When the Sun Stops Shining

Venture equity is about two things: commercials and control. Venture debt is mostly about commercials, when the sun shines that is. On a rainy day, it is control that slips away like an eel in the deep water.

Across Asia, more rainy days are on the horizon, and we are not just talking about the monsoon season.

Take India, Asia's poster-child of venture fuelled growth of late. Venture debt's share of Indian startup funding has roughly tripled since 2022. Just when the gap between funding rounds has stretched to a multi-year high.

That combination is how venture debt covenants get missed, often leading to a boardroom showdown.

This piece attempts to set out the mechanism, the clauses that matter most, two costs founders routinely underprice, and what the public record shows happens when it goes wrong.

Let's go.

1. "Why don't we get some debt in while we close our equity round?"

The market has shifted since its post-Covid high watermark:

• Indian venture debt boom: deployment nearly doubled from US$0.8bn in 2022 to roughly US$1.4bn in 2025, according to the Stride Ventures/Kearney Global Venture Debt Report, growing fastest precisely when equity funding collapsed from US$25.7bn to US$8bn during the 2023 "funding winter." Debt growth flattened once equity rebounded in 2024, then kept climbing into 2025 even as overall startup funding softened again.
• Broader Asia-Pacific private credit market: projected to grow from US$59bn in 2024 to US$92bn by 2027, according to the Alternative Investment Management Association's Alternative Credit Council (AIMA), with India amongst the fastest-growing markets.
• The runway stretch: the wait for the next equity round has expanded from roughly 18 months in 2019 to 28 to 31 months in 2024, per Crunchbase and Carta based on US data. When the wait for equity doubles, debt transitions from a temporary runway extension into a long-term solvency threat.

2. Four venture debt "bear traps"

Trap A: MAC clauses rarely make it to the courtroom

Material Adverse Change (MAC) clauses are usually treated as a backstop for genuinely unforeseen events. A US litigation case, Akorn v. Fresenius (2018), turned on extreme facts: a 25% revenue collapse, an 86% fall in EBITDA, and evidence of fabricated data. Since then, practitioners have continued to interpret MAC narrowly. The clause's real impact is that its ambiguity gives a lender leverage to threaten default and extract concessions.

Trap B: Investor abandonment

These clauses let the lender call default if a company's own investors indicate they will not fund further, independent of the company's actual cash position or performance.

According to Orrick, investor abandonment is "less subjective" than MAC, because it turns on facts, rather than a lender's judgement about a company's "prospects." An improvement in predictability. Not an improvement in founder's control.

Real-life case: the author has seen a case where a biotech company had an illustrious cap table post Series A, where one venture equity investor made the strategic decision to discontinue their own biotech team. This led to an investor abandonment at Series B, and hence an Event of Default and massive founder-dilution.

Trap C: Cash sweep & account control

A cash sweep requires that surplus cash, beyond agreed operating reserves, be automatically used to prepay the loan. Thomson Reuters Practical Law describes the mechanism plainly: loan agreements typically stipulate a fixed percentage of the borrower's excess cash that must be applied to prepay the loan. Two features make this bear trap a fierce one:

• It can be automatic. Once a trigger is hit, a minimum liquidity threshold, an event of default, a specific test date, the sweep activates without requiring the lender to make an active decision or the borrower to agree in the moment.
• It reaches cash the company has not spent yet. A missed payment covenant is retrospective; a cash sweep is prospective, it intercepts money before the company can use it for payroll, vendors, or growth spend, which is precisely why it is the mechanism founders describe as feeling like "losing access to our own bank account."

The related and sometimes conflated concept is account control, a lender's contractual right to instruct or restrict a specific bank account, sometimes independent of any cash sweep trigger. The two frequently travel together in venture debt documentation: the sweep decides how much cash moves to the lender; account control decides who can authorise it moving anywhere at all.

Trap D: Cross-default chain reactions

Cross-default clauses let a breach on one facility trigger default across others. The instinct is to panic about the whole capital stack at once but the actual exposure depends entirely on drafting, not on the instrument type:

3. Traps outside of the legalese

Interest rate hikes. Indian venture debt is commonly priced off SOFR or Prime plus a spread of 400 to 900 basis points, together typically 13 to 15% per annum. Fed Chair Powell's term expired in mid-2026, and the direction of the benchmark over a typical 18-to-36-month facility term is uncertain in either direction, floating rates hence are rate bets of a kind.

Foreign exchange fluctuations. For a company earning revenue across multiple APAC markets while servicing a single-currency facility, the 11.7 percentage-point volatility spread across APAC currencies can prove challenging:

4. Cases in point

BluSmart Mobility was admitted into insolvency proceedings by the NCLT Ahmedabad bench after defaulting on ₹15 crore raised through secured, redeemable non-convertible debentures, and an interim resolution professional was appointed. A related entity, BluSmart Mobility Tech, was separately admitted into insolvency over a further ₹5.84 crore default to a different creditor.

When GoMechanic's board admitted inflated revenue and fictitious garages in 2023, its Tiger Global-led round collapsed and the company was sold in a distress transaction. Stride Ventures, which had venture debt exposure to the company, was on the record calling itself a deliberately cautious investor precisely because of this asymmetry.

5. The asymmetry dilemma

Grow aggressively but take no entrepreneurial risks. Venture equity investors are compensated with an unlimited upside, so it structurally wants founders to make big bets that produce them. Venture debt providers have a capped payoff. As one Indian venture debt co-founder put it, describing the calculus after the GoMechanic governance collapse: "lenders can't compensate for write-offs the way venture capital guys can afford to do so," because the best case on a loan is roughly 1.2x, while equity can return 3 to 5x.

Given that asymmetry, covenants are the lender's only real lever. They exist specifically to constrain the risk-taking that equity is simultaneously paying the founder to pursue. The same board that told a founder to spend aggressively on an unproven growth bet, once venture debt sits in the capital stack, now needs that spending pre-approved by a counterparty with no upside if the bet pays off.

The DIY legal stack's propensity to blow up. The actual risk in Southeast Asia and India specifically is that the early paperwork was never drafted to a standard that survives scrutiny once a venture debt facility with real covenants arrives. Cooley LLP's analysis of convertible notes in Southeast Asia and India is direct on this: the region's more conservative standards have produced convertible notes with "extensive operational covenants," restrictions on hiring, fundraising, or capital structure changes without investor consent, that are considerably more onerous than typical US practice, and that create genuine risk of "foot faults," minor, often unintentional breaches that can still trigger default under the note.

6. A short checklist before signing

Before accepting a venture debt term sheet, founders should verify these key guardrails:

• Debt service threshold: Keep debt service under 25% of net monthly burn, and total principal under 6 to 8% of your last valuation.
• MAC & abandonment check: Identify if the contract contains an MAC clause, an investor abandonment clause, or both.
• Cash sweep rules: Confirm if cash sweeps trigger automatically, and explicitly negotiate the exact definition of "excess cash."
• Subordination & intercreditor agreements: Ensure existing convertible notes, SAFEs, and RBF structures are formally subordinated.
• Operating account security: Clarify whether account control rights extend to secondary operating accounts or non-lending banks.
• FX stress test: Model debt service obligations against a 10 to 15% local currency depreciation if earning in regional currencies.

Given market conditions it is also time to realistically evaluate runway and consider the timing of your next raise, whether it is equity or venture debt.

Get your cap table, statutory records, and financial documentation into a due-diligence-ready state before a lender or investor asks for it. Otherwise, you're negotiating from underneath a term sheet, not across the table from one.

This article originally appeared on the Founders Bureau of Singapore's Substack. This article is general information, not legal, tax, or financial advice.