The global reach of India’s startup ecosystem has pulled in investors from all geographies. While US funds dominate the landscape, even VCs from Europe, the Middle East and Southeast Asia are looking for upsides in the dynamic market, having seen the trajectory of Silicon Valley startups up close.

Among these is Canada-based Ocgrow Ventures, which has been an active investor in the tech industry since 1995, when the product economy was still building steam in the West. The privately held VC fund that manages the assets and investments of Harish Consul and his family, primarily focusses on early stage investments. The firm, led by Consul, has invested over $100 Mn across more than 50 companies worldwide, including early investments in tech giants Amazon and Shopify.

In India, Ocgrow Ventures’ portfolio includes 18 startups, including the likes of Garuda Aerospace, Rebel Foods, Gupshup, and Saveo.

“We invested in all the above companies at the seed or Pre-Series A stages. Our focus is on young India centric companies, which target Gen Z market, the huge growth in the middle class of young consumer market looking for new consumer services ranging from higher end products & services, including wealth management fintech to new social commerce buying habits for this next generation,” Ocgrow Ventures’ Consul told Inc42 as he outlined the fund’s thesis for the Indian market.

Consul, with over 35 years of entrepreneurial experience, highlighted India’s rapid rise as a global innovation hub in areas such as digital transformation, generative AI, fintech, and health technology.

Despite some inherent growth challenges in India, Consul views India as a promising market for startups and innovation.

In this conversation with Inc42, Consul sheds light on Ocgrow Ventures’ investment strategy, key sectors of interest for the Canadian VC firm, and the challenges Indian startups face as they scale.

Edited excerpts

Inc42: How has India’s private equity and venture capital investment ecosystem changed over the past two decades?

Harish Consul: Ocgrow Ventures has been investing globally since 1995 and in India specifically since 2011 through our global fund. Over the last three to five years, the change has been dramatic. India’s startup ecosystem has matured rapidly, with founders driving innovation and growth. We’re deeply connected to India’s market, speaking regularly at global tech and investment conferences with an India focus.

What sets us apart is our global network, which helps Indian startups scale internationally. A great example is Garuda, which started in India and is now growing globally with offices around the world. The mindset of founders has also shifted—from a “growth at any cost” approach to balancing growth with profitability.

We believe companies can achieve both, and technologies like AI automation are already helping founders improve margins and reduce operational overhead.

Inc42: When we look up Ocgrow, it’s often linked to real estate. Can you clarify the connection between your real estate background and your venture fund?

Harish Consul: Ocgrow Group has two divisions. We originally started as a real estate investment company, and our family has been in that space for over 40 years. That remains a long-term portfolio of real estate assets.

Ocgrow Ventures, on the other hand, is our global venture fund, which I founded. It focusses on investing in startups, particularly in India and globally, across sectors like AI, health tech, and consumer brands.

Inc42: What is Ocgrow Ventures’ core investment thesis as a private equity fund?

Harish Consul: We typically invest anywhere from $500K to $10 Mn in early-stage companies. Our philosophy is simple: back world-class founders who’ve already achieved product-market fit. These are companies with real paying customers and growing revenues. We’re looking for verticals that tap into massive total addressable markets (TAM), and right now, AI is a must for any company working in data analytics or similar spaces.

But for us, it’s not just about the business metrics—though those matter, of course. What’s really important is the founders themselves. We spend a lot of time with them, getting to understand their passion and mindset. We’re looking for that hunger and laser focus—the kind that’s rare to find. It’s not just about saying you’re passionate; it’s about living and breathing what you’re building every day. That kind of grit makes all the difference.

We’re also very hands-on. We often take board or strategic advisory roles and help companies scale fast by leveraging our extensive global network. It’s all about helping them grow exponentially and build those valuable global alliances that can take them to the next level.

Inc42: What are the key sectors Ocgrow Ventures is focussing on?

Harish Consul: AI-native companies are definitely a big focus for us—what we see as the next wave of SaaS. These are businesses using AI to automate traditional industries by leveraging data, which we categorise as vertical AI sectors. We’re also highly active in the consumer space. While many are moving away from it, we remain bullish on select areas within consumer tech, fintech, drones, and agritech are also key areas of interest.

Additionally, we’re very focussed on “Young India” and Gen Z-centric verticals. Enterprise AI platforms that use technologies like LLMs (large language models) to automate industries are another exciting space for us.

Inc42: You seem bullish on AI. How do you view its current status in India, especially considering that native AI applications are still limited while top-layer applications face challenges?

Harish Consul: That’s a fair point, but it’s changing rapidly. In just the last few months, we’ve seen a surge in AI-native founders building on top of existing layers. One example is an automation AI company we’re getting involved with—I’ll share more details later. We’re seeing incredible talent emerging from cities like Mumbai, Pune, Hyderabad, Bangalore, and Delhi. I don’t think India is lagging; in fact, I believe it’s on track to lead the charge in AI innovation very soon.

Inc42: Can you elaborate on the “Young India” centric verticals?

Harish Consul: Absolutely. India has a massive population under 30, and we’re seeing a rapid rise in Gen Z-focussed consumer brands. We’ve made several investments in this space, spanning sectors like retail, cosmetics, fashion, and skincare. Health and wellness are also key areas where we’re very active, particularly in health consumer products rather than delivery or restaurant services.

The rising middle class in India is driving demand for these consumer plays. Founders in this space are doing some really interesting things, and we believe this trend will only accelerate as demand continues to grow.

Inc42: Can you share specific examples of your Young India Centric investments?

Harish Consul: Many of our investments in this space have been made in just the last six months, and some haven’t been announced yet. Broadly, these investments are sector-agnostic but all consumer-focussed, targeting the 18 to 30 age group that’s shaping India’s market landscape.

Inc42: Your fund also focusses on global health tech and longevity ventures. Have you invested in any Indian health tech startups?

Harish Consul: We’re very active in health tech and longevity and are currently evaluating several opportunities in India. This sector is experiencing massive growth globally. We are seeing advancements in preventative, personalised, and precision-based medicine—areas like microbiomes, stem cells, peptides, and IoT devices.

In India, we’ve explored longevity clinics like Seva and invested in Savio, a pharmacy aggregator. However, we’re keen to connect with more Indian health and longevity startups. It’s a call to founders in this space to reach out to us—we see tremendous potential and want to deepen our focus here.

Inc42: You also cofounded another fund – Hanu Ventures? How does it fit into this structure?

Harish Consul: Hanu Ventures is another fund I co-founded with Nuno Martins, a  multimillionaire serial entrepreneur, venture investor, international keynote speaker, and scientist in Europe. It’s a part of Ocgrow Ventures but has a specific focus on health and longevity startups.

We’re absolutely open to investing in India through both Ocgrow Ventures and Hanu Ventures, particularly in the longevity space. If there are Indian startups innovating in this area, we’d love to hear from them.

We see immense potential in this space, and India is very much a part of our long-term investment strategy.

Inc42: What challenges do you see for the Indian startup ecosystem?

Harish Consul: India has made tremendous progress, but bureaucracy remains a major challenge. Regulatory hurdles, like delayed approvals for international investors and the complexity of compliance processes, are frustrating. The banking system needs modernisation—while UPI is world-class, global money transfers and forex operations remain outdated. Streamlining these processes would greatly improve the ease of doing business for both founders and investors.

Inc42: Can Indian fintech startups resolve these challenges long-term?

Harish Consul: Absolutely. We’re very interested in the FinTech space because young, tech-savvy founders understand these challenges firsthand. They live and breathe digital solutions. However, breaking into the traditional banking ecosystem can be daunting due to RBI regulations. While some founders have grown tired of navigating the red tape, those with the determination to challenge the status quo have a huge opportunity to drive change and innovation.

Inc42: In the past, we’ve seen international funds like SoftBank and Tiger Global face setbacks in India, investing large sums but not achieving expected exits. Do these stories impact the momentum of international investors, particularly for larger rounds?

Harish Consul: It’s true that such stories make investors more cautious, but I don’t think they dampen the global interest in India. India is emerging as a superpower and is on track to rise from the third-largest economy to possibly the largest in the coming decades. The ecosystem here is vibrant and brimming with talent, which makes it very attractive.

What has changed is the approach—investors are now more focussed on prudent growth and profitability from day one. The era of “grow at any cost and worry about profits later” is over. Business models must demonstrate both scalability and financial sustainability.

Sovereign funds, family offices, VCs, and private equity firms are all actively looking to increase their exposure to India. The momentum remains strong, and it’s an exciting time to invest here.

Inc42: Where do you see Indian startups heading by 2025?

Harish Consul: The Indian startup ecosystem is among the best in the world. India is on track to become the third-largest economy globally, and it’s already the fastest-growing major economy. Digitally, India is ahead of many other countries. In areas like facial recognition for boarding and payment systems, it surpasses even places like Dubai and North America.

While the ecosystem is strong, challenges persist in the financial and regulatory environment. Still, Ocgrow Ventures remains very optimistic. More founders are choosing to stay and build in India, though some still migrate abroad.

It’s a dynamic time, and India’s global influence is growing. Everywhere I go, people are talking about the India story, and we’re proud to be part of that journey—helping founders scale globally while staying rooted in India’s innovative spirit.

The post Decoding Rebel Foods Backer Ocgrow Ventures’ Early Stage Playbook For India appeared first on Inc42 Media.

