Why homegrown PE/VC firms can’t lead big ticket funding rounds

The Indian start-up ecosystem had a blockbuster year in 2021, having minted 44 unicorns and funding inflows into the sector growing manifold to $38 billion. Additionally, other factors such as China’s regulatory crackdown and the Indian start-up getting listed, catapulted the country into the third position in the start-up market, t behind the US and China.

Despite this massive growth in capacity and positioning of top start-ups and a new crop of unicorns coming up, Indian venture capital and private equity firms have largely stuck to investing and leading Series A and B rounds.

The biggest investors to lead major late-stage funding rounds of over $100 million last year included SoftBank, Tiger Global, Falcon Edge Capital, Accel and Sequoia Capital to name a few. Some of these foreign funds, who are capable of writing over $50-100 million cheques, may have invested directly or through their Indian subsidiaries.

Investors told BusinessLine that even in 2021, 85-90 per cent of the funding in Indian start-ups came through foreign investors and VC firms. Lack of access to big-ticket cheques and large-scale institutional funding from insurance companies, pension funds and endowments have largely kept Indian investing firms focused on early and growth stage rounds.

“The pools of domestic capital for alternative investing is still quite small. Historically, a lot of this alternative funding was done by SIDBI, HNIs or LIC. But the base of institutional capital in relation to the US is very small. We don’t have as many endowments, pension funds, fund of funds,” Co-founder and Managing Partner, Trifecta Capital, Rahul Khanna, told BusinessLine.

He added, “In India, no matter how rich you are, HNIs cannot invest in the best global funds like Sequoia and Accel in equity funds either. Indian managers who want to raise larger funding rounds run into the challenge of where they can access it in India.”

Most domestic investing firms are focused on early-stage investments (Seed, Series A, B) with fund sizes of less than $150 million, according to Ashish Sharma, CEO, InnoVen Capital. These funds are then allocated across 10-15 start-ups.

There are only a handful of domestic funds that have large fund sizes (e.g. A91) to participate in growth stage. “The domestic investor base continues to grow, particularly Family Offices/ UHNIs, but are still small in the context of overall funding. Growth/ late stage funding rounds (over $100 million) are typically led by global investors, be it Softbank or hedge funds like Tiger, Falcon Edge or global private equity or sovereign wealth funds or growth funds of a few Valley VCs,” Sharma told BusinessLine.

Young but growing

Sharma added, “It will take time for domestic capital to become more meaningful, but the trend is positive. In China the majority of capital raised by VC’s comes from a domestic pool of capital. In India, large domestic institutional pools of capital (Insurance companies, pension funds etc.) haven’t allocated much to venture as an asset class. Till we have more participation from them, the domestic pool of capital will continue to play second fiddle to overseas investors.”

Jatin Desai, Managing Partner, Inflexor Ventures told BusinessLine, “The Indian VC and start-up ecosystem is still relatively young. Even the domestic VC ecosystem is largely less than 10 years old and there were hardly five-six funds doing it initially. We saw a change when we were raising our second fund, a lot of domestic players are now interested. I think it’s only a matter of time before we start seeing higher funding, but I don’t think we will match Japan and China’s levels so soon.”

Khanna added that in the long-term this should change as there will be more capital formation locally. He is also expecting other investing vehicles like portfolio management services opening up to having exposure in venture capital.

“There is room to democratise alternate investing, but we are still early in that journey because it is a product with a lock in and potentially has more risk than a public instrument or liquid funds. But there’s a lot more appetite for this sector, for instance, now we have public company treasuries investing in our debt funds. That has started to open up. At Trifecta, we believe it’s our responsibility to grow the ecosystem. We were the first company to bring in banks, insurance companies and public company treasuries to invest in this sector,” he said.