Early-stage venture capital (VC) firms managing their second or third fund are looking to double down on successful portfolio companies, and allow their limited partners (LPs), or investors, to go deeper in mature start-ups.
In fact, a number of prominent early-stage VC funds such as Blume Ventures, Kae Capital and DSG Consumer Partners have been raising add-on funds specifically earmarked for a select bunch of portfolio companies.
“We wanted to ensure that the Blume investor base in India, as well as well as overseas LPs, are able to double down on our star portfolio companies through the growth phase," said Ashish Fafadia, partner, Blume Ventures, which raised an add-on fund last year. Blume had raised its first VC fund of $20 million in 2011, followed by a $60 million second fund in 2015 and is currently raising an $80 million third fund.
Likewise, Kae Capital had raised two VC funds of $25 million and $53 million in 2012 and 2017, respectively, and is now looking to raise a ₹100-crore add-on fund to back companies from its first fund, Mint reported on 21 January.
“We have seen these entrepreneurs go through ups and downs and bounce back strongly each time, and would want to continue supporting them through their journey in building world-class companies," said Sasha Mirchandani, founder and managing director, Kae. Mirchandani is one of India’s earliest venture investors and was one of the founders of Mumbai Angels.
DSG Consumer Partners, which invests only in consumer-focused start-ups, raised two add-on funds of $10 million and $20 million in 2014 and 2016, respectively, to back fast-growing companies from its first fund. These include Mswipe, a mobile point-of-sale terminal devices startup, and food brand Veeba Foods.
For LPs, these funds pose lower risk considering that they will be investing in companies with a proven track record, besides knowing the startups they will be investing in.
“Generally our LPs invest in a blind pool. But, for add-on funds, we told LPs exactly which seven companies we will be investing in. They know exactly where the money will go," said Deepak Shahadadpuri, managing director, DSG, which had raised its first VC fund of $24 million in 2012 to follow it up with a $50 million fund in 2017.
An add-on fund not only gives existing LPs the chance to participate in more mature deals, but also opens a gateway for new investors. In DSG’s case, 60% of the add-on fund came from existing LPs, while 40% was contributed by new investors.
Fafadia said an add-on fund is a win-win for Blume, as it can exercise pro-rata rights and continue supporting the best companies. “It also allows us to maintain strong founder relationships, and have oversight and provide assistance on the boards to eventual exits."
From its add-on fund, Blume has backed insurance start-up Turtlemint, which had raised a $25 million round led by Sequoia last week. It has also backed robotics startup GreyOrange, which raised $140 million in September last year led by Mithril Capital.