India’s micro venture capital firms are at a crossroads a decade after first bursting onto the scene, as they fight for deals with larger investors who have increasingly gone deeper and earlier in a hyper-competitive startup ecosystem.
Micro VC funds such as Artha India Ventures, Unicorn India Ventures, GrowX Ventures and 100X.VC have typically operated in the space just above the angel investors and below that of early-stage venture capital firms, usually coming in as the first institutional cheques in early-stage startups that have gone past the ideation stage and are beginning to record early revenue.
The definition of micro VC funds remains fluid. In the United States, they are defined as funds managed by a single, or at best, a couple of general partners, with a small boutique investment thesis, and rarely charging management fees. In India, however, domestic micro VCs have typically raised between $30 million and $50 million.
The lines have blurred further over the last two years in India with the emergence of super angels and angel syndicates and as blue-chip venture capital funds such as Sequoia Capital, Accel Partners, Lightspeed Ventures, SAIF Partners and Orios Venture Partners have set up their respective seed-stage vehicles to get on to the cap tables of promising ventures before their valuations skyrocket.
“There has definitely been an increase in competition, because of programmes such as Surge, and others. We might lose out on the chance to invest because entrepreneurs may have the inclination to go to those funds,” Anil Joshi, founder and managing partner of Unicorn India Ventures, told ET.
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While Sequoia launched its rapid scale-up programme Surge in early 2019, Accel, which already operates an incubator programme LaunchPad, also kicked off ReBound, focused on second and third-time entrepreneurs in the same year. Home-grown investor Orios Venture Partners also launched Misfits last year, which invests $50,000-$1.5 million.
A number of micro VC fund managers admit that the emergence of marquee VC-backed programmes over the last two years have made the startup landscape trickier to navigate, which has therefore seen them adopt niche investment strategies, and also to scout for opportunities outside the metros.
For example, Unicorn India Ventures, which is currently investing out of its third fund – a Rs 400 crore vehicle and its largest till date – has backed two ventures that have emerged out of Kochi, while Delhi-based GrowX Ventures focuses primarily on the deep-tech space.
“The amount of work may have increased, but we have also been able to get better deals and better terms,” Joshi said.
The idea is to create a differentiated strategy, by betting on specific emerging segments, or even sub-segments, while simultaneously building a brand.
“Which means, when you back a particular enterprise in our target domain, we’re fairly well equipped to help them scale up. And, an entrepreneur likes that. That’s how they tend to pick people – Who is the best fit for me? That is our core,” said Ashish Taneja, partner at GrowX Ventures.
GrowX Ventures is currently investing out of its $30 million fund – its second – which is focused on deep-tech ventures, particularly those operating in the space technology and electric vehicle segments.
That’s where Utsav Somani, who heads AngelList in India sees an opportunity.
“Micro VCs have to ensure that their average cheque sizes are at a point where they are seen as collaborative and not competitive. Even in the US, micro VCs never try to eat up the whole round or dominate the cap tables by themselves,” Somani said.
Last week, Somani launched iSeed Fund, which counts the likes of Naval Ravikant and Matrix Partners’ Josh Hannah as investors, which will look to make about 30 investments over the next three years, writing cheques of $50,000-$200,000.
Other fund managers, such as Anirudh Damani, who leads Artha Venture Fund, point out that micro venture funds are possibly the best option, not just for entrepreneurs, but also for investors looking to back funds.
“For anyone who’s looking to allocate capital to VC, you need to come in through a structure, where your money has power, and in this game, unless you have that, you’ll be kicked out way before you actually make any serious money,” Damani told ET.
And unlike angel investors, these funds tend to have their, and their LPs’ rights, protected when it comes to often hoary issues, such as dilution and liquidation preferences.
“We have seen cases where angel investors, or angel networks, have been strong-armed into exiting their portfolio companies… They’ve also had to give up a lot while negotiating for rights. You can’t do that with a fund,” Damani, an early investor in Oyo and Purplle, said.
“You could end up as the guy sitting by the wayside, because you were forced to give an exit at, say, Rs 800 crore, while the company ended up being valued at Rs 8,000 crore. While you got 30X, it really should have been 300X,” he added.
The outlook for micro VC funds is also different from the likes of mid-to-growth-stage funds. For instance, taking their portfolio companies all the way to an initial public offering, is almost never part of the plan.
“The thinking is to come in at the seed or pre-seed stage and go through two or three rounds and come out by the end of the Series C or D financing rounds. From that perspective, we’re quite okay, and I’m not worried about us being thrown out from the cap table,” Taneja said.
(Graphics by Rahul Awasthi)