Bengaluru: As start-up exits continue to be elusive, venture capital (VC) firms have been forced to seek more time from investors to return their money.

Most VC firms in India started out in 2006 and 2007. Now, many of them, including Nexus Venture Partners, Kalaari Capital, Matrix Partners and IDG Ventures India, have already extended or will extend the timeline of their first funds by two years to return cash to their investors, according to a dozen VC firms and limited partners (LPs) familiar with the matter. LPs are firms that invest in VC firms.

“Usually, LPs are happy to offer extensions, depending on the portfolio of the VC. Most people are okay hanging on for two more years, if it means a better chance at extracting more value. Usually, LPs have an option of giving or not giving an extension, but they typically exercise it positively—when you want to get good returns, you have to give them some time," said Mohandas Pai, chairman of Manipal Global Education and an active investor in the Indian start-up ecosystem.

The first funds of most VC firms expired this year; those that haven’t will do so next year. Funds are usually set up as 10-year legal entities, with clauses that allow for extensions of one or two years, sometimes more.

The expiry of the first funds was collectively a seminal moment of sorts for Indian VC firms. It passed unnoticed because many of the bets made by VC firms haven’t paid off yet and no investor wants to highlight that, the people cited above said. VC portfolios currently comprise duds, struggling companies, promising young companies and the so-called unicorns, many of whose futures are far from clear.

Two VC firms—SAIF Partners India and Accel Partners India—both of which began investing in India before 2006, have bucked the trend. In its first two funds totalling just $70 million, Accel uncovered gems such as Mu Sigma, Myntra and Flipkart, which have already yielded exponential returns through sales of shares to other investors. SAIF Partners similarly returned its first fund to LPs on the back of blockbuster exits through the initial public offerings of Makemytrip and JustDial. Another VC firm, Seedfund, also generated attractive returns on its first fund of $14 million, mostly because of the gains from its early bets on RedBus and Carwale.

However, even for Accel and SAIF, the success of their subsequent funds is far from clear. It’s also unclear if Seedfund will continue to operate after two of its partners launched their own start-ups this year.

India’s start-up business began in earnest when US-based VC firms such as Sequoia Capital, Matrix Partners as well as home-grown fund managers such as Nexus Venture and Helion Venture Partners set up shop in the country in 2006 and 2007. In that period, more than 20 VC firms launched in India.

Investors were testing the strength of India’s consumer Internet market and software-building capabilities.

After the initial boom and bust cycles that are typical in any Internet economy, three of these VCs, Kleiner Perkins Caufield & Byers, Draper Fisher Jurvetson and Canaan Partners, shut shop, conceding that Indian start-ups wouldn’t deliver meaningful returns or that they had placed the wrong bets.

Some rebranded: Erasmic Venture Fund became Accel Partners; NEA-IndoUS Ventures shed NEA from its name then became Kalaari Capital in 2012; WestBridge Capital Partners spun off from Sequoia.

For the most part though, VC firms plodded along for the first seven years and then reaped the benefits of the extraordinary 2014-15 funding boom for Indian start-ups. Companies such as Flipkart, Snapdeal, Ola, Paytm, Quikr and others that comprised early bets of VC firms raised billions of dollars at eye-popping valuations.

Large investors in the US, Europe and Asia, who either missed out on the record public listing of China’s Alibaba Group or were handsomely enriched by it, together with VC firms poured more than $9 billion into Indian start-ups, believing that the mobile Internet boom would yield their next big pay-off. Some early investors in Flipkart, Snapdeal, Quikr sold part of their stakes and realized massive gains. Three large acquisitions (Freecharge, Myntra and TaxiForSure) strengthened the theory that India start-ups will finally deliver exits.

Traditional VC firms raised billions of dollars in new funds. And, why not? Their portfolios showed the kind of paper gains that would fill any LP with confidence.

However, the rapid expansion of Amazon India and Uber India caught Flipkart, Snapdeal and Ola by shock (bit.ly/2dkf8J0). Most importantly, though India’s Internet market is huge in terms of number of users, but making money from these users is another matter altogether (mintne.ws/1TYtIRu).

These two factors together with other smaller ones have shown that many of the investments made by VC firms in 2015 are simply unviable and the future of the VC scene in its current form hangs in the balance.

To be sure, most investors are still sanguine about India’s Internet economy. The mobile Internet boom that is being turbocharged by the entry of Reliance Jio Infocomm Ltd will attract hundreds of millions of potential new customers for start-ups. Ola has shown this year that it can hold its own against Uber; Flipkart, too, finally seems to be in the early stages of a turnaround. Plus, there’s hope among investors that some newer investments such as enterprise product or SaaS (software as a service) start-ups will pay off.

“It’s true that things haven’t gone according to plan, but LPs are still very positive about India. They realize it will take longer, but they also believe that India is a market you cannot ignore. They will continue supporting VCs. There are only a few blue-chip VCs out there, so I don’t expect (a shakeout)," a managing director at a VC firm said.

None of the VC firms and LPs Mint contacted for this story spoke on the record.

mihir.d@livemint.com

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