that matter to the lender, because they explain when repayment is likely. According to the same Stride Ventures and Kearney report, the top uses in 2024 were working capital (52%), growth financing (44%) and runway extension (43%).

The logic is about dilution. Borrowing costs interest and a warrant stake worth a fraction of a percent, far less ownership than an equity round. If the money carries the company to a higher-valued next round, the lender's warrants gain too. The flip side is that a loan has to be repaid, and a startup that misses its milestones may struggle to service it. That is the core credit risk of the asset class.

Venture lending began as a product for venture-backed companies that lacked positive cash flow or collateral, with warrants offsetting the higher default risk. India's version is younger and has grown in clear stages.

The early years (2008 to mid-2010s). InnoVen Capital has operated in India since 2008, first as SVB India Finance and under its current name since 2015. It lends through a non-banking financial company (NBFC) rather than a fund.

The AIF era (mid-2010s onward). SEBI's AIF Regulations, notified in 2012, created Category II, a catch-all category that explicitly includes "debt funds" which receive no specific government incentives. That gave managers a ready-made vehicle for pooling money to lend to startups. Trifecta Capital raised what is widely described as India's first dedicated venture debt fund in the mid-2010s, and commentators date a boom in the product to 2015–16. Alteria Capital followed in 2017 and Stride Ventures in 2019.

Scale and institutional money (2020s). Trifecta's third fund, launched in 2021 with a Rs 1,000 crore target plus a greenshoe, closed at Rs 1,777 crore in 2023, backed by banks, insurers, development finance institutions and family offices. Its fourth targets Rs 2,000 crore including a Rs 500 crore greenshoe (first close January 2025). Alteria's Shorter Duration Scheme drew the International Finance Corporation as an anchor investor in 2025.

Benchmarks arrive (2026). In January 2026, Crisil added a separate Venture Debt Funds sub-category to its Category II AIF benchmarks, calling the product "a bespoke debt product combining coupon and equity participation." Investors now have an independent yardstick for managers' claims.

The Indian market is still small relative to the West. The 2025 Stride report notes that in the United States and Europe venture debt accounts for 20–30% of total venture capital funding, against roughly a tenth in India in 2024. Supporters see room to grow; sceptics note that the product depends on a deep, steady equity market behind it.

A venture debt AIF is a pooled, close-ended fund. Investors commit capital, the manager calls it down as deals arise, lends it to startups and returns interest and principal over the fund's life.

The rules below come from the SEBI (Alternative Investment Funds) Regulations, 2012, as amended up to 15 October 2026.

• What it may invest in. Since a 23 May 2025 amendment, a Category II AIF must invest primarily in unlisted securities and/or listed debt securities rated 'A' or below. Startup debentures are typically unlisted, so they fit naturally.
• No leverage. A Category II AIF may not borrow to invest. It can borrow only for temporary funding and day-to-day operational needs, for no more than 30 days at a time, on no more than four occasions a year and up to 10% of investable funds.
• Concentration cap. No more than 25% of investable funds may go into a single investee company (50% for a large value fund for accredited investors). Real portfolios are far wider.
• Close-ended, with a minimum life. Category I and II funds must be close-ended, with a minimum tenure of three years.
• Skin in the game. The manager or sponsor must keep a continuing investment of at least 2.5% of the corpus or Rs 5 crore, whichever is lower.
• Size and entry ticket. Each scheme needs a corpus of at least Rs 20 crore, and each investor must commit at least Rs 1 crore (Rs 25 lakh for employees or directors of the fund or its manager; the minimum does not apply to accredited investors).

Category II is the largest AIF category, with cumulative commitments of Rs 13,02,837 crore at 30 June 2026 out of Rs 17,53,070 crore across all AIFs. Venture debt is a small slice of it; private credit funds lending to established mid-sized companies sit in the same category with a different risk profile.

