Founders of new venture funds say limited partners are backing new, smaller funds due to the increased probability of higher returns
Mumbai: Several venture capital (VC) professionals, and founding members of leading VC firms, are setting up their own firms as investors look to back smaller funds, hoping their nimbler approach will deliver bigger returns.
Many new firms, such as Epiq Capital ($100 million), Pravega Ventures ($30 million), Fireside Ventures ($52 million) and Fundamentum ($100 million) were set up recently. While Epiq was launched by Rishi Navani, a former partner of Matrix Partners India, Fireside and Fundamentum were established by Helion founders Kanwaljit Singh and Sanjeev Aggarwal, respectively. Now, former managing director of Sequoia Capital Abhay Pandey joins the long list of VC fund managers leaving established firms to set up their own venture.
According to the founders of the new VC funds, limited partners (institutional investors investing into PE/VC funds) are looking to back new, but smaller funds due to the increased probability of higher returns.
“Empirically, it has been observed that smaller funds are able to generate higher returns compared to the bigger funds. A couple of good investment bets are sufficient to generate high returns for the LPs (limited partners) due to the small base. Whereas, for the bigger funds, at least six-seven successful investments are required to generate the same percentage of returns," said Ritesh Banglani, partner, Stellaris Venture Partners.
Banglani, who had earlier served as a partner at Helion Venture Partners, quit the firm to start his entrepreneurial journey as an investment manager. Stellaris focuses primarily on backing technology start-ups at seed and Series A funding stages.
“Right now in India the whole entrepreneurial space and ecosystem is developing extremely well and there is a lot of interest among investors, especially domestic, to participate in this journey. With the deepening of the ecosystem, investment opportunities are getting stronger," said Nupur Garg, regional lead, South Asia, International Finance Corp.
However, the number of funds and the overall amount raised by VC firms witnessed a drop in the past three years. According to Venture Intelligence, 17 VC funds have raised $1.06 billion so far in 2018 compared with 27 funds raising $2.79 billion in 2016.
Banglani said the VC industry is still very small in India and there are “market opportunities" to fill the gap across various investment stages.
Favourable fund economics and flexibility on sectors and style also play a crucial role. Vivek Soni, partner and leader, private equity services, EY India, said that LPs often back experienced investment managers with good track record and experience of working across cycles with large, international investment firms. This helps LPs diversify their capital exposure across money managers, sectoral themes and investment size.
“It also helps LPs negotiate better terms for management fee and carry structures as newly set up GPs are more flexible on the commercial aspects as compared to their previous organizations," Soni said. “This helps LPs reduce fee drag and increase returns. In most cases, LPs back VC professionals, who have previously served with established venture capital funds where the said LPs already have a long-standing relationship. The prior knowledge of the investment professionals’ working style, investment track record and experience often provides the right foundation to build a new LP-GP relationship."
To be fair, what is happening in the venture capital space has played out in the private equity space earlier and such developments are seen as a natural outcome as the industry evolves.
For instance, former Carlyle India head Shankar Narayanan quit the firm in June to start his own fund Sanaka Capital.
Similarly, Niten Malhan, a former managing director at Warbug Pincus India, is also setting up his own fund, New Mark Advisors LLP.
Ashish Khandelia, co-head for real estate investments at KKR and Co., too, quit in May to set up his own firm.
“I realized that I wanted to approach the consumer sector as a core focus and Helion was more focused on technology businesses. So I decided to step out and set up my own family office to learn the early-stage consumer brands space before setting up an institutional fund," said Kanwaljit Singh, founder, Fireside Ventures.
Singh added that there was ample interest from domestic family offices and wealthy individuals.
According to a partner of a leading global venture capital firm, investors are preferring to reallocate their money across multiple funds and believe that $100-$200 million is a reasonable fund size for a venture capital firm in India, given the investment opportunities available.
According to Anshul Lodha, director at Michael Page, setting up their own venture capital funds allows investment professionals more flexibility in terms of ease of decision-making as well as investment strategy.
“Moreover, top-heavy structure at a lot of venture capital firms is also forcing senior professionals to pursue entrepreneurial opportunities," added Lodha.