VCs adopt new funding route to invest in start-ups
Warehousing allows venture capital firms to invest after exhausting funds or before raising new fund
New Delhi: In 2011, taxi aggregator Ola’s founder Bhavish Aggarwal approached Kae Capital for some seed money.
It was a modest request—a mere ₹ 50 lakh—but Kae Capital had yet to form its first fund and Sasha Mirchandani, founder and managing director at Kae Capital, had to turn down the offer.
The fund was still a distance away from getting money into the bank.
Four years on, Ola is valued at close to $2.5 billion, and Mirchandani says he still regrets the decision.
It need no longer be this way.
To ensure that they do not miss out on such deals again due to a lack of funds, Kae Capital and other Indian venture capital firms,such as India Quotient and Blume Ventures, have adopted a concept called “warehousing".
Common in the West, warehousing is a process that allows venture capital firms to invest in start-ups even when they have exhausted their funds or are yet to raise a new fund.
“We don’t want to repeat an Ola," said Mirchandani.
Warehousing is done in multiple ways. A general partner (GP) of a fund can request an anchor investor, usually a limited partner (LP), to invest in a start-up with his personal money.
The GP and LP then together fund a start-up, with the LP contributing 95-98% of the money.
Another way is for the GP to simply borrow money from an LP or friends and family in order to invest in a start-up as an individual.
When the venture capital firm closes its fund, the shares of the start-up will be acquired by the VC from these investors at the cost at which they invested.
The size of such deals could be anywhere between ₹ 50 lakh and ₹ 3 crore.
In return, these LPs may get a preference from the GPs for participating in the fund, which is about to close. “When we are doing the final close, we will go back to them. If they want to put in more money, we’ll take their money over anybody else’s," said Ashish Fafadia, chief financial officer, Blume Ventures.
He, however, added that such deals largely take place on the basis of personal relationships between a GP and an LP, which means there are no hard and fast rules to how warehousing works.
In the last three months, Kae Capital has invested in three start-ups including Nudgespot, a Bengaluru-based customer communication platform. The company did not share details of the other start-ups.
India Quotient said that it has invested in seven start-ups but refused to name them. “If I don’t give them (start-ups) money, they will go to somebody else," said Anand Lunia, founder and partner at India Quotient. “We are an active investor. While we were raising our second fund, we didn’t want to slow down or be out of the market just because the fund close was taking time."
Blume Ventures said that it has invested only in one start-up through warehousing and also declined to give the name.
Nudgespot co-founder Raveen Sastry said such a move doesn’t affect a start-up in any way.
“Typically it works like a promissory note which is returnable," he added.
All three venture capital firms mentioned above are in advance stages of closing their second fund. Kae Capital expects to raise $50-60 million, India Quotient is raising $25 million in its second round and Blume Ventures will be closing a $60-million deal shortly.
However, the process of warehousing is not easy and there are some who try to avoid it as far as possible.
Blume had initially committed investment in one more start-up through warehousing. However, it has now raised a small tranche of ₹ 20 crore of its second round of $60 million.
“This is just to make sure that we do not have to do warehousing. It is much easier to do it through the fund straight away," said Fafadia. He added that there is a lot of paper work involved in warehousing. Besides varying from one state to another, there is a stamp duty cost, which makes the scenario expensive.
“In a state like Maharashtra, the cost is almost 0.01% of the total deal," said Fafadia.
Lawyers say warehousing is a convenience issue with no legal implications. However, investors need to be mindful of the right way of transferring shares.
“The shares, which are owned by the GP (post the funding), will be transferred in the fund’s name, and the fund will become the owner of the share," said Rishi Anand, partner at law firm Cyril Amarchand Mangaldas.
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