In India, carrying on a business of lending generally requires registration with the RBI as an NBFC. Law firms advising the sector, such as King Stubb & Kasiva, note that funds therefore usually do not write loans in the ordinary sense. Instead, a Category II venture debt fund subscribes to non-convertible debentures (NCDs) issued by the startup.

Economically, an NCD behaves like a term loan: a fixed coupon, a repayment schedule and security over assets. Legally it is a security, which is what an AIF is built to hold. Practitioners also describe hybrids, such as convertible debentures paired with warrants. Check the placement memorandum for the instruments the manager actually uses.

Not every venture lender is a fund. Some operate as NBFCs, and a few run both structures.

For an investor wanting direct exposure to a portfolio of venture loans, the AIF route is the practical one. InnoVen is an example of an NBFC lender, while Trifecta and Stride raise money through funds. BlackSoil, which merged with Caspian Debt in November 2025, operates both an NBFC and an AIF.

The figures below are typical ranges reported by Indian practitioners, not rules.

• Ticket size: from about Rs 2 crore to Rs 200 crore, depending on the lender and the stage of the startup.
• Interest: 13–15% a year is the common range.
• Tenor: 18–36 months, amortising monthly or quarterly.
• Moratorium: three to six months of interest-only payments at the start.
• Fees: an upfront processing fee, and commonly a prepayment fee of 1–3% of the outstanding balance if the borrower repays early.
• Security: a charge over current assets and receivables, sometimes intellectual property, a pledge of promoter shares or a corporate guarantee.
• Covenants: lighter than bank loans, typically a minimum cash balance, limits on further borrowing and information rights.

Lenders underwrite on the quality of the VC backers, revenue growth, unit economics and runway. A startup with 12 months or more of runway after the loan is a much stronger credit than one with six.

A warrant gives the lender the right to buy shares in the borrower at a fixed price, usually the price of the last equity round or a discount to the next one. The right typically lasts five to seven years, well beyond the life of the loan. If the valuation rises, the lender buys cheap and sells at an exit. If it falls, the warrant simply expires.

This equity kicker is what lifts a well-run fund's returns above the coupon. It is also why Crisil found that earlier vintages of venture debt funds have higher IRRs than recent ones. The benefit of warrants "kicks in at the later stage of the funds", once portfolio companies raise up-rounds, list or get acquired.

Sources describe warrants in two ways that look contradictory but are not. Warrant coverage is the value of the warrants as a percentage of the loan, commonly quoted at 5–20% globally. The fully diluted stake is the share of the company those warrants represent, typically 0.1–2% in India.

Take an illustrative case:

The numbers are illustrative and ignore later dilution. A 0.5% stake sounds trivial, yet on one successful borrower it adds a gain equal to a fifth of the loan on top of the interest. A few such outcomes can offset several losses.

Most return claims in this market come from managers about their own funds. Separate three kinds of evidence: how the return is built, independent benchmarks, and manager-reported track records.

A fund's net return to you is roughly:

1. Interest and fees earned on loans, on capital that is actually deployed.
2. Minus credit losses on borrowers that fail to repay in full.
3. Plus warrant gains realised over the fund's life.
4. Minus management fees, fund expenses and the manager's carried interest.
5. Minus your tax, since interest passes through to you.

Two features shape this build-up. Loans are short, so capital comes back quickly and may be recycled into new loans if the fund documents allow it; Trifecta said recycling could take its third fund's investible capital to Rs 4,440 crore against a Rs 1,777 crore corpus. And warrant gains arrive late, so IRRs often look modest in the early years.

The most useful independent figure is Crisil's. In its benchmark release of January 2026 (covering data to March 2025), the venture debt funds sub-category IRR "stands in the band of 10-15%". Three points matter when you read that number:

• Basis. Crisil's AIF benchmarks are calculated on a post-expenses, pre-carry and pre-tax basis. Your own return after the manager's carry and your slab-rate tax on interest will be lower.
• Vintage effect. Earlier vintages have higher IRRs, helped by warrants. Pooled IRRs dip for the FY22 and FY23 vintages, consistent with warrants that have not yet paid off.
• Range, not a promise. A band of 10–15% hides dispersion between managers. Fund selection matters.