Despite showing signs of a funding revival, the Indian startup ecosystem is in a peculiar place now. Most of the capital has been raised by companies in the public markets, which skewed the mergers and acquisitions (M&As) market in 2024. But will this have any ramifications on startup M&As in 2025?

With only 71 such deals recorded in 2024, it was the worst year for M&A deals in the Indian startup ecosystem over the decade. The second-lowest number in terms of M&As in the last 10 years was 82 in 2020. Post this, there was a funding revival which spurred on consolidation in key sectors like edtech, digital media and entertainment, and ecommerce.

In 2022, for instance, the number of M&As in the Indian startup ecosystem shot up to 240, before halving in 2023 and then further falling in 2024 to the nadir.

But looking beyond that, startup M&As are likely to shoot up by 58% in 2025, as more and more listed companies flex their capital. Sectors that are expected to witness the most number of M&As include — AI, edtech, ecommerce and consumer services as well as fintech.

One of the key reasons is the fact that most companies are looking to integrate automation into their operations and become AI-first, even as they experiment with new distribution channels and new products. This includes listed giants like PB Fintech, Nykaa, Paytm, Zomato, Swiggy, Nazara, Zaggle among others.

These listed new-age companies are expected to flex their muscles and dictate the terms of the M&A market in the coming year.

Listed Giants To Pursue Strategic M&As In 2025

While the trend of distress sales or fire sales will likely continue for startups that have hit hard times, one new factor could very well emerge in 2025.

That’s listed new-age companies eyeing growth-stage startups with proven business models, and a measurable revenue boost. Sectors like fintech, enterprise tech, and consumer services are most likely to see this wave of established players acquiring startups either for the tech or to add new verticals. Which is where the QIP wave of 2024 gives us a hint or two.

In 2024, Zomato raised INR 8,500 Cr through a QIP, followed by Nazara’s INR 855 Cr preferential placement, and Zaggle which netted INR 595 Cr from its QIP. In 2025, we expect several such QIPs from the cohort of startups that went public between 2021 and 2023.

Listed companies in competitive sectors such as fintech and consumer tech segments prefer QIPs for fundraising as a means to reduce the regulatory and financial burden compared to options such as debt, secondary or rights issues. For instance, a QIP round would suit companies in competitive sectors such as Paytm or Nykaa, or even those like PB Fintech which are looking to expand into new segments.

Typically, such funds are allocated to new lines of business that came up after the public listing, such as acquisitions of adjacent or new verticals, investments in technology infrastructure (AI, in this day and age) or just for customer acquisition and brand-building for the long-term.

SaaS Startups, Edtech Consolidation On The Cards

The line between traditional SaaS and AI is fast blurring, as evidenced by the transformation seen by large SaaS giants such as Salesforce, Freshworks and Zoho. Other Indian SaaS companies are also busy integrating AI capabilities across their product suites to stay relevant in 2025.

In 2025, investors expect M&As to grow for sectors such as enterprise tech which are going through the AI churn and revolution. SaaS companies are shopping for tech capabilities, focussing on IP-led tech acquisitions. Watch for consolidation in areas like cybersecurity, cloud computing, and AI-enabled enterprise applications.

The edtech sector is also expected to be in for significant consolidation in 2025, with even unicorns likely to be acquired, particularly with continued speculation around Unacademy.

The market is maturing beyond the pandemic boom, and with the focus on sustainable business models, there’s little room for the splurging VC dollars as seen in the past. Watch for interesting combinations of online and offline models, particularly in test preparation and skill development segments.

The public listing of PhysicsWallah is also likely to be preceded by a few acquisitions, especially as the edtech giant continues its multi-product strategy.

Industry watchers expect more M&As to get through in 2025 as smaller startups become streamlined thanks to the adoption of AI models and after cost-cutting in key areas.

Analysts say that the bigger companies may keep an eye out for acquisitions in niche verticals as expansion will play out majorly in 2025. However, valuations may continue to see a big downward correction, relative to 2021-2022 numbers.

“Investors are now looking for real growth metrics in any edtech up for sale instead of vanity metrics like MAUs, DAUs. They also need a track record of financial discipline over the last couple of years rather than a sudden dip in costs,” according to a partner at a Delhi-based early stage VC firm.

Will Quick Commerce Giants Acquire Competition?

Vertical-specific quick commerce models are emerging as force breakers, with companies specialising in categories like fresh meat (Meatigo, Licious), medicines (Plazza, 1MG), fashion (Myntra, Slikk, Blip), food (Swiggy, Swish, Zing). While many of these platforms have the scale to sustain these quick commerce operations, several new startups will likely be at the mercy of VC funding to scale up.

Will investors back these new QC models or will these startups just become more acquisition targets for the giants?

Within QC, the focus for major players is shifting from customer acquisition to operational efficiency and sustainable unit economics either through the right product assortment or new categories.

It won’t be a surprise if some of this consolidation happens on the brand front if and when the delivery apps push for more private labels.

Dhruv Kapoor of Anicut Capital highlighted opportunities for vertical growth in quick commerce, where players could specialise in specific categories with streamlined supply chains for faster deliveries.

He noted that investors are now cautious, prioritising differentiation over more players in an already crowded market. This could lead to increased consolidation and new business models in the ecommerce space.

Plus, we can expect a tooth-and-nail battle in India’s metros for 10-minute cafe deliveries with Blinkit Bistro, Swiggy Snacc and Zepto Cafe. But other startups are also emerging, essentially turning the cloud kitchen model on its head by going logistics first.

Expect to see AI-driven demand mapping and automation in the kitchen being billed as moats for these apps. Some of these city-specific startups could fuel the next wave of M&As for well-capitalised giants in the quick commerce segment.

The post Will 2025 Bring Springtime For Startup M&As? appeared first on Inc42 Media.

Investors expect a bullish year ahead for startup funding, but that doesn’t necessarily mean a great 2025 for venture capital (VC) funds and private equity firms in India.

Our Indian Tech Outlook 2025 series has delved into individual sectors such as GenAI, fintech, edtech, ecommerce and gaming, all of which are likely to throw up a few surprises for Indian VC funds and startups investors.

The mood in the ecosystem has certainly lifted after 2024, which showed more signs of maturity in terms of public listings, a push towards profitability, the propensity of consumers to pay more for services, as well as the rapid rise of new models such as quick commerce which are giving a new lease of life to relatively older sectors such as ecommerce, logistics tech and delivery services.

But as we turn the spotlight to VC funds in India, there’s still a lot of churn in the pool. We know that the past two years have seen a number of new funds emerge, with a lot of dry powder waiting to be deployed in the Indian startup ecosystem.

VC Funds In India: The Trajectory In 2025

For one, the exodus of partners and fund managers has led to a dearth of experienced talent at some of the most prominent funds in India. As a result, a lot of the legacy funds are in the process of consolidating leadership and establishing new decision makers.

This has fuelled the launch of new funds, but most of these funds are going after the same pie — early stage bets and a sharp focus on AI. Many of these funds are built in a micro VC mould, which has created a new glut of investors in the market, and a lot of the froth will separate from this mix in 2025.

The other big hurdle of 2024 was the increased compliance burden on Indian venture capital funds — particularly with regards to the certification compliance that will come into effect from May 2025.

This has complicated operations at VC funds, as we covered towards the end of the year, but has coincided with fund closing cycles at some of the legacy firms that have been active since 2012 and 2013.

All these factors have come at a time when pre-IPO rounds and secondaries have become the flavour for larger funds. But it’s also created a tunnel vision around exits and fears around the bubble bursting.

That’s what’s bubbling on the surface — let’s dive deeper into how the VC ecosystem is changing as we step into 2025.

Pre-IPO Rounds Become Late Stage Engines 

As we have recounted in our review and outlook series for a number of sectors, the nature of pre-IPO rounds is fast evolving. In fact, at the late stage, many rounds can now be categorised as pre-IPO, seeing as they often come with exit conditions.

As per our conversations with investors, startups are now looking to raise a significant round without an eye on the valuation, with promises of an IPO in the next two years. But this means that investors are scrutinising the use of funds more closely, akin to how it happens in the public markets.

Besides being crucial liquidity events for early investors, these late stage rounds are helping companies build stronger foundations before going public.

Startups are also being compelled to be more compliant with filing and disclosure norms by investors that are infusing funds at the pre-IPO stage. This has resulted in a shift in the hiring patterns as well, with most investors now being engaged to rope in experienced finance and operations professionals, rather than splurging money on tech talent.

While earlier the likes of BYJU’S, OYO, Meesho, PhonePe, Paytm, CRED, Ola Cabs and other large unicorns raised mega rounds at Series E or Series F stages, the pre-IPO wave has all but erased these stages from the market.

Domestic Funds Turn To QIP Route

On the institutional front, QIPs are emerging as a competitive front with notable examples in 2024 —  Zomato’s INR 8,500 Cr refuel, Nazara’s INR 855 Cr preferential placement or Zaggle’s INR 595 Cr QIP.

Overall, more than INR 1 Lakh Cr was raised by listed companies through QIPs in 2024. In 2025, we expect several such QIPs from the cohort of new-age tech companies that went public between 2021 and 2023.

