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Rise Of Domestic Investors
In recent years there has been a steady increase in the domestic VCs and PE firms who are fuelling local capital into local startups thereby reducing dependence on overseas investors
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Yes, it's a fact that the Indian startups cornered USD 36 billion in global venture capital funding in 2021 across 2,000-plus deals. It is also true that over the past decade-and-half, a bulk of private equity and venture capital funds have originated outside India and they still do but with a noticeable difference.
Today, investors have more confidence in India's strong economic fundamentals. That is why the past seven to eight years have seen more home-grown investors setting shop successfully who are also managing to raise funds from within the country.
Take for example Chiratae Ventures, a leading technology-focused venture capital firm which is a growth-stage investor in the Indian market. Of its USD 1 billion assets under management (AUM) it has raised 40 per cent from within India.
"Today, out of our USD 1 billion AUM, we have raised more than USD 400 million from India. There is a clear trend that Indian investors are putting more money into riskier asset classes like private equity and venture," says Sudhir Seth, Founder and Chairman of Chiratae Ventures.
Is there enough liquidity in the Indian market for home-grown investors to raise the capital? Certainly, there is! Says Sethi. "The top six companies in the IT services industry, in the last six years, have distributed dividends and share buybacks of USD 27 billion, which means more cash is in the hands of the investors, where does that cash go?" asks Sethi.
India's alternative investment fund (AIF) industry has doubled from USD 36 billion at the end of 2016 to USD 72 billion by September 2021– an increase of more than 100 per cent in AUM for Securities and Exchange Board of India (Sebi) registered funds alone according to the most recent Benchmark Report for India AIFs.
As per a recently published report by Preqin, the global leader in alternative assets data, tools, and insights, Category I funds outperformed the MSCI India 'Total Return Index' by 19 per cent, backed by strong venture capital returns, with Category I funds of vintage 2016 being the best performing at 24.6 per cent net IRR. The MSCI (Morgan Stanley Capital International) India Index is designed to measure the performance of the large and mid-cap segments of the Indian market.
Experts point to the practical existence of two Indias from the investor’s perspective. Sanjay Nath, Founder, Blume Ventures expands: "There are two Indias—one is the China Model which is the consumer-centric market. The masses in metro cities, Tier-II cities or Bharat are regular consumers of digital-first businesses such as fintech, edtech, agritech, ecommerce and more. The other India can be called the Israel model which primarily focuses on product innovation and is majorly built in Gurgaon or Bangalore for the world."
Nikhil Vora, Founder and CEO, Sixth Sense Ventures takes it a notch up to explain the current culture of entrepreneurship which is 'encouraging'. "The investors and industry captains are acknowledging the active participation of founders coming from tier-II and tier-III cities. Small city entrepreneurs are honing their capability to be able to crack the legacy in extraordinary form. The divide between India and Bharat is getting narrower and the markets are converging," says Vora.
He recalls that in 2014, when he started the journey, around 90 per cent of the investments from the first fund were highly Bombay-Delhi centric.
"In the current composition almost 60 per cent of the investments are from tier-II and tier-III cities,” Vora says adding that for investors, what is more important is not to focus on the current market state but to be able to foresee the market five years down the line.
What factors are enabling the growth of local investors? Experts point to a number of key initiatives undertaken by the central government in recent years that has helped. "The Indian government’s investment in physical and digital infrastructure and its initiatives in simplifying business regulations and removing onerous outdated compliances has been in progress. This is a positive move in enabling the business growth engine," says market expert Srinath Sridharan.
He adds that the Indian private investing space is showcasing signs of maturity if we look at the past five years. The market has shown that new investments accounted for half of VC transactions. The VC-to-PE pipeline has also been robust and consistent, he adds.
With sweeping regulations leading to shutting down or massive curtailment of capital raising exercise for China-based startups, both foreign and domestic VC investors perceive India as an alternate and a safer bet. That is why perhaps the VC investment in India increased 160 per cent between the first and second halves of 2021.
How does Ritu Verma, Co-founder of Ankur Capital, a VC firm focusing on agritech and healthcare sectors, look at the current market scenario? Are there any specific sectors earmarked for deplying their funds? "We’re sector agnostic," says Verma.
"We’re deploying out of our second fund now. The first fund was deployed across 14 companies and our thesis was 'technology is creating new opportunities'. We ended up having a large exposure to agtech and food, and a bunch of deeptech companies. That continues to remain our focus for our second fund," she adds.
What are the key factors that a venture capitalist seeks while investing in a startup? "There are three critical things. And I speak from a lens where we sit as an early stage VC firm," Verma says.
"One is the team because at the end it’s the team that takes it through the journey. The second part is the market and size of the market that the venture is getting created in. The third is what is innovative, disruptive and the business model that is being approached," she adds.
Vikram Gupta, Founder and Managing Partner of IvyCap Ventures has an interesting take as well.
Gupta had raised the USD 100 million fund at a time when the global markets were weltering through a mayhem. What is your investment mantra? "Since the beginning, IvyCap’s approach has been to invest in only a handful of companies. IvyCap takes a very active board position in these companies, at the same time we bring our mentors to support these companies," Gupta says adding that they do not believe in 'spray and pray' approach in investing.
He explains with an example: "In 2015, we invested Rs 15 crore in Clovia for a 30 per cent stake in the company, and supported the company to grow to its current stage," he adds.
So how does the system work? "We have an alumni-driven engagement platform—IvyCamp with 6000+ curated startups, 500+ mentors and more to help founders scale their business through various innovation programmes. We look at the founding team, business models, execution ability as well as the key models around profitability, scale, capital efficiency of the business,” says Gupta.
IvyCap has also assigned a small seed fund of Rs 1-2 crore ticket size through its IvyCamp platform. The idea behind having this fund is to make these investees investment-ready for our Series-A investment rounds, he adds.
The key for those seeking investment, therefore, is to have strong business fundamentals in place, a strong management team that can deliver and profitability should remain the centre piece of the pitch. We can hope for the emergence of more home-grown, local investors in coming years. That would be a true mark of ‘self-reliance’. Amen!