The return of micro venture capital?

Given their experience and proximity to both entrepreneurs and venture capitalists, micro venture capital funds may finally be here to stay

Just when you thought micro venture capital funds in India had run their course, a whole new wave may be starting to take shape.

Last Tuesday, Mukul Singhal and Rohit Jain, the duo that led seed investments at Gurgaon-based venture capital firm SAIF Partners, joined a small tribe of local venture capitalists eager to give micro venture capital another spin.

Singhal and Jain, reports The Economic Times, aim to build a portfolio of up to 20 seed stage start-ups over a year, putting about $500,000 to work in each.

Singhal, also a fairly prolific angel investor in his personal capacity, isn’t saying much more at this stage about his plans. On a more general note, however, he shares that the market is more ready now for specialist seed funds, aka micro venture capital funds.

His optimism is somewhat borne out by the recent launches of a couple of new micro venture capital funds. Earlier this month, Mumbai-based Unicorn India Ventures, co-founded by Anil Joshi, former president of angel investor group Mumbai Angels, garnered $6 million in the first close of its $22 million ( 150 crore) debut fund.

It aims to invest up to $200,000 in technology start-ups and has just announced its first investment in on-demand cab aggregator Roder.

Then there’s Venture Catalysts, also based in Mumbai, which is raising a 100 crore (about $15 million) seed fund that will support its start-up incubation services.

Singhal and Jain though are a bit different from their predecessors in micro venture capital. This is a rare instance of seasoned fund managers leaving an established venture capital firm to launch a micro venture capital shop.

The only other example is former Seedfund executive director Anand Lunia striking out on his own with India Quotient more than four years ago. Lunia, Singhal and Jain have one more thing in common: they decided to turn specialist seed stage investors when they found their existing environments inadequate to exploit what they believe are compelling and relatively untapped opportunities.

In fact, it’s hard to disagree that the case for micro venture capital funds in India is stronger today than it has ever been.

Investing at the seed stage has lately been a bit of a fad with mainstream venture capital firms such as SAIF, Sequoia Capital, Matrix Partners, Nexus Venture Partners and Helion Venture Partners.

These firms run large in-house seed investment programmes and strike anywhere between 10 and 15 deals each every year. The programmes were started as a counter to soaring entry valuations in later funding rounds, their traditional hunting grounds.

However, as entry valuations in those later funding rounds, typically the Series A and B stages, now begin to correct, the mainstream firms will pare their seed investment programmes. This won’t happen immediately.

Valuations in the venture capital market have just started to correct and mainstream firms will continue to run their seed investment programmes aggressively for a while. Still, as one fund manager in an upcoming micro venture capital fund puts it, “For most large firms, seed investing is a seasonal strategy. There is always a tendency to put it on the back burner when the market changes."

When the season does change, more likely than not given the cyclical nature of the venture capital business, the withdrawal of larger firms will create a gap in the funding cycle. It’s a gap that neither venture capitalists nor entrepreneurs can afford to have. Seed capital extends a start-up’s runway after it has raised angel funding and, critically, before it is mature enough to raise an institutional or Series A round.

The existence of a robust micro venture capital industry therefore becomes not just important but necessary.

Unfortunately, the Indian market’s first experiment with micro venture capital hasn’t fared too well. Starting with Mumbai-based Seedfund, the country’s first specialist seed investor, almost every micro venture capital firm that started up in the last decade has had to diversify into later-stage investing. This is primarily because the aggressive seed funding programmes run by larger firms have edged them out of deals. As late as last August, Orios Venture Partners, founded by prolific Mumbai-based angel investor Rehan Yar Khan, shifted gears. Compared to its $50 million debut fund which was targeted at seed-stage start-ups, it is now raising a $150 million fund that will invest across stages.

Earlier, in July, Bengaluru-based AngelPrime, backed by Palo Alto, California-based Social+Capital Partnership among others, rebranded itself as Prime Venture Partners when it raised a 300 crore (about $47 million) second fund. It will continue to fund companies at the seed stage but will also participate in later, notably Series A rounds.

Similar strategies have been adopted by early entrants Blume Ventures and India Quotient, though to a lesser degree in the case of the latter. Blume, which is raising a $60 million second fund, was one of the most prolific seed-stage investors in the country about three years ago. In its new fund, however, up to 70% of the corpus will be reserved for later-stage funding rounds.

Despite those early experiences, the second wave of micro venture capital in India could turn out to be quite different. The seed programmes at mainstream firms have created a whole new generation of fund managers seasoned in seed investing.

It wouldn’t be unexpected to see some of that talent strike out on its own, much like Singhal and Jain, and Lunia before them.

Given their experience and proximity to both entrepreneurs and venture capitalists, micro venture capital funds may finally be here to stay.

Snigdha Sengupta is a freelance journalist in Mumbai and founder of StartupCentral. She contributes stories on private equity and venture capital to Mint.

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