The primary factor is the high degree of liquidity in the mutual fund industry, which has recorded positive net equity inflows every month since March 2021. SIP contributions crossed INR 2,500 Cr mark  for the first time in October. Adding to this, the bullish market has stretched valuations, which is enabling promoters to dilute their equity for greater value than raising debt.

As of today, the market is still favourable for high valuations as indicated by the premium earned by MobiKwik, BlackBuck and Swiggy towards the end of 2024. This only adds to the notion that more companies will be lining up for the domestic institutional capital through QIPs.

Indian VC Funds See Big Spurt In Strategic M&As 

After a 20% spike in funding for the year in 2024, the next year is expected to see an even bigger jump. But when it comes to M&As the picture was bleak in 2024.

What might change in 2025 is the focus on strategic bets that could unlock value down the line for listed companies and large scaled-up startups that may have IPO plans in the pipeline.

Mergers and acquisitions fell to an all-time low since 2014, there is a consolidation wave imminent as listed new-age companies with healthy cash reserves look for the right deals. The capital flow is heavier towards public markets, which has tilted the M&A market.

Another factor that potentially adds to this notion is the rise in private equity (PE) activity in India. Between January and November 2024, the total PE inflow nearly touched $31 Bn across more than 1,000 deals. Startups in healthcare, green energy and manufacturing sectors are said to be on the radar of PE-backed corporations and conglomerates.

No Stemming The Secondary Deals Wave

The year 2024 witnessed a wave of secondary deals in the Indian startup ecosystem as VCs offloaded stakes via such deals in multiple startups like Capillary, ixigo, Urban Company, Porter, Pocket FM, among others.

Amid the increase in secondary transactions, startup founders also saw a jump in the interest in secondary deals. As per Inc42’s annual survey, 60% of the 100+ surveyed founders revealed that investor interest in secondary transactions “increased” in 2024.

Up to 35% of the surveyed founders said they see a “moderate” increase in interest for secondary transactions, 25% saw “significant increase” in interest from investors for such deals. This indicates that VC and PE firms are keen on backing well-established new-age tech companies and don’t mind entering the cap table later in the game.

Expect more such deals as funds from the 2012-2013 vintage reach expiry dates in 2025, and VCs look to offload their portfolio to return funds to the LPs.

New Models, Structures In The AIF Cupboard

When Peak XV Partners announced a new fund called Peak XV Anchor Fund with capital from its internal balance sheet, many saw it as a signal of how things will evolve for some of the more mature VC firms in India.

In Peak XV’s case, the launch of the evergreen or rolling fund allows the firm to stretch beyond its current mandate of focussing only on India, and allows it to pursue a legacy even more removed from Sequoia Capital in the US after the two entities separated in 2023.

It would not be a surprise to see other legacy firms pursue a similar structure to launch rolling funds, especially after realising gains from exits from IPOs in 2024.

Rolling funds reduce the burden on fund managers to raise new funds and engage with LPs as the firm invests through its own profits, and makes it easier for funds to find coinvestment partners in non-core sectors or geographies.

In addition to new structures, some funds in India have also implemented unique fee models more suited for the needs of the Indian market and Indian LPs. Expect more such models to come to the market as funds try to build competitive moats to raise funds from LPs.

Niche, Micro VC Funds To Continue Chasing AI High

The AI boom has not only turned the heads of entrepreneurs, but also experienced (and not so experienced) general partners (GP) and fund managers.

Typically speaking, micro VC funds are set apart by the fact that they have a special focus or a highly evolved thesis, thanks either to the fund manager’s expertise in a particular niche or whitespaces in the market. In 2025, AI is still a white space, given that there’s still plenty of headroom for innovation and maturity, especially in India.

Data shows that the number of new funds in India has seen an exponential growth over the past three years, and a lot of the activity is geared towards the early stage, where micro VC funds have become a distinct category similar to angel funds.

A lot of this is down to the all-new opportunity that’s opened up in the wave of the GenAI revolution, but it’s not just native AI companies raising the funds. Those with a data advantage are leveraging investor interest to pitch niche models that could solve vertical-specific challenges or target non-sophisticated consumers.

AI’s spillover impact will also be seen in fintech, SaaS, ecommerce, consumer services and healthcare, and startups in every sector are now looking to position themselves as AI-first.

With the micro VC boom, have come fears of a frothy market, where inexperienced GPs are looking to cash in on the buzz. While we are not yet in a bubble, having a glut of investors and not enough depth in the market could result in a few issues around due diligence towards the end of 2025.

The post Indian VC Funds In 2025: New Faces, New Models And New Horizons   appeared first on Inc42 Media.

The Indian startup ecosystem made a strong comeback in 2024 after weathering a harsh funding winter in the previous two years. The market is still in a rational mode. But investors, long been sitting on dry powder, finally loosened their purse strings and injected $11.75 Bn across 994 deals. This marks a 19.04% jump in total funding (between January and December 21) compared to $9.87 Bn raised from 908 deals in 2023.

Conversely, ticket sizes across key industries shrank considerably despite the renewed momentum. Excluding the mega-deals (valued at $100 Mn and above) in 10 key sectors, Inc42 assessed average ticket sizes and our findings indicated an interesting shift in sync with the global trends. As outlined in the table below, cleantech emerged as a standout performer, recording the highest YoY growth in average ticket size at 32.13%, rising from $8.4 Mn in 2023 to $11.05 Mn in 2024. Healthtech followed with a 28.03% increase, trailed by fintech (21.5%), deeptech (10.42%) and enterprisetech (7.2%).

Ashwin Raguraman, managing partner at Bharat Innovation Fund (BIF), an early-stage, deep tech-focussed venture capital firm, noted that deal value and volume would be poised for sustained growth in cleantech and deeptech. The reason? The number of funds investing there is steadily rising, given the global relevance of these sectors.

“Previously, only sector-focussed funds were active in deeptech and cleantech. But 2024 saw a surge in interest from generalist VCs who have completed their due diligence. So, we will come across more deals and higher ticket sizes in these sectors,” said Raguraman.

“The only catch here is the long gestation period. People may not have the appetite for such long cycles. Or they may choose to come in a little later, even if they are ready. That is the only reason, if any, why capital may not flow at the pace we would imagine.”

In stark contrast, logistics saw one of the worst slides in average ticket size. It plummeted by 62.32% YoY, from $11.9 Mn in 2023 to $4.5 Mn in 2024. Media and entertainment followed with a 39.5% drop, while agritech and ecommerce declined by 19.61% and 10.29%, respectively.

A close look at investor sentiment suggests certain sectors become less conducive to equity funding as respective ecosystems mature or VCs gain enough exposure to industries and their potential. This pushes investors to look for sectors and startups with clear paths to profitability, prompting others to explore alternative financing. In the ecommerce sector, for instance, many direct-to-consumer (D2C) startups now prefer revenue- or cash-flow-based loans or go for a debt-equity mix to raise working capital.

“Valuations in ecommerce and D2C are becoming more conservative, which has led to reduced funding per round as investors target realistic growth metrics,” said Sandiip Bhammer, founder and managing partner at Green Frontiers Capital, a US-headquartered and climate tech-focussed VC fund. “Alternative financing such as debt or [debt-equity-based] hybrid rounds help founders avoid stake dilution and focus on more disciplined, profitability-driven growth.”

Again, industry segments such as SaaS (and its many domains), supply chain management (logistics is a subsector within SCM), KYC mapping and big data are emerging as digitally scalable lean operations. Hence, they require smaller initial investments, positioning them as attractive opportunities. Therefore, capex-heavy sectors like edtech, ecommerce [inventory models], or certain fintech businesses are no longer funding priorities for investors with a focus on innovation and efficiency, explained Bhammer.

Is The Decline In Average Ticket Size A Major Concern?

Not quite. According to many investors with whom Inc42 spoke for a deep dive into the current funding landscape and 2025 projections, the situation is, by no means, as grim as it was in 2022 and 2023. Instead, it reflects a maturing ecosystem where startups are working on their progress towards growth milestones and investors are well past their extremes – from a funding downpour to a funding freeze.

As Pranav Pai, founding partner at the early stage VC firm 3one4 Capital, emphasises, the decline in average ticket size in 2024 indicates a market recalibration that started two years ago. It was a knee-jerk reaction after the frenzy of FOMO-driven funding at lofty valuations in 2021 when Indian startups raised $44 Bn across 1,584 deals. Most businesses failed to justify their valuations (and the kind of capital they raised), compounded by exit woes, which left over-optimistic investors in the lurch. Understandably, Covid-19 was a business dampener in many cases.

In the subsequent years, investor sentiment was further tempered by stock market volatility, a prolonged economic downturn and geopolitical conflicts like the Russia-Ukraine war and the Israel-Palestine crisis.

Pai’s observation aligns well with the emerging data trends shown below.

Amid these market corrections, investors became more selective, backing fewer startups and expecting strong governance and sustainable unit economics.

“Venture capital itself is a power-law game, which means a few investments in a portfolio tend to generate maximum returns. As a result, fewer companies win over time, while most fail,” said Bhammer. It also explains why VCs today are looking for a few ‘quality’ companies capable of providing astronomical returns but are wary of investing too much in startups which do not tick all boxes.

This pattern of writing big cheques for ‘quality’ companies alone while limiting the ticket size for others could be as disturbing as the previous trend of overfunding. Does it mean businesses raising mega-rounds at this point will be under tremendous pressure to deliver at the earliest by hitting profitability and enabling quick exits?

