Indian VCs and the elusive quest for domestic investors
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Infosys, India’s most well-known software services company, has debuted in the country’s venture capital market as a limited partner. The Bengaluru-based company’s Innovation Fund has committed Rs31.6 crore (about $4.6 million) to venture capital firm Stellaris Venture Partners’ first fund. Stellaris was founded this year by Alok Goyal, Rahul Chowdhri and Ritesh Banglani, the team of fund managers that broke away from Helion Venture Partners late last year following an internal spat.
This isn’t the first time that Infosys’s Innovation Fund, which commands a $500 million corpus carved out of its balance sheet, has donned the hat of limited partner. In September last year, it invested an undisclosed sum in Palo Alto, California-based venture capital firm Vertex Ventures. Apart from Infosys, Vertex Ventures, which garnered commitments worth over $150 million from several investors last December for its debut fund, counts the Singapore government’s investment arm Temasek Holdings as an investor.
Infosys’s investment in Stellaris spells the first move by the storied software company towards playing an active role in India’s bustling technology start-up market. So far, the Innovation Fund has made direct investments in nine start-ups and only one is based here—Bengaluru-based ANSR Consulting, an outsourcing services firm that also runs start-up accelerator Kyron. The remaining eight are spread across the US, mostly in California, Denmark and Israel. Its investment in Stellaris is expected to give it exposure to Indian technology start-ups in areas such as SaaS (software-as-a-service) and across sectors such as healthcare, education, financial services and retail, which form the newly minted venture capital firm’s focus of investments.
Also, the earlier investment in Vertex Ventures is in some ways indicative of Infosys’s growing interest in start-up activity in the Asian region. Vertex Ventures focuses on investments in Southeast Asia and India.
What’s not so clear yet, though, is what Infosys wants its Innovation Fund to evolve into in the longer term. At the moment, it appears to be keen to experiment with a hybrid strategy wherein it wants to dabble in direct investments and be an investor, as a limited partner, in select venture capital funds. It could also be a deliberate strategy to de-risk its investments given the extremely high risks associated with venture capital investments.
For start-ups in India, rather than being a direct investor or a corporate venture capital fund on the lines of an Intel Capital or a Qualcomm Ventures, Infosys as a limited partner would be far more beneficial. India’s venture capital market sorely misses the presence of a domestic base of institutional limited partners, industry parlance for investors in venture capital funds. This has over the years led to an over-dependence on foreign capital, largely from the US, making the industry vulnerable to the ups and downs in those markets. Indeed, for much the same reason, start-ups here have also had to depend on overwhelming amounts of capital from overseas to meet their funding needs at every stage of growth.
It has long been held that immensely successful local technology companies such as Infosys and Wipro could potentially play a significant role in helping develop a base of domestic limited partners. However, so far, they have been reluctant to take the lead. The same is also true of large and successful companies from other sectors. In mature venture capital markets such as the US, public pension trusts, family offices (investment entities backed by high networth individuals’ money) and university and corporate endowments account for the bulk of limited partner capital that finds its way into venture capital funds.
In India, in the absence of pension trusts and university endowments, corporate endowments and family offices have an opportunity to play a dominant role in the country’s private equity and venture capital market. In recent years, the population of family offices involved in the venture capital market has grown. The most well known of those is Tata Sons interim chairman Ratan Tata’s RNT Associates. It started with direct investments in start-ups and in August this year announced plans to launch a $100-150 million venture capital fund. RNT Associates is also associated with local venture capital firms Kalaari Capital and IDG Ventures India. It doesn’t yet have any known limited partner commitments.
This column has said earlier that the presence of a Ratan Tata or an Infosys in India’s venture capital market could go a long way in encouraging other local corporate entities and family offices to consider start-ups as an investment asset class. The question is whether dabbling in venture capital is a long-term strategy for both, or a reaction to the prevalent hysteria around start-ups. Tata is currently preoccupied with the internal turmoil at Bombay House, Tata Sons’ corporate headquarters in Mumbai. And Infosys, for now, seems content sitting on the fence.
Snigdha Sengupta is a consulting writer with Mint. She contributes stories on venture capital and private equity.