Domestic venture capital funds proliferate as HNI interest in start-ups grows


Anil Joshi, co-founder of Unicorn India Ventures, says the number of people who see start-ups as an investment asset class has grown in the last one-and-a-half years. Photo: S. Kumar/MintAnil Joshi, co-founder of Unicorn India Ventures, says the number of people who see start-ups as an investment asset class has grown in the last one-and-a-half years. Photo: S. Kumar/Mint

Mumbai: Domestic early-stage venture capital (VC) funds are proliferating in an effort to tap increasing demand from rich individuals and investment offices of business families (family offices) looking to invest in start-ups.

VC firms such as Unicorn India Ventures, Endiya Partners, Altius Ventures, Parampara Capital and Venture Catalysts are tapping the domestic capital pool to collectively raise almost Rs.650 crore.

The proliferation highlights the growing popularity of start-ups as an investment asset class for high networth individuals (HNIs) and family offices.

Early-stage VC funds typically infuse under $1 million as seed, or pre-series A, investments in start-ups.

“Till about a couple of years ago, the total number of angel investors in the country was in the range of 500-600. However, once the ecosystem opened up in the last one-and-a-half years, more people have been sensitised about this asset class and want to invest in it,” said Anil Joshi, co-founder of Unicorn India Ventures.

In the last year, the population of angel investors has crossed 1,000, reckoned Joshi.

Unicorn India adopted a strategy of approaching HNIs and family offices for its fund-raising.

“We have consciously tried to bring in individuals who were HNIs, running listed SME (small and medium enterprise) businesses, who felt that they had missed the start-up opportunity,” Joshi said.

“More people are realising that this asset class is here to stay,” he said.

Unicorn India plans to raise a total of Rs.100 crore from domestic investors.

In 2015, early-stage investment (angel and seed investments) grew 64%, increasing to $327 million from $200 million in 2014. Deal volume went up 82.5% to 650 deals from 356 deals in 2014, according to data from VCCEdge, the financial research platform of business information website

Interest in start-ups is also on the rise as other asset classes that HNIs have traditionally preferred have not been performing well lately.

“The reality is that most other asset classes continue to perform badly. HNIs are not too keen on real estate, gold has been underperforming and commodities are also down,” said Lovkesh Kapoor, founder at boutique investment bank WisdomHill Capital, which advises HNIs and family offices as part of its start-up investments practice.

These VC firms are raising funds at a time when the start-up ecosystem has started seeing signs of an investment crunch. Large, established VC funds are going slow on fresh investments and deals are taking longer to close. Start-ups are having to rework business models to conserve cash.

Fund managers hope that the perceived slowdown will not affect their money-raising plans much, given the strong domestic investor interest in start-ups.

“The environment is not as bullish as it was five months back, and the turmoil in China too has affected the sentiment to some extent. But, there are still several good family offices out there which do not have exposure to start-ups and are eager to enter the space,” said Mohit Gulati, founder of Altius Ventures, which is looking to raiseRs.100-150 crore for its early-stage fund.

Investors should look at the slowdown as an opportunity for value buying, experts said.

“While the focus has been on say e-commerce or food tech companies or hyper-local companies and their challenges, we must remember that there is a lot more happening in this space, be it innovation in healthcare or in fin tech,” said George Mitra, chief executive officer of Avendus Wealth Management, which advises HNI clients on investments.

The emergence of many new early-stage funds also represents another step in the evolution of the Indian start-up ecosystem, which has few dedicated early-stage VC funds.

“In the US, you have 5-10 popular seed funds such as First Round Capital, Lowercase Capital, True Venture and Floodgate. These funds, while being extremely successful, have continued to focus on early-stage investments,” said Satish Andra, founder and managing director of Endiya Partners.

“We believe that in India the same thing is happening in the early-stage investment ecosystem and that the same opportunity exists here for early-stage funds,” said Andra.

Endiya plans to raise a total of Rs.200 crore, which it will invest primarily in technology and healthcare start-ups. The VC firm is tapping large family offices and domestic institutional investors with technology and healthcare sector expertise.

Newer early-stage funds will also help the ecosystem by filling the gap left by larger VCs that are becoming wary of of pre-series A/seed investments, industry experts said.

“Larger funds have now moved from traction to looking at unit economics. They will be cautious of investing in the early stages and these new funds can fill that gap,” said Kapoor of WisdomHill Capital.

Despite the rising interest of HNIs in early-stage firms, investments in start-ups still make up a very small fragment of the overall portfolio for most rich individuals, experts said. “Though there is interest, the opportunities are limited,” said Anshu Kapoor, head of private wealth management at Edelweiss Financial Services Ltd. “There are only a few avenues through which you can access the ecosystem and hence as a percentage of their portfolio it is a small amount today. However, over the next two to five years this should change.”