Some recent examples: Despite the collapse of edtech in India, Physicswallah (with a similar business model like the former decacorn BYJU’S and now facing similar operational challenges) bagged $210 Mn in September 2024 while Eruditus Executive Education raised $150 Mn a month later. Globally, Mistral, the Paris-based OpenAI challenger, raised a whopping €468 Mn equity round in June this year after raising €385 Mn in December 2023.

However, not too many industry insiders think large-scale but selective VC funding is chomping off the average ticket size of promising startups minus the ‘celebrity’ tag. After all, if the VCs have the dry powder to deploy, they are bound to chase a few opportunities more intently.

“In sectors with high mortality rates, mitigating risk is critical. This involves spreading smaller investments across a wider pool of startups and geographies, or structuring rounds into milestone-based tranches – practices that naturally result in reduced ticket sizes,” said Padmaja Ruparel, cofounder of Indian Angel Network (IAN).

Which Sectors Will See Bigger Ticket Sizes In 2025?

During an interaction with Inc42, BIF’s Raguraman talked about a critical metric which helps assess investor sentiment – the interplay between the deal volume in a specific sector and their average ticket size. These two components can be directly or inversely proportional depending on investor interest, and the analysis provides a lens to where investors’ focus will likely shift.

Let us look at the table below to understand the interplay and the emerging trends.

Key sectors likely to capture maximum investor interest: According to our analysis, investors will be most bullish about five sectors in 2025. These include cleantech, deeptech, enterprisetech, healthtech and fintech, as they have shown YoY growth in both deal volume and average ticket size in 2024, signalling strong investor confidence.

Among these sectors, investment in healthtech saw a major increase in 2024. If we do not consider the $216.2 Mn fundraising by PharmEasy (a down round where the e-pharmacy took a 90% valuation cut), the sector raised around $499.5 Mn across 77 deals. This marks more than a 100% rise from the total funding secured in 2023 – $248.74 Mn from 65 deals.

Namit Chugh, principal at the healthtech-focussed VC fund W Health Ventures, attributed this growth to targeted subdomains that have demonstrated scalable and successful business models. Among these are healthtech SaaS, AI-based tools and a host of startups providing domain-specific solutions for eye and dental care, IVF and maternity care, weight control, cosmetology, remote patient monitoring and more. Their viability as standalone businesses away from traditional hospitals will continue to attract investor interest. Notable examples include startups like Dozee, Qure.ai, Toothsi, Element5, Mylo, Elevate Now and Nivaan.

However, healthtech funding rounds have been relatively modest in the past five years, as the sector is growing at a calibrated valuation and ticket size. In 2024, Qure.ai raised $65 Mn, the largest healthtech round minus the mega-deals. In contrast, the fintech and D2C sectors saw much bigger rounds. For instance, alternative lending startup Finova Capital raised $135 Mn, while fine jewellery D2C brand BlueStone bagged $107 Mn.

Talking about these roller-coaster trends among the few bright spots, Chugh emphasised the importance of sector-specific dynamics in shaping funding patterns. “Customer acquisition costs are a major factor,” he said. “Financial services and D2C businesses often require higher investments due to elevated acquisition costs, resulting in larger deal sizes.”

Funding data between 2022 and 2024 solidify this point. Lending-focussed fintech startups raised $4.7 Bn during this period, accounting for 45.19% of the $10.4 Bn total funding secured by fintechs. Similarly, D2C startups netted $3.9 Bn, or 52.7% of the total ecommerce funding at $7.4 Bn. On the other hand, healthtech startups raised only $2.25 Bn during 2022-24, with fitness and wellness ($258 Mn across 47 deals), healthcare SaaS ($362.3 Mn from 47 deals) and telemedicine ($376 Mn across 45 deals) leading the charge.

“The sector is still maturing, but customer acquisition costs in healthtech are lower because healthcare spending is often a necessity, not discretionary, unlike consumer-facing sectors. Preventive healthcare further reduces the need for aggressive customer acquisition efforts. Hence, there is a high possibility that we may not see a flurry of mega-deals similar to fintech or consumer-focussed industries,” said Chugh.

However, a deep dive into unique areas will drive the growth trajectory of this sector. Healthtech startups in India primarily focus on digitalising data and processes, service aggregation, early detection of medical conditions and hardware development (read medical devices). But few are exploring transformative areas like ground-breaking R&D or AI-driven drug discovery although these have tremendous growth potential. Consider this. IIT-Bombay, Tata Memorial Centre and other research partners announced a homegrown gene therapy to fight cancer earlier this year. Ambitious startups may soon follow suit across domains to impact the investing landscape.

Key sectors which may attract selective investor interest: A look at other outcomes per our analytics chart reveals that investors may continue to explore opportunities in edtech, agritech, ecommerce and media & entertainment. For one, the average ticket size increased in edtech despite a dip in deal volume in 2024. The other three sectors witnessed a rise in deal volume, although the average ticket size shrank. However, logistics may face a decline in deal volume and size in 2025, given its overall decline in 2024.

Edtech funding, in particular, will remain shaky. Although Physicswallah and Eruditus bagged mega-deals, the sector could only manage $208 Mn across 27 deals if we leave those two out. The Indian edtech space, once lauded globally for its meteoric growth, is now struggling after industry giants like BYJU’S and Unacademy were knocked off their pedestals.

In spite of these headwinds, optimism persists. PhysicsWallah, preparing for a public listing in 2025, recently transitioned to a public company. Singapore-based Eruditus is also mulling reverse flipping, the option to shift the parent company back to India, as it looks to list on the BSE or the NSE. Will they bring the spotlight back on building a sustainable landscape in the post-BYJU’S era, signalling a continued belief in India’s edtech market?

Investors are also eyeing niche subsectors like edtech SaaS (raised $45.79 Mn from four deals) and skill development ($35.76 Mn secured across 11 deals). Together, they accounted for 55.55% of the total edtech deals in 2024 and 39.20% of the total funding of $208 M excluding mega deals. Among these were startups such as Kreedo, Beyond Odds, byteXL and more.

“Edtech has already absorbed substantial capital, but the returns have yet to materialise fully,” said an angel investor who did not want to be named. “Now, investors are shifting to startups offering strong product differentiation and a solid go-to-market (GTM) strategy.”

Will VCs Bounce Back In 2025 To Boost Indian Startups?

All said and done, the Indian startup ecosystem entered a new phase in 2024, marked by adaptability and business maturity, which paved the path for sustainable growth. Capital inflow into promising sectors, an uptick in IPOs and new fund launches are bound to drive robust recovery and forward momentum, boosting investors’ confidence. Founders and investors must shift gears to take on the challenges ahead. Meanwhile, Inc42 has zeroed in on four emerging trends of 2025.

Early stage funding will remain stable, but the approach will be more selective, with a clear shift towards quality over quantity. Investors will look for founders who can achieve product-market fit while running lean and efficient operations. In a maturing ecosystem, the focus will be on businesses that are innovative and operationally sound, capable of scaling while managing risks in an increasingly competitive market.

Growth and late stage deals may pick up momentum for companies that have weathered the recent market turbulence and come out stronger for scale and value addition. Late stage startups may see a significant funding boost when global investors regain confidence. Clear exits, a growing appetite for tech-driven startup narratives and investor trust in India’s maturing public market will intensify the growth drive.

A deep pool of domestic capital will create long-term value. Indian startups will see a significant surge in capital flow as homegrown limited partners (LPs), pension funds, insurance companies, family offices and retail equity investors step in to support the next wave of innovation. In fact, a fast-growing pool of local investors can create many opportunities for startups and the broader economy while reducing their reliance on foreign capital.

“This trend is supported by India’s rising economic stature, policy confidence and the ongoing shift of household assets from idle savings into more productive vehicles like mutual funds and equities. As a nation, we must nurture and grow the next generation of companies that will drive shareholder value, akin to the legacy of the best Indian corporations such as Infosys and HDFC, which have been doing it for the past three decades,” said Pai of 3one4 Capital.

Public markets will be ready to support startups’ innovation culture: Perhaps the most critical development will be the increasing number of startups going public. Entering the public markets will create new opportunities for innovation, investment and long-term cycles of value creation and economic growth. The next chapter for startup innovation is just beginning, and the outlook has never been more exciting.

[Edited by Sanghamitra Mandal]

The post VCs Cut Ticket Sizes Amid Uncertainty; Will 2025 Fare Better? appeared first on Inc42 Media.

The rise of direct-to-consumer (D2C) brands in India is one of the biggest retail revolutions outside Silicon Valley. The concept has been around for more than a decade now. However, these brands have gained significant traction since the outbreak of the pandemic, as they leverage targeted social media metrics, personalisation and digital-first strategies to build huge consumer followings. The rapid ascent of quick commerce has further accelerated D2C growth, enabling better discovery by a younger, trend-seeking audience and fast delivery for extreme convenience.

The sector’s prominence in recent years is underscored by IPOs, mega funding rounds (deal value of $100 Mn or more) and the emergence of unicorns (valuation of $1 Bn and above). For instance, pure-play D2C unicorn Mamaearth was listed on the mainboard BSE and NSE in 2023. Male grooming and lifestyle brand Menhood debuted on NSE Emerge in July 2024. And Brianbees Solutions (FirstCry) had a mainframe IPO worth INR 4K Cr+ in August this year. Jewellery brand BlueStone also filed its draft red herring prospectus (DRHP) for an INR 1K Cr initial public offering.

