Niche funds are rising, from prop-tech to media

Over the past 6-12 months, specialized funds have sprung up in sectors such as prop-tech, supply chain, media-tech, STEM and climate-tech, several executives and fund managers told Mint.

According to a Bain Capital report released this March titled ‘India Venture Capital Report 2024’, even as fund-raising slowed to $4 billion in 2023, domestic VCs stepped up, driving more than 90% of the fund-raising and, significantly, launching several thematic funds focused on emerging themes.

While sector-specific funds have existed for some time, it is only now that they are coming centre stage, as investors become more discerning and look to make targeted bets in sunrise industries to maximize returns on capital deployed.

Newer funds such as Synapses, Spyre and Cedar Capital have joined the likes of Audacity, Caret Capital, SenseAI, and Good Capital, among others, in driving this trend.

“Thematic funds tend to create an ecosystem and help portfolios leverage the fund from a go-to-market perspective, so capital is differentiated and valued more by entrepreneurs and investors (LPs)," Pankaj Bansal, co-founder and managing partner at Caret Capital said, adding that many LPs use thematic funds to back innovative ideas to their own ventures and even acquire if opportunities exist.

Gurugram-based Caret Capital, a $50-million sustainability fund established in 2020, focuses on mobility, distribution and employment. Its portfolio typically comprises startups that are working on three aspects of the value chain—goods and services supply chain; human capital supply chain; and assets and infrastructure supply chain. Some of its companies include Mooofarm, which operates in the dairy supply chain sector; Xindus, which simplifies exports for SMEs; and supply chain solution provider Celcius.

What is also helping drive this trend is that the domestic pool of capital is expanding, with insurance companies, local banks, HNIs and family offices keenly investing in the space.

“In the conversations I have had with investors or family offices, they are very happy to participate and cut a cheque for our fund," said Murali Krishna, a principal investor at Spyre, a Mumbai-based $50-million early-stage property-tech fund launched in 2024. He added that the firm is likely to add another $25 million to its corpus in the coming months.

“Real estate is the second largest industry and is expected to be a $3-trillion industry, and it is also one of the largest employers in the country," said Murali Krishna, a principal investor at Spyre, adding that tech adoption in real estate has been minimal and “this is where we see the opportunity". Builders are increasingly seeking technology to improve efficiency and profitability, Krishna said.

Then, Gurugram-based Audacity has raised a $30 million fund that invests in media technology. “The large family offices who invest in us do so because they realise that they cannot avoid such a pivotal sector such as media, especially as it is the sector most disrupted by AI," Kabir Kochhar, founder & managing partner, Audacity VC. He added that generic funds that look at opportunities across different sectors will never be able to have the vast coverage and expertise of specialised funds.

“For our mediatech-specific thesis, we see India as the foundry for the birth of some of the most exciting startups that scale globally. So, the addressable market expands significantly to cover the $2.5 trillion mediatech ecosystem. Our depth of focus allows us to be stage agnostic and find lucrative entry points across the investment cycle," Kochhar said.

Most recently, Synapses, a Delhi-based firm launched by a former IFC executive, launched a $125-million fund that focuses on enhancing STEM (science, technology, engineering, and mathematics) opportunities.

“There are never enough investment opportunities because the ones that are known get chased by investors and over-capitalised at high valuations and, hence, they are no longer investible," said Ruchira Shukla, co-founder and managing partner at Synapses. “So, to create outlier returns, funds need to do the hard work to discover and cultivate proprietary opportunities."

And then there are funds such as Mumbai-based Tomorrow Capital, a $100-million VC fund that focuses on select sub-sectors within healthcare, fitness, education, home and interiors, and logistics.

Early-stage investing has become very competitive and crowded. There are more than 50 active funds out of the overall 100+ funds in the country today, several experts estimate. Ironically, at a time when the funding winter is still extant, there is a problem of plenty for early-stage founders looking to raise money, as GPs look to innovate to stay relevant.

With deepening markets in India and rise in consumption driven by a burgeoning middle class, more such sectors are expected to come about in the next few years, according to industry experts. These specialized funds also give opportunities for founders to be backed by investors who will support them with resources that align with the unique challenges and opportunities in that targeted space.

Pointing out that sectoral or thematic funds generally overperform vis-à-vis generic funds, Caret Capital’s Bansal explained that $50-million funds on an average typically won't have more than 20 investments, but a thematic fund can easily have over 200 investable companies.

“Funds that focus on specific sectors bring deep insights and understanding of the unique dynamics and challenges within those industries," said Ashish Bhatia, co-founder of startup mentorship platform India accelerator. “This enables them to provide targeted support, strategic guidance, and valuable connections that can propel startups forward."

Bhatia added that the appetite for such funds among limited partners (LPs) within India has been on the rise and will continue on a similar trajectory but still short of bigger and mature markets like China or the US.

To be sure, specialist funds targeting niche sectors have been around for sometime. Firms like Quadria Capital and Somerset Indus Capital Partners have successfully raised multiple healthcare-focused funds over the years, as well as returned capital to their investors. Cedar Capital and Beams Fintech Fund have expanded the capital pool for fintech firms over the past few years.

Other venture capital firms such as SenseAI & Good Capital also launched specialised funds on artificial intelligence. Firms like Avaana Capital and Aavishkar Group have raised capital to invest around the climate-change thesis. Omnivore Capital has long focused on food and agritech.