Manager-reported data fill in the picture but should be read as marketing until verified:

These are the managers' own, unaudited figures, from established firms that survived to raise later funds. Survivorship bias flatters any such list.

• Cash flow early in the fund's life. Interest starts as soon as capital is deployed, so a venture debt fund can distribute cash well before an equity fund, which waits for exits.
• A senior seat at the startup table. Lenders are repaid before shareholders and usually hold security, so you reach VC-backed growth companies from a safer position than an equity investor.
• Upside without full equity risk. Warrants give a small participation in valuation gains, which Crisil's data show can lift returns materially over time.
• Faster capital turnover. With 18–36 month loans, the portfolio renews itself several times within one fund life, so a single bad year of lending matters less.
• Diversification inside the fund. A typical fund lends to dozens of companies across sectors such as fintech, consumer and cleantech. SEBI's 25% cap per company is a hard backstop.
• Regulated and transparent structure. SEBI registration, a placement memorandum, manager skin in the game and dematerialised units give you a more standardised product than lending privately to startups.
• Pass-through taxation. A Category II AIF is not taxed on interest or capital gains itself. The income is taxed once, in your hands, as if you had made the investment directly.

Everything above comes down to one practical task: choosing between a handful of Category II funds whose documents all promise disciplined lending and attractive warrants. PMS Sahi Hai is built for that comparison step. It is worth being exact about what it does and what it does not.

What the platform gives you

• A Category II shortlist in one table. The AIF compare page lists the AIFs the platform tracks, with a filter for Category I, II and III and columns for strategy, vintage, AUM, one-year return, lock-in and Nyra score. Vintage matters more in venture debt than almost anywhere else, because warrant gains arrive late.
• Plain-English research with Nyra. Nyra, the platform's AI research assistant, takes a goal written in ordinary language, such as "Category II credit fund with a short lock-in", and ranks matching funds. Its page describes it as an analytical tool, not a SEBI-registered investment adviser.
• The rules in one place. The guide to AIF Categories I, II and III explains what each category may hold and whether it can borrow, and our earlier post, Category II AIF Explained, covers the category as a whole.

What it does not do

Nyra's published methodology scores strategies on five pillars and marks any strategy with less than 12 months of track record as "Not Rated". Many venture debt schemes are young, so expect gaps. The platform does not publish loss rates, warrant gains or portfolio-level credit data for venture debt funds, and a score is not a recommendation.

How to combine the two

Use the compare table and Nyra to narrow the field to two or three Category II funds with a lending strategy. Then take the due-diligence questions in this guide to each manager and test their answers against Crisil's benchmark. The platform shortens the search. The manager's answers decide the commitment.

The drawbacks deserve as much attention as the return figures.

• Credit risk on loss-making borrowers. The borrower usually cannot repay from profits. Repayment often depends on raising the next equity round or refinancing. When equity markets dry up, defaults can cluster across a portfolio at once. Indian VC equity funding has been largely flat for three years, at $10.9 billion from 1 January to 15 October 2026.
• Security that is hard to enforce. Collateral is often intangible: receivables, brands, software. Practitioners note that enforcement through the courts, the Companies Act or SARFAESI is slow for small startup loans, so recoveries may be low and late.
• Returns that are good, not spectacular. Crisil's 10–15% band is before carry and tax. After both, the premium over simpler fixed income may not justify the illiquidity for every investor.
• Vintage risk. Recent vintages show lower pooled IRRs. A fund raised at the top of a startup cycle may lend to companies whose next rounds never come.
• Illiquidity and long lock-in. Units are close-ended with a minimum three-year tenure, and in practice fund lives run longer. Trifecta's first fund was still distributing gains in its eighth year.
• Manager-reported data. Loss rates quoted in the market are mostly self-reported and unaudited. Treat them as claims to test, not facts.
• High minimum and limited choice. The Rs 1 crore entry ticket puts the asset class out of reach for many investors, and only a handful of managers have a long track record.
• Tax drag on interest. Interest is taxed at your slab rate, which for a top-bracket investor can absorb a large share of the coupon. Warrant gains may be taxed more lightly, but they arrive late and are not guaranteed.

