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November 22, 2016

Why Venture Capital has replaced Growth Capital in LP Mindshare

It is well know from experience in the US, Venture Capital funds depend on 1-3 "super hits" in their portfolios to generate most of their returns. In India, this phenomenon started to play out with Redbus - whose $100 million+ sale to Naspers in 2014 - generated more returns for Seedfund than the size of the firm's fund. 

Of course, in 2015, the mega valuation spikes for horizontal E-Commerce Unicorns - Flipkart and Snapdeal - made the fortunes of their respective earliest investors: Accel India and Kalaari Capital (formerly IndoUS Ventures). In Sep-09, Kalaari Capital had invested $2.25 M (INR 10 Cr) in Snapdeal for a 40% stake valuing the company at $5.6 M (INR 25 Cr). In Feb-2015, Kalaari Capital made a partial exit worth $60 million with a 11x return (when Softbank invested in the company at $1.6 Billion valuation). At Snapdeal's $5.5 Billion valuation in 2015, Kalaari's stake - including the realized and unrealized portion - would fetch the firm a return of 26 times its investment.


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With out-sized returns like these, it is no wonder

1) Investors of all sizes (Mutual funds, Hedge funds, etc) and nationality (Chinese and Japanese) chased startups in India during 2015.

2) The success has led to a mini explosion in the number of seed / micro VC funds raising capital.

3) Limited Partners (LPs or investors in PE/VC funds) have developed a keen interest in the Venture Capital segment.  In an interview to Mint, Nupur Garg, Regional Lead - South Asia, Private Equity Funds at International Finance Corp (one of the top LPs in Indian PE/VC funds) says her firm is looking to invest in a couple of early stage funds. Extracts:
In fact, early-stage funds have access to a large pot of domestic institutional capital that is not so accessible for various reasons to the traditional growth equity funds. As of H1 2015, 43% of the funds-raised was for venture capital, vis-à-vis 36% growth equity and 20% buyout. More capital was raised for India-dedicated VC funds in first six months of 2015, than was raised in any single year between 2006-2013.
...We all know that Indian growth equity funds have generally under-performed. We can debate endlessly on who and what is to blame, but the fact is that the industry as a whole has so far not delivered the promise of the underlying growth in the market. Early-stage funds offer another route to tap into this growth and make out-sized returns. Plus there is experience and proof of concept available today, investing discipline is coming back in and valuations are coming closer to sanity. This coupled with the availability of high quality start-ups makes early-stage funds an attractive investment option for LPs. 
...Early-stage activity has exploded (while growth equity has declined), growing at 20% since 2008 thanks to the shifts in demand for capital within the entrepreneurial environment. And the number of early-stage fund managers has more than doubled—venture capital is fast eclipsing growth equity as the dominant form of investment in India.


Venture Intelligence is India's longest serving provider of data and analysis on Private Company Financials, Transactions (private equity, venture capital and M&A) & their Valuations in India.