Between 2019 and 2024, the D2C ecosystem saw 16 mega deals. Among these were prominent players such as Lenskart (raised $1.15 Bn across five mega-rounds); FirstCry ($396 Mn from two mega-rounds); FreshToHome ($225 Mn via two mega deals); boAt ($100 Mn); Licious ($342 Mn from two mega-rounds); Furlenco ($140 Mn); MyGlamm ($150 Mn), Country Delight ($108 Mn) and latest BlueStone, which raised its first mega deal of $107 Mn in August this year.

Overall, the sector has thrived on the consumer front, with innovations across health, beauty and lifestyle brands grabbing market attention.

All these should have made the sector a darling of venture capitalists in the foreseeable future. But there is a sobering flip side.

VC funding in D2C startups has taken a significant hit in the past three years. It was not unusual during 2022-23, when the broader market experienced a harsh funding winter. However, there was a thaw in 2024, and many sectors rebounded, except for D2C.

According to Inc42 data, D2C brands raised approximately $595 Mn across 115 deals in 2024, a steep decline from $1.4 Bn from 134 deals in 2023. The average ticket size across stages also plunged by 66% (65.68%, to be precise) to $4.18 Mn this year from $12.2 Mn in the previous year.

More interestingly, the overall D2C funding plummeted by 57.5% between January 2019 and December 2024. It is the steepest decline for a six-year period despite the pandemic-driven FOMO and the subsequent funding boom right before the capital crunch.

Have Investors Lost Interest In D2C Brands?

Not quite, although the global sentiment indicates that VCs have put in money for nearly a decade when the D2C model was at the forefront of retail innovation. However, these startups are no longer very high on their priority list and many will think twice before funding pure-play D2C brands.

The reason: Their sales channels are practical table stakes for young consumer brands but may not be a sustainable business model. After all, deep-pocketed retail behemoths are already there with greater control over supply chains and typically enjoy brand loyalty that runs deep.

Additionally, thriving on niche products may not be possible in the long run, as homegrown and global conglomerates can quickly enter any subsector if it has growth potential. In fact, one brand can rarely rule the market unless it is a breakaway company in some ways or using irreplicable tech.

However, VCs deeply ingrained in the Indian D2C landscape feel more optimistic. No doubt, the funding numbers reflect a cautious approach. But the dip in deal value likely indicates a greater alignment with leaner business models.

“Think of it like this. Platforms [D2C websites and apps] and ecommerce marketplaces require heavy investments even before sales take off. But emerging D2C brands can scale faster at low cost and get more visibility through quick commerce entities. Hence, the smaller ticket size,” said Alok Mittal, angel investor and cofounder & executive chairman of Indifi Technologies, a debt financing company.

Again, investors could be recalibrating funding deals based on category potential. For example, packaged foods have yet to deliver breakout stars, while cosmetics have thrived (Mamaearth, MyGlamm, Wow Skin Science & more). Investments in fine jewellery slowed earlier. But it is now making a comeback, thanks to success stories like CaratLane (acquired by the Tata group-owned Titan) and BlueStone, observed Mittal.

Sandeep Murthy, managing partner at the VC fund Lightbox, thinks quite a few investors are grappling with the challenge of differentiation. Consider the beauty and personal care space, the fastest-growing D2C segment with a CAGR of 28%. Standing out in that segment among multiple brands is tough, prompting investors to pause and evaluate existing bets, he added.

“Investors will refine their focus and double down on proven winners. All that is part of the usual cycle, the usual sentiment,” said Mittal. Essentially, D2C brands will remain a promising investment in the long term despite a dip in funding.

VCs Find Seed Funding In D2C Lucrative; Growth & Late Stage Deals Are Down

Although some investors have stayed away from D2C brands and consumer product-based businesses, several VC firms, including DSG Venture Partners, Fireside Ventures, Inflection Point Ventures and Rainmatter Capital, among others, have actively invested in this space.

Inc42 data shows that seed stage D2C startups raised $121 Mn in 2024, up 147% from $49 Mn in the year-ago period. The deal volume also remained steady, with 60 deals in this period compared to 64 in 2023.

Ticket sizes at the seed stage also improved. As many as four startups – Foxtail ($14.4 Mn), Libas ($18 Mn), TechnoSport ($25 Mn) and Hocco ($12 Mn) – raised more than $10 Mn each. In contrast, the largest seed round in 2023 was a modest $4 Mn, raised by the fashion app Freakins.

The rising interest can be attributed to three major factors: Opportunities for early exits with high returns, low-risk investments and the ability to explore niche markets.

Growth stage D2C brands, on the other hand, saw a more cautious approach. They raised $152 Mn across 19 deals, and the biggest round amounted to $34 Mn bagged by Kushal’s, a fashion and silver jewellery brand. It was a significant drop compared to  2023 when growth stage D2C businesses raised $331 Mn across 29 deals. At the time, D2C sportswear brand Agilitas netted the biggest haul, around $52 Mn.

Late stage D2C brands fared even worse, raising $232.9 Mn across 10 deals in 2024, compared to $914 Mn raised across 10 deals in the year-ago period. BlueStone ($128 Mn), Country Delight ($51.8 Mn), Lenskart ($19 Mn), Curefoods ($25 Mn), Bombay Shaving Company ($3 Mn) and High Street Essentials ($6 Mn) were the top fundraisers in 2024.

The key issue with growth and late stage brands is that many have already raised too much too quickly but are delivering poor RoI. Among the 13 D2C startups which reported FY24 financials, nearly 50%, including BlueStone, boAt, Lenskart, Purplle, Ustraa and Wrogn, were in the red. Those claiming profitability included Zappfresh, CaratLane, iD Fresh Food, Mamaearth, Milk Mantra, Minimalist and Rare Rabbit.

According to Mittal, there is still a funding pipeline covering up to Series C, but future investments will primarily depend on the size of the VC fund. Smaller VCs managing funds worth $200 Mn or thereabouts may target startups with a valuation of $40 Mn or so. Larger VC firms handling more than $1-2 Bn corpus may focus on businesses nearing billion-dollar valuations.

“That said, there won’t be those mega deals where more than $100 Mn was pushed into ecommerce marketplaces in a single round. D2C funding is unlikely to see that. Founders will have to prove their mettle and become profitable. Huge funding to enable scaling up or support growth at all costs – trends we saw in the marketplace era – is no longer viable.”

Alternative Debt Financing: Will It Be A Game Changer For D2C Brands?

Although traditional investors have tightened their purse strings, it does not mean that a slow fade or a hard pass will hurt the D2C segment for good. Capital is still available to drive sustainable growth across stages but does not come as typical equity funding. In sync with the current landscape, revenue as well as cash-flow-based alternative debt financing platforms like Velocity, Indifi and GetVantage are redefining funding access with data-driven financing solutions. These platforms assess real-time sales data, GST returns, bank statements and digital transactions to provide non-dilutive working capital without collateral.

Revenue-based debt financing differs from the more popular venture debt model. Most venture debt funds require a company to provide warrants to the venture debt lender. This means shareholders will experience dilution with venture debt. Also, one must pay high interest rates, repay the money within a short tenure and return a fixed amount every month regardless of the cash flow. In contrast, repayments are flexible in revenue-based debt financing and calculated based on the revenue earned by the debtor in the preceding month.

“These [debt] financing platforms integrate with marketplaces like Shopify, Amazon and Flipkart to analyse online revenue streams,” explained Abhiroop Medhekar, cofounder and CEO of Velocity. “This allows brands to secure growth capital quickly, often with term sheets issued within 48 hours of data submission. It is an efficient way to meet requirements during peak sales cycles.”

He claims that the scalable financing model helps D2C brands navigate seasonal demands while maintaining growth momentum. Here is a case in point. The 2024 festive season saw more than 1 Lakh Cr in sales on ecommerce platforms, while Black Friday sales saw a 28% surge in D2C order volumes. Therefore, brands relied heavily on debt financing solutions To avoid supply chain bottlenecks and manage limited supplier credit.

The growing appeal of debt financing was evident in 2024. Unlike the previous year, when equity deals ruled the startup ecosystem, 2024 saw late stage D2C brands increasingly opt for alternative debt financing.

While this approach to financing is quite new, a quick look at the numbers will solidify the trend. In 2024, only six late stage D2C brands managed to raise funding, with most deals involving debt or a mix of debt and equity. Take Country Delight, for instance. It secured $28.3 Mn in two rounds – $20 Mn in equity from Temasek Holdings and Venturi Partners and $8.3 Mn in venture debt from Alteria Capital. BlueStone also raised $21 Mn in debt funding through two rounds – $9 Mn in venture debt from Trifecta Capital and $12 Mn in cash flow-based financing from Neo Asset Management.

According to Indifi founder-angel investor Alok Mittal, the lending platform collaborated with more than 400 D2C brands in 2024 for debt financing across various stages. “Many of these debt financing rounds go unreported, though. Nonetheless, we are seeing robust activity, as a growing number of D2C businesses are going for this kind of financing,” he said.

Challenges Galore: Does The D2C Ecosystem Face An Existential Threat?

Ask industry experts, and you will get a mixed response. Most investors think there is no shortage of opportunity, but brands need to address the core problems to thrive in the long run. And it all evolves around efficiency and cost-effectiveness.

