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The Counter View

The government should instead come out with a scheme to bring institutional investors into the venture capital funds. This will also give confidence to private investors and grow the ecosystem, said Swarup

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Of the 100+ unicorns in India, none are funded by Indian VCs, says the founder of Venture Gurukool & Ankurit Capital, Mahendra Swarup, as he cites the lack of institutional support and experienced talent as the reasons why domestic capital has hit a barrier in India in this conversation with BW Businessworld’s Noor Fathima Warsia.

One would argue that the lack of domestic capital in Indian startups has a large adverse impact. Why was it that Indian VCs, PEs and the like did not catch up as startups in India picked up despite the availability of wealth? 

The domestic venture capital (VC) space in India is relatively new. Private equity funds (PE) came in first and domestic PEs started taking off in the early 2000s, which was when the internet bubble burst. That kept domestic money out of the digital space. In the last decade, India became a hot investment destination for foreign players and sectors such as telecom, mobile and data boomed. India’s IT talent also came into the limelight. 

This attracted VC funding to Indian shores. That was how the story began but the regulatory framework around alternate investment funds (AIF) and related issues was not clear. Hence, the domestic industry did not take over. 

It was only when large amounts of overseas monies began coming into startups and tech and digital assets that the regulators woke up and the AIF regulations came into play. This was done also to increase the domestic pool of funds. 

Most of the high net-worth individuals (HNIs) and family offices at the time could only invest their surplus in gold, real estate or stock. When regulations and bodies such as the Indian Private Equity & Venture Capital Association lobbied, some HNIs diversified investments into IAFs. But it was not nearly enough.  

Domestic capital is at less than 10 per cent and to sustain the ecosystem, this should grow to at least 30-40 per cent in the next few years. 

How do you see domestic capital working differently for a startup than foreign money? 

Domestic capital is where the growth will come from because it is patient and understands local dynamics. Foreign money is hot money, looking for faster gains. The startup ecosystem is fragile in every country and can only be sustained patiently. 

Any upheaval in the western world can upset the cart in India. Even the most heavily invested startups are vulnerable and need sustained support and subsequent funding. If the current investing winter continues, most of the 100-plus unicorns will fall to the wayside. VCs playing big in the country will be very choosy of the follow-on investments. 

The Indian ethos of investing is different also because Indian investors look at a seven-eight years time frame for returns. A shorter-term view forces young entrepreneurs to spend money aggressively and when that happens not only do deviations and issues crop up but slow organic growth cannot be attained.  

What are some of the big challenges you see in the Indian VC ecosystem?  

One big issue is the total lack of talent. We don’t have enough experienced VC fund managers. Some of the foreign companies have been in existence for nearly five decades and bring depth and experience. The Indian fund managers cannot compare with this.

Hardly 10 per cent of funds raised are giving returns. Some of the independent reports show that the returns from Indian venture capital funds are pathetic. This is a very high-risk area with a dearth of talent, it is difficult for domestic capital to take off.  

Institution support too is lacking. The government is not mandating investments up to a certain percentage from PSUs or provident funds into domestic funds, which could be a huge source. For them, it is a small part of the overall kitty and hence will have the required risk-taking ability as well.  

The government is trying hard but going the wrong way with its SIDBI Fund of Funds for Startups. They cannot handle it, which is evident in the fact that the Rs 10,000 crore fund is in existence for a few years but has barely been disbursed. I am told the backlog is almost three years.  

The government should instead come out with a scheme to bring institutional investors into the venture capital funds. This will also give confidence to private investors and grow the ecosystem. 

What is your advice to grow the domestic capital sooner than later? 

The domestic capital funnel has a long way to go. This is something that comes with time, experience and with growing up in the ecosystem. Of the current unicorns, none are funded by Indian VCs. The initial rounds would have had some angel investing but the last rounds have all been foreign VCs, walking away with the cake. In a way, we are offering our startup ecosystem on a platter to foreign funds. 

If the startup ecosystem has enough capital, it can contribute USD 1.5-2 trillion to the Indian government’s vision of a USD 5 trillion economy. The government must realise that investing in startups is like investing in infrastructure --- it is a long-term game. The startups of today are the large industrial houses of tomorrow. They need the right support and the time to grow.  


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Magazine 30 July 2022