“Mere paas ma hai (I have my mother)." The legendary line from Deewar could resonate well with the current Indian start-up scene. Imagine start-up founders saying, “I have SoftBank, Tiger Global... who do you have?" To which Vijay Shekhar Sharma of Paytm can promptly reply: “Mere paas (Jack) Ma hai."

Jack Ma’s Alibaba, a big investor in Paytm, is making the Noida-based company look relatively strong compared with its peers. Anyone tracking Indian start-ups, e-commerce in particular, will tell you how Alibaba might play white knight, brokering a consolidation deal among desi players to take on foreign giant Amazon. (Alibaba is also a minority investor in Snapdeal along with SoftBank and Foxconn.)

The noise around consolidation has become louder in recent months as fund raising has become a challenge even for the big boys. Indian start-ups suddenly find themselves in a tough spot as category-leading investors such as SoftBank and Tiger seem to have hit the pause button.

Deal-making had hit a record high last year with venture investors of all hues—hedge funds, tiger cubs (offshoots of hedge fund Tiger Global), pension funds and sovereign funds—lining up to grab a slice of the Indian start-up pie. But now this set of momentum investors has stopped in a heartbeat, and the effect is being felt. Terms like down rounds have entered the Indian start-up lexicon.

The missing piece is mid to late-stage venture investing which appears or disappears based on global liquidity. What we have is a robust ecosystem of early stage venture funding—you see an angel fund, a pre-seed fund or a pre-series A fund sprouting every other day. But with the venture funds concentrated on one end—seed to early stage—the question is where will the next round of capital providers come from? If this ecosystem is not built here, the start-ups will always be subject to the vagaries of global liquidity sentiment.

In India, we don’t have investors who are ready to take risks at a later stage and write cheques of $50 million-plus in venture tech. What that has done is skew the venture ecosystem towards one end, making it extremely vulnerable to any highs and lows brought about by occasional bouts of investment by hedge funds and sovereigns.

So, when there was a gold rush for Indian tech, a few companies which had raised about $10 million in series A suddenly found themselves receiving a cheque of $50 million plus or in certain cases $100 million plus, which completely distorted the market. Now with that pool of capital not available, some venture capitalists back home are clueless about what the actual size of series B and C rounds should be.

A common grouse of desi investors about these large hedge fund type venture capitalists has been that they came in and distorted the market without much local know-how of where some of these companies stand, the market opportunity, the risk-rewards ratio associated with them and so on. They primarily came in seeing that category-leading investors are here.

To put it in context, India historically has been a private equity market, which has traditionally invested in non-tech companies with a lot of predictability in earnings and returns. While venture capitalists invest in companies with the likelihood of generating a lot of alpha, where some companies can make 20-30 times while some can go bust, private equity firms don’t follow this model in general.

So, while there is a robust ecosystem building on the early stage side, there is a huge gap in the mid-late stage. One reason that venture funds are not addressing this opportunity is that by signing small cheques and coming in really early into the life cycle of a company, they can still make huge upside. So, why take a risk at the mid-stage where the return horizons could be lower?

So even though there are more than two dozen new fund managers currently on the road to raise close to $2 billion, there is hardly anyone focusing on a strategy to provide late-stage funding to tech companies barring probably the odd fund like Iron Pillar, a firm founded by former limited partner Anand Prasanna and former Citi India investment banking head Sameer Nath. They want to invest in companies at the growth to late stage where the exit outcomes are clearer. Late-stage venture investing requires a different kind of skill set—it’s a private equity type of skill set with risks associated with it.

Now a lot is riding on the poster boys of Indian tech. Their success is important not only for them and their investors but will also have a ripple effect on the entire venture ecosystem. But unless we plug the gap for mid-to-late stage funding, we will always need a Jack Ma to see us through.

Shrija Agrawal is Mint’s deals editor. Due Diligence will run every week and cover issues in India’s venture capital, private equity and deals space.

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