Smaller funds may give start-ups a new lease of life
Investors are breaking away from larger groups to create independent fundsencouraging news for start-ups
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Bangalore: In early 2012, Anil Joshi, then a member of the Mumbai Angels investors network, had a meeting with Kumar Rangarajan, co-founder and “chief ion" of Little Eye Labs, to explore investing in the Bangalore-based company that uses analysis and monitoring tools to help improve the performance of mobile apps.
But it was a missed opportunity.
“Before we got really comfortable with it (the idea), it (Little Eye Labs) had already closed the deal for that round of funding," said Joshi.
Little Eye Labs eventually got acquired by the world’s largest social networking site, Facebook, early this month.
With no intention of letting any such opportunity slip out of his hands again, Joshi plans to launch his own fund, to be tentatively called Dev (as in development) Venture Fund, and estimated to be about $25 million, which would focus on early-stage investments in the mobile, telecom and information technology (IT) sectors.
The investments would vary from $300,000 to $2 million, depending on the stage of the company, Joshi said in an interview.
“The increase in the number of ideas emerging means there is more room for more investors to enter the ecosystem with small funds. There are sufficient number of seed stage and Series A funding options in India, but there is void in funding between these two stages. This is what I am trying to fill," added Joshi.
The new fund will be used to invest in 15 to 20 companies. “I am in talks with two like-minded people with a lot of experience and things look positive," said Joshi.
Joshi is not the only investor to break away from a larger group to create an independent fund and, according to experts, this is encouraging news for start-ups.
There are about half-a-dozen early-stage funds (excluding angel funds) available in India, each closing around six or seven deals every year, but investors say the number of pitches they receive on a monthly basis was close to 150 to 200 in 2013.
According to Venture Intelligence, a research service that focuses on investments and mergers and acquisitions (M&As) in India, only 137 early-stage deals were closed in all of 2013.
The last two years have seen the start of at least five small funds, most of them launched by people coming out of large angel groups or venture capitalist organizations.
Take the case of Sasha Mirchandani, a serial entrepreneur who left BlueRun Ventures to start a seed fund, Kae Capital, in February 2012.
The eureka moment for him came when a big investor told him to start a seed fund because he was good at what he did. Very soon he realized that his passion was investing in early stage companies.
“I was sceptical to begin with, but after discussing with my family and a few friends, I realized that this was my chance to make my passion my career," said Mirchandani.
“This is a very positive step because it not only means more funds, but means that these guys do it full time, giving more time and mentoring to portfolio companies," said Deepak Srinath, founder and director, Viedea Capital Advisors, a company that offers venture capital fund-raising and M&A advisory services to growth stage firms in the Internet and digital media space.
“Now the chance of a reasonably good idea dying because of lack of funding becomes minimal," he added.
Small fund investors say they are motivated by the idea of launching companies and being their own boss, among other things.
“Not many companies get early-stage funding in India. In the West, there are more angel investors than later stage investors and the pyramid is inverted and there is a hierarchy. In India, the pyramid is not inverted. So just like any entrepreneur, we see a gap and set out to fill it. This is an opportunity to make a difference," said Anand Lunia, who started an early stage fund, IndiaQuotient, after three years of learning in Seedfund.
Small fund investors like Mirchandani and Joshi face their fair share of challenges.
For one, the investments ecosystem in India is still in its infancy.
“As first time fund managers, the challenge was that we (India) have not seen entire cycles of investment go through successfully. We are ready to face this challenge when we raise funds, invest money, harvest money and get exits, and do this multiple times," said Karthik Reddy, managing partner, Blume Venture Partners.
Reddy took a 70% pay cut from his former job as vice- president, brand capital, at media company Bennett Coleman and Co. Ltd to start Blume Venture Partners. So did the others.
“Compared to being in a VC firm that pays huge checks, this move hurts the pocket a lot. Also, at an organizational level, it is a lot less resources, brand value and support. But I feel it is short-term pain for long-term gain," said Mirchandani.
Experts also say starting a fund means very high risks and long gestation periods.
“When I met Anil (Joshi) last week, I asked him ‘Anil are you sure you want to do this? You might as well build five startups in that time frame and experience the same economics’," said Reddy.
“I even wrote a blog on VC Circle about my experiences of starting Blume and it starts with ‘Please do not try this at home!’"
“The only strategy that might work now is one in which small fund managers keep their focus on domains they are experts in, choose investment partners wisely, pick entrepreneurs carefully and build a brand before raising more funds," said Reddy.
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