If the trade-offs fit your goals, getting access is straightforward in principle but needs care in practice.

• Who can invest. Resident Indians, NRIs, family offices, companies and trusts can invest in Category II AIFs, subject to the fund's own eligibility terms and KYC.
• Minimum commitment. Rs 1 crore per investor. Accredited investors are exempt from this minimum, and large value funds for accredited investors have their own higher threshold. Our guide to AIF minimum investment covers every exception.
• Commitment vs drawdown. You sign a commitment, and the manager draws it down in instalments as it finds deals. Keep the undrawn portion liquid, because missing a call has consequences set out in the fund documents. How AIFs work in India explains units, NAV and commitment calls.
• Distributions. Interest and principal flow back over time. Some funds distribute regularly, while others recycle early repayments before distributing.

Angel funds, a separate Category I sub-category, invest equity in early-stage startups and suit a different goal. They should not be confused with venture lending.

Under section 224 of the Income-tax Act, 2025 (old section 115UB of the 1961 Act), a Category II AIF is a pass-through vehicle. Income is taxed in your hands "in the same manner as if" you had made the fund's investments directly. For a venture debt fund this typically means:

• Interest on the fund's debentures is taxed as income from other sources at your slab rate.
• Gains on warrants or shares are taxed as capital gains. Whether they are long-term or short-term depends on how long the fund held the asset.
• Income is taxed when the fund earns it, even if it is not distributed in that year, and the fund deducts tax at source on resident investors' income.
• Losses pass through only partly. Capital losses reach you only if you have held the units for at least 12 months.

Tax rules for AIFs are detailed, and section numbers changed when the 1961 Act was repealed on 1 April 2026. Treat this as orientation, read our line-by-line guide to Category II AIF taxation and TDS, and consult a tax adviser on your own position before investing.

1. What is the gross yield on the current portfolio, and what are the fees, expenses and carry?
2. What are the realised credit losses by vintage, measured how, and are they audited?
3. How much of past returns came from warrants, and from how many companies?
4. What instruments does the fund use (NCDs, convertibles, other), and what security does it take?
5. What is the typical borrower's runway after the loan, and who are the lead VC investors?
6. How are warrants valued in the fund's NAV before they are realised?
7. Does the fund recycle capital, and how does that affect distributions?
8. What did earlier funds return, compared with Crisil's sub-category benchmark?

Venture debt sits between two familiar worlds. It is credit, so most of its return is a coupon and its main risk is default. It is also tied to the startup economy: defaults rise when equity funding slows, and extra return comes from warrants on the winners.

For an investor who already has listed equity and conventional debt, a venture debt fund can add a stream of high-yield income with a small equity option attached, through a regulated Category II structure. The independent evidence suggests realistic expectations of 10–15% pooled IRR before carry and tax, with wide dispersion between managers and vintages.

It suits investors who can commit Rs 1 crore or more for several years, accept slab-rate tax on most of the income and do the homework on the manager. It does not suit anyone who needs liquidity, guaranteed income or equity-like multiples. In this asset class, underwriting skill is most of the return, which is why comparing managers side by side on PMS Sahi Hai, and questioning them with Nyra's shortlist in hand, is time well spent.

Venture debt is a specialist asset class, and manager selection drives most of the result. Start on the AIF compare page: filter for Category II, look at vintage and lock-in, or ask Nyra to rank lending strategies against your goal. Then collect the placement memoranda of your two or three finalists, compare fees, loss history and warrant gains against Crisil's 10–15% benchmark, and put the due-diligence questions above to each manager.

If you would like a second pair of eyes on the shortlist, book a private consultation with the PMS Sahi Hai team, and confirm the tax impact with your adviser before you sign.