Debt vs. Equity Financing – Which is Better for Startups?

by KarNivesh | 28 October, 2025

India’s startup ecosystem has seen tremendous growth in recent years, with entrepreneurs raising nearly ₹1,27,072 crores (₹14.44 billion) across 1,337 deals in 2024 alone. For any startup founder, one of the most critical strategic decisions is choosing between debt financing and equity financing. This choice determines not only the company’s growth trajectory but also how much ownership and control the founders retain. With venture debt in India growing at a staggering 58% compound annual growth rate (CAGR)-reaching around ₹1,08,240 crores (₹1.23 billion) in 2024-founders must carefully evaluate both financing routes before deciding.

India's Venture Debt Market Growth (2018-2024): Rapid expansion from $80M to $1.23B

Debt financing means borrowing money that must be repaid with interest. For startups, this usually takes the form of venture debt, designed for companies with strong growth potential but limited profitability. In India, venture debt interest rates typically range between 10–18% annually, depending on the startup’s risk profile. Some lenders may include warrants, allowing them to buy equity later at a predetermined price, giving them a small share in the company’s success.

Founder Ownership Dilution Across Funding Stages: From 100% to 41% by Series C

On the other hand, equity financing involves selling ownership stakes to investors such as angels, venture capital firms, or institutions in exchange for funds. While founders are not required to repay the capital, they dilute their ownership. Data shows that founders generally give up 15–25% of their company during the first priced round, while employee stock option pools range between 10–18% over time. The trade-off here is between maintaining control and gaining access to long-term growth capital and mentorship.

The venture debt market in India has grown exponentially from ₹560 crores (₹80 million) in 2018 to ₹10,824 crores (₹1.23 billion) in 2024, highlighting the increasing sophistication of founders who are using non-dilutive capital to scale faster. Bengaluru leads this market with nearly 40% of venture debt deals, followed by Delhi NCR and Mumbai. Surveys show that 61% of Indian founders prefer debt financing for working capital management and runway extension. The median funding ticket size in 2024 was ₹23.76 crores (₹2.7 million)-up 23% from the previous year-indicating strong investor confidence.

Debt financing offers distinct advantages for founders who wish to retain control. First, it results in zero ownership dilution, allowing founders to keep full equity. Although debt involves interest payments, its effective cost (8–14% after tax benefits) is often lower than the 25–35% implied cost of equity. Additionally, venture debt is typically faster to secure-taking only 4–8 weeks-compared to equity rounds, which may take 3–6 months. Moreover, startups that use debt financing demonstrate up to 49.7% higher revenue multiples than equity-only counterparts, largely because the need to repay debt enforces financial discipline.

However, debt also carries risks. It requires regular repayments, irrespective of the company’s performance. This can strain cash flows-especially for startups still stabilizing revenue streams. Furthermore, venture debt lenders often demand collateral or impose financial covenants, limiting a company’s operational flexibility. Debt financing also lacks the strategic guidance and industry connections that equity investors typically bring.

Equity financing, on the other hand, provides patient capital without repayment pressure. It is particularly beneficial during early stages when startups are validating their product-market fit. Apart from funds, equity investors bring strategic value-mentorship, business networks, and credibility that open doors to partnerships and future funding. However, the major drawback is ownership dilution. By the time startups reach Series C, founders’ ownership often drops from 100% to 41%, and by Series D, it may reduce further to 40%. While the value of their reduced stake increases with company growth, the control diminishes.

Another downside of equity financing is the lengthy fundraising process, which may distract founders from core operations. Additionally, the opportunity cost of giving away equity can be massive if the company’s valuation grows significantly in later years.

When comparing both options, the numbers tell a clear story. Traditional bank loans in India cost around 8–12%, venture debt about 10–18%, while the implied cost of equity capital ranges between 25–35%. Debt also offers tax benefits since interest payments are deductible, reducing the overall effective cost. Therefore, startups with steady revenue streams, such as SaaS and subscription-based models, often find debt to be a cheaper and smarter option.

Choosing between debt and equity depends on a startup’s stage and business model. Founders should opt for debt financing if they already have venture capital backing, predictable revenue, and need funds for working capital or equipment purchases. It’s also ideal when they want to extend runway without giving up equity. In contrast, equity financing suits early-stage startups, especially those in biotech, deep tech, or hardware sectors with long development cycles and uncertain revenues. These startups benefit more from the strategic support and risk-sharing that equity investors provide.

Several real-world examples highlight the power of debt financing. Uber used venture debt to fund city expansion without diluting equity, a model followed by Indian startups like Ola. Airbnb and Tesla also utilized debt alongside equity to balance growth and control. In India, companies such as AjnaLens and many SaaS startups generating between ₹5–44 crores (₹600,000–₹5 million) annually have successfully leveraged venture debt to extend runways and delay equity dilution.

A hybrid approach often works best. In the early stages, startups should rely on equity funding to build their product and credibility. Once revenues become predictable, they can layer in venture debt-typically 20–35% of their last equity round’s value-to fuel growth without heavy dilution. Later, as they scale, new equity rounds can fund expansion at higher valuations, reducing the overall cost of capital.

India’s government also plays a supportive role through initiatives like the Startup India Seed Fund Scheme, offering up to ₹50 lakhs for validation and ₹2 crores for scaling, and the Fund of Funds for Startups, which has deployed ₹4,67.75 crores across 2,622 startups as of December 2024. The expanding venture ecosystem, supported by cities like Bengaluru and Mumbai and emerging Tier 2 hubs, provides diverse financing options for founders.

In conclusion, debt and equity financing are not competing options but complementary tools in a founder’s arsenal. Equity financing provides long-term support, credibility, and strategic partnerships, making it ideal for early growth phases. Debt financing, meanwhile, empowers founders to scale without sacrificing ownership once cash flows stabilize. With the right balance-starting with equity and strategically incorporating debt-Indian startups can achieve both sustainable growth and financial independence. The key is to make an informed choice aligned with the startup’s goals, growth stage, and risk appetite.