For the majority of D2C businesses, distribution remains a crucial challenge even today. Most have adopted a 360-degree omnichannel strategy – a seamless mix of online and offline via their websites/apps, ecommerce marketplaces, quick commerce and collaboration with brick-and-mortar retail. They also expand their global footprints, requiring efficient operations and distribution, scalability and sustainable growth, and better unit economics.

The next hurdle is creating a ‘meaningful’ differentiation. As Ninad Karpe, founder and partner at 100X.VC, points out, the market is nearly saturated, and “more of the same” is not cutting it anymore. Investors are now looking for brands that stand out through true innovation, whether by offering unique products, adopting disruptive business models, or building a strong narrative.

Talking to Inc42, many VC players have stressed that to scale successfully and secure growth capital in 2025, Indian D2C brands must focus on profitability, operational excellence and customer retention. These evolving strategies will gradually build long-term resilience rather than short-term growth.

Others say engaging more with shoppers and being where they are will be critically important because that is how the buying happens. Targeted social media campaigns can be excellent at times for customer acquisition and retention. But one must be able to analyse what kind of traction drives sales. (Amazon versus Instagram will be an interesting case study here.)

Additionally, the rising costs of digital ads and the diminishing returns tend to drive customer acquisition costs (CAC), making this strategy increasingly unsustainable. The key to success lies in timely and strategic shifts from the classic D2C model.

Murthy of Lightbox thinks D2C brands must learn to walk and chew gum at the same time. Overall, a delicate balancing act is required to grow without sacrificing profitability. “The downturn forced companies to focus on profitability. The challenge now is accelerating growth while maintaining that focus,” he said.

“Striking that balance is critical for attracting growth capital. We are seeing that in our portfolio. Nua, a brand specialising in female hygiene products, became profitable in June this year and has continued to grow rapidly. This ability to achieve profitable growth has generated significant interest from investors.”

Through The VC Lens: Five D2C Trends In 2025 

The ecosystem will mature: The D2C landscape in 2025 is set to evolve due to dynamic consumer preferences and innovative approaches to scaling. The recent decline in deal value and volume may seem a matter of concern. But it actually reflects a maturing ecosystem rather than shrinking opportunities. This will lead D2C brands to innovate boldly, build deeper consumer connections and address gaps in profitability to harness growth.

New execution standards on the cards: As new-age consumers increasingly explore quality, affordability and convenience, brands will set up impeccable execution standards and adapt ahead of time. Quick commerce will continue to reshape retail, creating opportunities for D2C players in popular categories like beauty & personal care, electronics and household goods. Fast delivery will no longer be an added advantage but a must-have capability for instant gratification.

Marketplace integration will diminish: Established D2C brands may rely less on online marketplaces and sell directly through their websites and apps. This approach will give them greater control over their brands and supply chains, reduce marketplace commissions and fees and foster stronger customer relationships.

AI/GenAI will enhance D2C retail: Cutting-edge technologies, especially AI/GenAI, will take D2C retail to the next level. By leveraging these tech tools, brands can personalise offerings, automate workflows and enhance customer engagement. The growing adoption of digital platforms in Tier II and III cities will also open doors for further expansion.

Rural markets will drive growth: Brands that meet the unique requirements of rural consumers, create affordable yet aspirational products, or focus on niche markets will stand out from the rest. Rising incomes and growing interest in personalised and premium experiences will make this an exciting time for the D2C sector.

Is the D2C ecosystem all set to cope with the changes ahead? Many VCs and angel investors think so and pin their hopes on D2C 2.0. If D2C founders make informed decisions aligned with the evolving market, the sector will thrive again.

Edited by Sanghamitra Mandal

The post Are Indian VCs Still Bullish On D2C Startups? appeared first on Inc42 Media.

TVS Capital Funds (TCF), set up in 2007 by Gopal Srinivasan, has carried forward the entrepreneurial legacy of the iconic TVS Group for nearly two decades. A third-generation entrepreneur from that prominent business family and chairman of TVS Electronics, Gopal, too, had a unique but clear vision when he explored the PE space. Backed by TVS and Shriram Groups, he went on to launch India’s largest rupee-only capital fund to “empower next-generation entrepreneurs building multi-decadal businesses”.

As Gopal mentioned in an earlier interview with Inc42, one found little regulatory control when TCF entered private investments. But despite the risks of turmoil in an under-regulated market at the time, institutional and individual investors had a strong interest in funding innovative, forward-thinking businesses.

Banking on this enthusiasm, the PE firm launched TSGF (TVS Shriram Growth Fund) 1A in 2008 with backing from several institutions and large family offices. With a corpus of INR 585 Cr, the first fund invested in as many as 13 companies across sectors, including DCB and RBL Banks, 9.9 Media, Papa Johns, Dusters, MaxiVision Super Speciality Eye Hospitals, MedPlus, TVS Supply Chain Solutions and others. The team worked relentlessly, but it barely managed to return the original capital to limited partners (LPs) after five years, effectively costing investors five years of potential interest.

The regulatory landscape changed in 2012 when the Securities and Exchange Board of India (SEBI) paved the path for registering and managing alternative investment funds (AIFs) with a structured mechanism and greater transparency. TCF did not squander the opportunity and formally registered as an AIF CAT II PE fund with SEBI.

The team wanted to raise a second fund but was reluctant to ask LPs for more money, given the lacklustre performance of its maiden fund. However, as Gopal said, the response from the stakeholders was overwhelmingly positive. Everyone encouraged the team to continue and reassured that they were on the right path.

Launched in 2012, TSGF 1B (Fund II) had a corpus of INR 600 Cr, was primarily sector-agnostic like its predecessor but narrowed in on a few emerging sectors such as financial services, banking, agriculture, direct-to-consumer (D2C) brands and real estate. The fund made ten new investments in Nykaa, RBL, IEX, NSE, Suryoday Small Finance Bank, City Union Bank, Prabhat, Wonder La, Karur Vyasa Bank and Texmex Cuisine.

As Gopal mentioned earlier, the partially selective investment strategy paid off. The second fund delivered a gross IRR of 27.4% and a net IRR between 15.6% and 17.6%, helping it emerge as one of the top-performing funds in the Indian market.

TCF has raised more than INR 3,000 Cr across its three funds and fully exited the first two. TSGF 3 (Fund III), with a corpus of INR 1,918 Cr, was launched in 2018 and deployed 96% of its capital in 13 companies. Among these are Digit (partially exited), InsuranceDekho, Yubi, Vivriti Capital, PhonePe, SarvaGram, Increff, Finnable, Five Star Finance (exited) and Leap (exited).

In January 2024, TCF got SEBI approval for its fourth and largest fund (so far), targeting INR 3,000 Cr. With INR 2,500 Cr already raised, the latest fund will focus on financial services and technology as broader themes and may explore ‘zero-stage’ companies founded by seasoned CXOs and successful entrepreneurs.

Here is an overview of the TCF funds launched so far.

How The Investment Thesis Has Evolved At TVS Capital Funds

Between 2007 and 2024, TCF launched four funds, each reflecting an evolving investment thesis. The first fund was sector-agnostic, casting a wide net, but the second narrowed its focus, targeting a number of sectors which were well understood. When Fund III was rolled out, TCF had already zeroed in on financial services and tech-for-finance startups, those offering tech products and/or services for financial services companies.

“From Fund II, we invested in select sectors we understood well. By Fund III, we had deepened our selective approach with a sharper focus on financial services where we had strong expertise, robust research capabilities and extensive networks,” said Krishna Ramachandran, who came on board as TCF’s managing partner, chief operating officer and chief finance officer in 2023.

Introducing a multi-stage investment model at this point helped gain further leverage from the sector shift. The first two funds focussed mainly on growth stage investments, but Fund III backed early and late stage startups. “This strategy allows us to exit early with high returns within the fund’s lifecycle, reinvest the money and make the capital work harder,” said Krishna. “By the time Fund III was almost fully deployed, we achieved an investment efficiency ratio of 98% [it indicates how well a PE firm can invest its capital to generate returns] – arguably the highest in the industry.”

The strategic pivot had a clear goal: Deliver optimal returns and manage risks efficiently. In Fund II, around 75% of the capital was allocated to financial services and B2B, but it grew to 100% in Fund III.

With Fund IV, TCF is expanding its horizon and embracing two core themes – financial services and technology. The fund will focus on sub-segments such as lending, distribution, wealth, insurance and fintech within financial services. Within technology, key focus areas will be tech for finance, IT services and tech for business.

“We are diving deeper into financial services and also exploring technology, which is a new focus area for us,” said Krishna. “About 40% of GDP is driven by financial services and technology. The growth potential in sectors like lending and insurance is significant, with insurance expected to grow 5.6x over the next decade and lending expected to grow by over 4x.”

As these sectors become increasingly intertwined and shape the future of business, TCF’s evolving investment focus aims to tap into high-growth opportunities based on its industry expertise.

How The Genesis Of TCF 2.0 Has Started With A ‘Neo’ Team Of Experts  

Despite its notable achievements, TCF is not resting on its laurels. The investment firm has embarked on a transformation journey to emerge as a ‘Neo TCF’ and reach the next level.

To begin with, the PE firm is building a robust, process-driven organisation instead of depending on its people alone. “It is about creating a system where talent, processes and tech tools will work seamlessly, but the organisation will not rely on any single individual,” said Krishna.

