Venture debt financing and firm development: evidence from Indian entrepreneurial landscape

This paper explores the impact of Venture Debt (VD) funding on Indian firms’ development outcomes. We define success of funding round (FR) of a firm as (a) the prevalence of a subsequent FR and (b) based on percentage increase in self-reported valuation of consecutive FRs. Analysis of 13,809 FRs in Indian firms from January 1998 to September 2022 uncovered a positive and significant association between success and VD-backing of the firm. When success is defined as prevalence of a subsequent FR, we find VD investors to have marginally higher selection effects vis-à-vis their equity counterparts. On the other hand, when success is based on self-reported valuation data, selection effects are elusive. Further, counterfactual analysis for both definitions of success indicates that the likelihood of VD-funding rounds becoming successful are not any different had they received VC funding instead of VD funding. This goes to show the absence of treatment effects of VD investors. Taken together, our findings indicate that while Indian VD investors may select better portfolio companies, they fail to have any treatment effects on firms’ development outcomes. Lastly, parametric hazard model outcomes uncover reduction in investors’ time to exit in the event of the firm being VD-backed.