Domestic venture capital (VC) and private equity firms in India have been successful in attracting multi-million-dollar investments in the past two calendar years (CY2022 and CY2021), despite the funding slowdown and global bear markets. This success has come as a surprise to many, as the global economic climate has been cautious and investment activity has been relatively slow.
In the past, domestic VCs and private equity (PE) firms in India were typically dependent on institutional and strategies Limited Partners (LPs) bases such as life insurance firms, global endowment funds, and global sovereign funds. However, this has changed in the last 2-3 years, Indian founders, cash-rich angel investors, and Indian family offices pitching in as LPs into domestic VCs and PEs, multiple investors told Fe.
Data from Tracxn showed that domestic VCs have been able to capture a majority of the investments into Indian startups despite stiff competition from global VCs. In CY2022, domestic VC invested more than $18 billion in startups. And in CY2021, when the Indian startup ecosystem had a funding bull run, domestic VCs contributed around $35.4 billion in funding to startups, which is significantly higher than the $8.2 billion invested in CY2020 and $12 billion in CY2019.
Nruthya Madappa, partner at 3one4 Capital said that for LPs, India has always been seen as a second asset class after the US or Europe allocation, but lately, the Indian startup ecosystem has received more priority even in comparison to its large neighbour China.
“In the last two to three years India has emerged as an asset category of its own for LPs and investors now are seeking larger allocation to VC funds based here. Once LPs get comfortable with a particular geography and believe that there is potential there, they like to back domestic VCs on the ground. This is because LPs realise the highest returns do come from fund managers people who are on the ground and have experience understanding domestic markets,” Madappa said.
3one4 Capital currently has a large base of LPs from Europe, Japan, the US, including from names like South Korea’s Krafton Inc, and the UK’s premier sovereign fund British International Investment. 3one4 Capital had last closed an oversubscribed third fund worth Rs 1,000 crore in November 2021 and continues to make investments from it.
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Chennai-based BoldCap which recently raised a $25 million early-stage fund for SaaS startups has also seen interest from Indian LPs. Sathya Nellore Sampat, founder and general partner of BoldCap told Fe that although more than 90% of its capital came from foreign LPs, it has been able to raise capital from domestic family offices and serial entrepreneurs such as Binny Bansal for its $25 million fund.
This shift in the LP base has also provided domestic VC firms with a more diversified pool of capital, enabling them to invest in a wider range of startups and pursue new industries as well. Particularly LPs have been drawn to the growing number of non-agnostic VCs that have dedicated funds for industries such as SaaS, healthcare, agritech, and sustainability.
Mark Kahn, managing partner at agritech-focused VC fund Omnivore said that LPs have begun to appreciate the sectoral focus of certain funds and many have begun to believe that sector-specific funds may have an upper hand over agnostic funds.
“With Omnivore’s agritech focus, we provide LPs with exposure to the one-third of the Indian economy, ie, the actual rural agriculture market. Apart from this, LPs are also scouting to back sustainable and climate-focused funds. But I think it is generally not that different since the risks involved are all the same,” Kahn added.
Additionally, domestic VC firms have adapted their investment strategies and processes to better suit the current economic climate. They have become more cautious in their investments, focusing on companies with strong fundamentals, resilient business models, and experienced leadership teams. However, experts also point out that domestic VCs will have to step out from the early-stage investment category and look towards backing startups in the mid-to-late stages beyond Series B and above to make a larger impact in the ecosystem. Currently, the majority of the domestic VC funds have focused their investment on early-stage firms only.