Known as the investment firm’s conscience-keeper (and often as the face of the neo team), Krishna wears many hats as a chartered accountant, management accountant and company secretary. His career spanned stints at Royal Philips, Allianz, KPMG and Vodafone, and he had previously served as the managing director for Chennai operations at Accenture.

Right now, he is part of TCF’s platform team, overseeing operations, client requirements, risk management, hiring and talent development. Overall, Krishna balances backend processes with client-facing tasks, ensuring seamless functionality. In fact, his diverse background across industries like insurance, advisory and telecom has proven invaluable for refining processes, reviewing portfolios and ensuring operational efficiency.

Asked if he missed his big MNC days, Krishna came up with a firm ‘no’. “It is never boring here. Something is always happening, whether investing, exiting, or evaluating opportunities. Moreover, I work closely with the CFOs of our portfolio companies, focussing on audits, risks and governance. It adds to the fast-paced, exciting vibe of the organisation.”

Additionally, TVS Capital Funds continues to bolster its leadership team to promote excellence and usher in new perspectives. This practice is in sync with Gopal’s vision, as the founder built a sound board of directors, besides advisory, investment and platform teams for long-term strategic direction and timely innovation.

For instance, apart from Gopal, TCF’s investment committee includes industry veterans such as D. Sundaram, former vice-chairman and CFO of HUL, and R. Dinesh, executive chairman of TVS Supply Chain Solutions, who are further strengthening the investment business.

But when the PE player pivoted to multi-stage investments and backed more startups, bringing in new people to sustain its mission of supporting new-age entrepreneurs became essential.

Accordingly, TCF expanded its leadership team between 2022 and 2024 and made several high-profile appointments. In 2022, Anuradha Ramachandran joined the investment team as a managing partner, bringing nearly two decades of experience in strategy, investing and portfolio management across sectors like fintech, technology and life sciences. She now leads investments and portfolio management in the financial services vertical.

The following year, the firm onboarded Naveen Unni as a managing partner alongside Krishna. Unni, a McKinsey veteran of 20 years, has expertise in manufacturing, mining, oil & gas, infrastructure and utilities across India, Southeast Asia and Australia. At TCF, he drives investments and manages portfolios in the technology sector.

In the same period, TCF strengthened its ranks by adding Ravi Krishnan as VP of finance and former McKinsey executive Chandrasekar V as partner in research. Long-time team members Rajalakshmi Vaiyanathan and Suraj Majee were promoted to principal and VP, respectively.

Setting The Gold Standard In Due Diligence

As Krishna emphasises, TCF has followed a comprehensive, feedback-driven assessment framework before funding any company. This proprietary system, known as the ‘1080’ process, ensures rigorous evaluation of potential investments by engaging extensively with the company, its leadership team, current and past employees and its overall ecosystem.

Although the fund house does not typically invest in seed stage companies, it often engages with promising ventures for extended periods to track their future growth potential. By the time an investment decision is made, TCF will typically know the founding team for at least a year. This ongoing engagement helps it understand founders’ evolution and the organisation’s progress.

During due diligence, it also conducts more than 80 interviews, often involving 20+ key stakeholders of the company. These people include not only senior management and board members but also customers, suppliers, former employees and distribution partners. Additionally, it enlists independent HR experts who can further verify findings through detailed interactions with founders and their teams.

As managing partner Anuradha Ramachandran describes it, the ‘360° times over’ approach helps gather insights from diverse sources to understand the target company and its promoters comprehensively. Next, senior leaders, including Gopal and other experts, review and analyse the findings to identify key trends and validate possible outcomes, ensuring a thorough understanding of the company and its leadership.

“The extensive nature of the 1080 process is proprietary to TCF, reflecting the significant time and effort invested in the details. Insights from these assessments are discussed during investment committee meetings, ensuring that decisions are backed by rigorous analysis and validation,” added Krishna.

A Tech Makeover For Efficient, Process-Driven Operations

As a 17-year-old legacy PE firm, TCF faces critical challenges in its growth journey. To enhance financial efficiency, it must reduce idle cash, recycle capital effectively and deliver the best possible returns to clients. But achieving these goals requires moving away from ad-hoc practices and building robust, process-driven systems to ensure efficiency and consistency across operations.

Much of TCF’s journey involves streamlining opportunity identification, investment management and good governance for portfolio reviews. It will also enhance engagement with portfolio companies to ensure regular and meaningful interactions. Additionally, it focusses on establishing systematic approaches for seamless fundraising, effective client engagement, efficient handling of investor queries and robust succession planning for long-term continuity.

Understandably, technology is at the core of this transformation. TCF is integrating new-age digital solutions and tools to reduce manual dependencies and minimise the risk of process failures, thus building a more resilient and scalable foundation for the future.

For instance, it has implemented Salesforce solutions across all investor and client interactions. These include onboarding all Fund IV clients digitally and automating KYC processes. It has also integrated Microsoft tools for better team collaboration.

TCF incorporates artificial intelligence selectively to enhance research and investment processes. Although most of its internal tools currently operate without AI, the firm uses AI-driven solutions like CoPilot and ChatGPT for extensive data mining and analysis across internal and external databases. For example, CoPilot facilitates internal searches within TCF’s systems, while ChatGPT supports external data exploration.

An intranet and knowledge management portal will go live soon, followed by a comprehensive HRMS by the end of 2024. These initiatives will help transform the fund house into a fully digital, agile, scalable organisation.

“It is unique for a [legacy] fund of our size to have fully digital processes for investment management, fund accounting, HR and client engagement,” said Krishna.

A Disciplined Approach Is Key To Success

The Indian startup ecosystem has been on a roller coaster ride in the past few years. After the FOMO-driven funding surge of 2021, the sector was hit by a harsh funding winter throughout 2022 and 2023. Investment activity has resumed in 2024, but it has yet to peak. Nevertheless, TCF has distinguished itself with a methodical and disciplined approach amid this turbulence.

The reason?

The firm prioritises rigorous evaluation, relationship building and in-depth assessments via its proprietary 1080 process before investing.

“We have always been cautious and prudent,” said managing partner Naveen Unni. “While asset availability at the right price has been challenging, we have not succumbed to the frenzy of overvaluation during the boom nor faced difficulties in finding quality opportunities. Added to this is the capability capital we provide to investee companies, which sets us apart.”

Going forward, TCF will continue to invest in category leaders and businesses with enduring growth potential. Its portfolio features trailblazers in sectors like rural co-lending platforms and MSME lending, led by visionary founders. This disciplined strategy ensures that the PE player can always spot attractive opportunities, even during turmoils.

“Our philosophy is to build multi-decade businesses,” said Krishna. “We aim to invest in companies that not only thrive during our holding period [five to eight years] but also continue to create value for decades.”

As TCF prepares to deploy its fourth fund, its meticulous, process-driven and long-term approach will continue to shape its investment strategy, setting it apart in the fast-evolving startup landscape.

[Edited by Sanghamitra Mandal]

The post How TVS Capital Funds Is Reinventing Its Investment Playbook After Two Decades appeared first on Inc42 Media.

Impact investment, funding ventures which deliver positive social outcomes alongside strong financial returns, is steadily gaining momentum in India, with climate tech emerging as a key theme. Between 2021 and 2024, more than 15 funds have been launched by venture capitalists, with many prioritising climate technology, according to Inc42 data. Leading the charge are VC firms like Unitus Ventures, Capria Ventures, Asha Ventures, Omnivore and Transition VC, among others.

Among the early adopters is Green Frontier Capital, a US-based climate tech VC fund led by Wall Street veteran Sandiip Bhammer. The fund applied for an AIF (alternative investment fund) licence in India in 2020. Then Covid-19 hit the world, and launching an AIF was not possible. Bhammer, the founder and managing partner, was not daunted and decided to take the FDI route. Green Frontier entered the Indian market in 2020 through foreign direct investment (FDI) and has deployed $30 Mn across 10+ companies in four years, with an average ticket size of $2.4-2.5 Mn.

Its portfolio spans transformative startups, including BluSmart Mobility, Chupps, ElectricPe, Euler Motors, KisanKonnect, Nutrifresh, EMotorad, RAS Luxury Oils, Revfin Services, Zero Cow Factory, Project Clean Food and Project Clean Ocean. The fund exited BatterySmart with 18x returns within three years. It is now eyeing another significant exit.

In November 2024, Green Frontier Capital reached another milestone and launched its first India-based CAT II AIF under the Securities and Exchange Board of India (SEBI). The Green Frontier Capital India Climate Opportunities Fund, India’s pioneering climate tech VC fund, comes with a target corpus of INR 1,500 Cr, has secured an anchor investor and aims for a first close of $50–60 Mn by Q1 (January-March) 2025.

An alumnus of Boston College, Cornell and Stanford, Sandiip Bhammer has been on Wall Street since 1994 and headed investments across CLSA, HSBC, Citigroup and many US-based hedge funds. He also helped mobilise more than $50 Bn of capital in India before 2000.

After spending years as an investor in public and private markets, he shifted gears in 2020, embracing academia at the University of Massachusetts, Amherst. Bhammer taught equity investing, focussing on ESG (Environmental, social and governance) and mentored Indian startups.

