Entry of big players in VC sector to boost start-ups

Sudhir Sethi, founder of IDG Ventures India, spent most of his childhood overseas as his father was in the Indian Foreign Service. Returning to India, he worked for two decades in computers - his employers included HCL and Wipro - before starting his investment career in 1998 with Walden International India, the first Silicon Valley-based venture capital (VC) firm to set up an Indian arm. Though Walden has funded numerous Indian start-ups, its investors, or limited partners (LPs) as they are called in VC jargon, remain predominantly people and companies based outside the country - especially endowment funds, pension funds and large banks. It is the same with IDG, which Sethi joined in 2006, as well as the other big players in the Indian VC sector - Sequoia Capital, SAIF Partners, Accel Partners, Helion Advisors. All of them are dominated by foreign LPs.

The latest India-focused fund IDG is raising, however, is different. Though unwilling to reveal the proposed fund size, Sethi confirms it will have a significant contribution from investors within India, spread across eight cities. These even include a Mumbai-based itar (traditional perfume) manufacturer! "I'm a desi guy now," says Sethi.

IDG is not alone. In the past three years - and for the first time - a clear trend of Indian participation in venture funding of start-ups has become visible. No doubt this is still small - a mere three per cent of the total. It is also confined to family firms of high net worth individuals (HNIs), rather than financial institutions as in markets like the US. "Other than the Small Industries Development Bank of India (SIDBI), most institutions in this country don't understand either venture capital or start-ups," says Karthik Reddy, Managing Partner at VC firm Blume Ventures.

Still, a beginning has been made. Average assets under management (AUM) of HNI family firms are between Rs 200 crore and Rs 250 crore, though the highest is around Rs 5,000 crore.

Industry insiders maintain the Indian reluctance was not due to any shortage of investing funds in the country, but simply lack of awareness. The increasing media coverage of start-ups and their funding, however, has finally made investors aware that start-ups can be looked at in the same way as any other asset class, such as bonds, mutual funds or land. "Putting money in a VC fund is much like investing in mutual funds because these funds diversify your investment - and hence your risk - across several start-ups," says Sasha Mirchandani, co-founder of VC firm Kae Capital and the association of angel investors, Mumbai Angels Network. "It is much less risky than investing in a single start-up."

Likely Impact

Indian start-ups have already attracted billions of dollars from global funds. But substantial Indian investment is bound to boost local start-ups even further and make it still easier for them to get money. "Why should we go to the US if we can get enough capital in India," says Mirchandani. The kind of start-ups being promoted, however, is likely to stay the same, with the technology reliant ones enjoying a distinct advantage. "Only the sources of capital are changing," says Rehan yar Khan, a well-known angel investor who set up the Rs 300 crore VC firm Orios Venture Partners last year, with funds drawn entirely from Indian investors.

The first fund in India which tapped only Indians was Blume Ventures Fund I, which raised $25 million in 2011. It was not an easy task. "We had to convince investors we are here to last at least 20 years as an institution," says Reddy. The money has been since deployed across 65 start-ups. Mirchandani's Kae Capital, which started around the same time, has no doubt drawn funds from Sequoia Capital and SAIF Partners, but also from the likes of Deep Kalra, founder of MakeMyTrip.com, Anupam Mittal of Shaadi.com and Naveen Tewari of InMobi, in their individual capacities. So too India Quotient, begun in 2013 by Anand Lunia, former Managing Partner at VC firm Seedfund, has drawn investments from Times Internet, Ronnie Screwvala's Unilazer Ventures and SIDBI, as also from overseas funds such as Omidyar Network which operates an India arm.

How successful have VCs using Indian funds been so far? It is still early days, but Blume Ventures has already had a few successful exits such as ZipDial and TaxiForSure. ZipDial was acquired by Twitter and TaxiForSure by Ola Cabs in the early months of this year. Again, around 25 per cent of the start-ups Blume invested in have managed to attract follow on funding. Blume is now raising a fresh $60 million fund, 40 per cent of which will come from Indian investors. So too India Quotient is raising $25 million in a new fund, much higher than its first fund of $5 million.

What sets apart a number of the Indian VC funds from their overseas counterparts in India is also their willingness to invest in start-ups at the business-plan stage, even before these have begun earning revenue. Typical investments are around $200,000 to $250,000. Until now, while Series A and subsequent funding for successful start-ups had been growing, pre-revenue funding - which is obviously more risky - was hard to come by. Entrepreneurs had to largely use their own funds or turn to personal sources. With this gap starting to close, industry sources believe, the funding ecosystem for start-ups in India will be complete.

Growth in the number of Indian LPs may also stem the trend of Indian start-ups shifting their headquarters overseas after a few years. "One of the big reasons why some companies move out of India is that their investors are overseas and influence them into doing so," says Sethi of IDG Ventures. Further, Indian LPs will help not only start-ups but Indian VC firms as well, increasing their deal flow. "With Indian investors coming in, the dollar investor will also be prompted to put in more," Sethi adds. It will also assist in finding the right start-ups to back, since Indian LPs would be people in close touch with premier educational institutions.

Indian investment in start-ups is set to further increase with the Securities and Exchange Board of India (SEBI) having eased the norms for their shareholding and disclosure in early June, making it easier for them to list on the bourses. It has also set up an 18-member committee headed by Infosys Chairman Emeritus N.R. Narayana Murthy to recommend a new regulatory framework for start-ups and alternative investments.

Larger Funds Untouched

The larger funds, however, remain untouched by this development. "Domestic LPs don't apply to us as our association with foreign LPs has been very strong over the past 15 years," says Mayank Khanduja, Vice President, SAIF Partners. But these funds too have been booming, with the dollars pouring in (see Fund Bonanza). The biggest among them, Sequoia Capital, which has been in India since 2006, launched its $530 million India-focused fund IV in May 2014. In April this year, it topped this with an additional $210 million, making it a $740 million fund. A month earlier, in March, SAIF Partners closed its India Fund V at $350 million. Again in March, Accel Partners India announced a $305 million Accel India Fund IV. Nexus Venture Partners is raising a $400 million fund called Nexus Opportunity Fund. "One of the reasons VC firms are raising more funds is because we want to stay longer in the companies where we have invested," says Sandeep Singhal, co-founder of Nexus Venture Partners.