Here's why funds that turned cagey about domestic startups are raising money again

With several venture capital and private equity firms on the road to raise money, ET takes a look at how the journey could be.

“It was the best of times, it was the worst of times…”

If that line, penned by Charles Dickens more than 150 years ago, were to be applied today to a specific, singular context, it would have to be the dichotomy faced by India’s risk-capital sector.

Funds that had turned cagey about backing domestic startups are again raising money to invest in ventures emerging from the Asia’s third-largest economy, expecting to find more gems following the whip-cracking that’s still reverberating through the industry.

But as they turn to limited partners to back their new investment vehicles, they are finding these investors still sceptical about India-specific funds because of a continuing lack of options to sell investments, inflated valuation expectations, an uncertain regulatory regime and the ongoing choppiness in global markets.

Limited partners, or LPs, could be billionaire individuals, family offices, sovereign funds, pension funds, endowments or superannuation funds, to name a few, that provide money to venture capital and private equity firms.

“I don’t expect capital allocations for India to increase,” said Gopal Jain, managing partner of mid-market private equity firm Gaja Capital. “All the three asset classes of which India is a part—namely Asia, excluding Japan; Emerging Markets and BRIC (the Brazil, Russia, India and China economic grouping)—are faring badly. I expect the fundraising environment for India to remain challenging.”

Jain represents one half a sharply divided fraternity of fund managers and limited partners ET spoke with to gauge the sentiment towards India, with several industry professionals leaning towards decreased capital allocation in the new financial year.



“India continues to be an important geography for us, but global LPs are increasingly looking at the country’s regulatory landscape as well, based on which allocations could get decided,” said an investment manager with a prominent asset management firm that has backed a number of funds that have, in turn, invested in prominent domestic startups.

A slowdown in capital allocation by LPs could not come at a worse time for fund managers, a number of whom have announced ambitious plans to launch new funds, among which are a number of debut investment vehicles. That’s another area of uncertainty.

“A lot of investors are not very fond of debut funds, and it will be tough for (the funds), unless, for example, they are spin-out funds of a certain pedigree,” said Mahesh Parasuraman, partner at Amicus Capital Partners, a private equity firm launched last year.

Among the debut fund managers on the road to raise money from LPs are Alok Goyal, Ritesh Banglani and Rahul Chowdhri, who quit Helion Venture Partners to start their own firm. Former SAIF Partners principals Mukul Singhal and Rohit Jain, too, are in the process of setting up their own fund, and Mohit Gulati, cofounder of Oliphans Capital, is setting up a $25-million early-stage fund called Altius Ventures.

The possible hurdles domestic fund managers face are a far cry from the ease with which Silicon Valley majors such as Sequoia Capital, Nexus Venture Partners and Accel Partners were able to raise new investment vehicles last year.

In February, Sequoia Capital India completed raising money for a $920-million fund, the biggest by any VC fund for India-specific investments.

“LPs globally have seen a correction in their attitudes towards India. There was a certain excitement that persisted for a number of years but that, unfortunately, led to a lot of mediocre fund managers managing to launch funds,” said Harsh Pais, partner at leading law firm Trilegal.

Others, more optimistic, point to the tremendous inflow of private capital into the country’s startup ecosystem in 2014 and 2015 as evidence that India continues to be among the foremost destinations for global LPs.

In 2015, investors poured $19.7 billion into domestic startups, according to data collated by VCCEdge, crossing the previous benchmark of $18 billion set in 2007. In 2014, investments totaled $12.4 billion.



“With GDP growth at over 7%, and having recently overtaken China as the world’s fastest-growing major economy, India is a key part of the asset-allocation decision (for LPs),” said Deepak Shahdadpuri, managing director of DSG Consumer Partners.

The investment firm recently onboarded Verlinvest, the Belgium-based investment holding company created by the founding families of Anheuser-Busch InBev, as an LP in its second fund, DSGCP II.

“It took us 10 weeks to get to our first close and most of the investors we met in Asia, Europe and the United States were receptive to an India product,” Shahdadpuri said.

Industry professionals say that the entry of strategic investors into India, such as Japan’s SoftBank and China’s Alibaba Group and Foxconn, who have shelled out significant sums over the past 18 months, has forced venture capital and private equity firms to be a lot more discerning in their investment approach.

“They have begun to focus on new themes that are based on multiple factors, including the uptick in the economy,” said Trilegal’s Pais.

For some LPs, there is simply no question of watering down their focus on India.

“For us, clearly, India is our largest market in the region and we are actively looking for opportunities in the country,” said Nicholas Cator, executive director at Verlinvest. “That is why we have partnered with Deepak in his latest fund, because we feel that over the next 3-4 years it will bring us opportunities to back high-growth consumer companies.”