“Climate investing was gaining momentum in the US, but no one was betting on it in India. That presented a huge opportunity. We entered the Indian market early, leveraging our U.S. networks and based on our earlier success. Without that groundwork, we would not have a sound track record. Thanks to that, we are now considered India’s pre-eminent climate investors,” said Bhammer.

As part of Inc42’s ongoing Moneyball series, Bhammer had an exclusive interaction, delving deep into the fund’s investment strategy, the competitive advantage the new fund offers to its portfolio companies compared to traditional VC funds, the climate tech opportunity in India, funding trends in 2025 and more. Here are the edited excerpts.

Inc42: Tell us about the investment thesis of Green Frontier Capital.

Sandiip Bhammer: We are raising an INR 1,500 Cr ($177 Mn) fund and plan to make 15 investments, averaging $10 Mn per company. The fund will invest in pre-seed to Series A rounds, but we will provide follow-on funding for portfolio companies as they grow beyond Series A. Investment sizes will vary depending on the stage. It could be $500K for pre-seed, $1 Mn for the seed round, $1.5 Mn for pre-Series A and $2-3 Mn for Series A.

Our investment thesis revolves around ‘three Ds’ – digitisation, disruption and decarbonisation. Digital technologies are the cornerstone of our strategy as digital-first businesses often require less capital upfront and can be scaled rapidly. The second D, or disruption, refers to businesses challenging existing technologies [and incumbents] in terms of cost and effectiveness. Many of these startups are working on replacing fossil fuel applications. Finally, the businesses we invest in must have a measurable impact on decarbonisation.

We received SEBI approval as Category II AIF nearly three years after applying. This will allow our Indian investors to leverage our experience, track record and the robust pipeline of opportunities we have built in India.

Inc42: Why do you think it is an ideal time to invest in climate tech?

Sandiip Bhammer: As early movers in the climate tech space, we have become a go-to source for validation among startups. When generalist VCs flooded this sector a few years ago, we took a step back to avoid overpaying in an overheated market. With many of those investors shifting their attention to the newfound GenAI boom, climate tech companies are returning to us. This renewed focus has strengthened the pipeline for our AIF and gained support from the US-based limited partners. Meanwhile, our team in India remains a vital asset, positioning us well for the journey ahead.

Inc42: What about India’s climate tech ecosystem? How do you see it evolve?

Sandiip Bhammer: As the world’s fastest-growing economy, India stands at a critical juncture in the climate narrative. Given its rapid economic expansion, there will be a significant rise in its greenhouse gas emissions. While China and the US remain the largest emitters today, India is on track to witness the fastest growth in emissions, although it will not surpass them in total global emissions. As the fastest-growing economy in the world, India’s emissions will rise alongside its economy. Currently a $4 Tn economy, India is projected to reach $16 Tn in the next 25 years, growing four times over.

Also, most climate tech innovations are happening across the Global North. But India runs on jugaad – quick and affordable solutions for diverse use cases instead of original, groundbreaking inventions. It partially stems from cultural resistance to failure, which is not well-accepted in India. Unlike in the US, where failure is seen as part of the innovation process that encourages disruptions, a founder who fails in India finds it difficult to raise funding.

Inc42: What unique opportunities do you see in India, given your experience as a cross-border climate tech VC?

Sandiip Bhammer: As a climate tech investor operating in the US and India, we have the advantage of looking at opportunities from two geographies, which gives us a broader perspective. The US plays a crucial role in capital mobilisation and shapes much of the global climate narrative. Without a U.S. presence, Indian VCs might struggle to tap into the capital available there for global climate investments. That’s why establishing a strong network in both countries is essential.

At Green Frontier Capital, we prioritised building our U.S. network before expanding to India. Also, our board includes globally recognised experts such as Soumitra Datta, dean of Oxford’s Said Business School; Hessa Bint Sultan Al-Jaber, Qatar’s former minister of information and communication technology; Nishith Desai, founder of the global law firm Nishith Desai Associates; and Roy Salamé, former managing director and head of the Global Investment Opportunities (GIO) Group at J.P. Morgan Private Bank. These distinguished advisors closely work with us and our portfolio companies, providing invaluable insights and support.

Again, partnering with a climate-focussed VC is key for companies seeking validation for their sustainable approach. Generalist VCs often lack the technical expertise to guide startups effectively in this space. A case in point is RAS Luxury Oils, an Indian beauty brand committed to eco-friendly solutions. It came to us for product and process validation, and our endorsement opened the door for other climate investors. Our expertise and stamp of credibility firmly position our portfolio companies in the market.

Inc42: What are your focus areas within the broader climate space? What kind of businesses are you exploring?

Sandiip Bhammer: I won’t discuss specific startups we are targeting, as that is part of our competitive edge, and I don’t want to disclose it. However, I can give you an overview of our existing investments and future focus.

In the past, we invested heavily in electric mobility across the spectrum, including battery swapping, charging infrastructure, battery chemistry, EV ride-hailing and manufacturing for two-wheelers and three-wheelers. The EV ecosystem is so vast that it can warrant a dedicated fund to explore all its subsectors. Besides mobility, we invested in food tech, agritech and consumer lifestyle innovations.

In the future, we want to focus on renewable energy, especially rooftop solar. We are also looking at plastic circularity, having identified a promising company developing an eco-friendly alternative to single-use plastic. Additionally, we are evaluating investments in waste-to-energy technologies and battery recycling, both critical for a sustainable future.

Inc42: What about due diligence when you evaluate startups and their projections?

Sandiip Bhammer: At the stage we invest in startups, fully validating projections is nearly impossible since many of these markets are emerging for the first time. Consider our investment in BatterySmart. The battery-swapping model was not initially proven, but it surpassed expectations.

Our due diligence is more about spending time with the founder/s,  understanding their commitment and assessing their willingness to work hard and make sacrifices. It is also about evaluating what they aim to disrupt and the scale of that disruption.

We typically invest in businesses that disrupt fossil fuel technologies in terms of pricing and performance. In climate tech, price reduction alone isn’t enough; the product has to match or preferably exceed the performance of existing options, particularly in a market like India, where adoption hinges on value. To ensure this alignment, we rely on people with deep expertise who can thoroughly assess these companies and confirm their dedication to climate goals.

Inc42: What key metrics do you focus on to assess a startup’s performance after investing in it?

Sandiip Bhammer: We closely monitor the outcomes reported by our portfolio companies to measure their climate impact. You will find their reported impact if you visit our website and explore any company we have invested in. Take BluSmart, for example, a zero-emission ride-hailing service. It has reported preventing more than 58,267 tonnes of carbon dioxide generation, equivalent to the annual absorption capacity of 2.2 Mn+ fully grown trees.

We review these metrics monthly, and no other VC in India’s climate tech space offers this level of transparency. This data is not for our limited partners alone. These insights are publicly available on our website. When there are significant changes in these metrics, whether positive or negative, we engage with the company to understand what has triggered the change. If the impact has declined, we explore potential issues and work collaboratively to address those.

As climate tech investors, we are not just vocal about creating impact; we rigorously measure it and hold our portfolio companies accountable. Any noticeable fluctuation in impact metrics triggers a deep conversation to ensure we stay aligned with our environmental goals.

Inc42: So, when does revenue kick in as a performance metric?

Sandiip Bhammer: Revenue is undoubtedly a critical metric. But if we only look at financial metrics like revenue, EBITDA or profitability, we may miss the bigger picture. In the startup ecosystem, [positive] EBITDA and net profit typically don’t materialise until the venture scales significantly, which often takes five to seven years.

By that time, startups begin to generate higher revenues while keeping expenses, especially fixed costs, under control. When fixed costs remain stable and revenue growth accelerates, EBITDA and net profits will start improving.

While we monitor revenues closely, our portfolio companies are often growing from a very low base. Hence, their revenue growth may appear exceptionally strong, reflecting the steep trajectories of early stage growth.

Inc42: What’s the limited partners’ take on this approach?

Sandiip Bhammer: There is growing excitement among investors. People are more interested than ever to invest in areas that not only offer financial returns but also allow them to feel that they are making a positive impact on the planet. For many LPs, making a profit while protecting the environment has become just as important, if not more, than simply generating profits.

Inc42: Where do VCs in India fall short?

Sandiip Bhammer: Many of them come from the software background or management consulting or startups. But they often lack experience in public markets and managing exits. The success parameter in venture capital is distribution of paid-in capital, or DPI, which reflects the cash-on-cash returns from exits. Unfortunately, most VCs in India have not demonstrated a strong record of meaningful exits.

We have positioned ourselves differently by generating sound exits for our investors. The exit from BatterySmart is one such example. It delivered an 18x exit multiple in three years, de-risking our investors’ capital and allowing us to give them early returns. The outcome gave them the confidence to make bigger bets on extraordinary companies.

Inc42: What is your key learning as a climate tech VC operating in India?

Sandiip Bhammer: Quite a few nuggets, I would say. A critical lesson is understanding India’s unique approach when it comes to fundamental, high-risk innovation. This country thrives on price-led and use case-driven solutions. Essentially, it tries to gain market share based on the price advantage and tweaks and scales existing products or technologies to solve problems.

I think the fundamental breakthroughs in climate technology are more likely to come from the Global North. In contrast, India’s strength lies in tailoring these advancements to its needs and scaling them efficiently. Basically, India is a ‘scale’ market and the focus here is adapting and applying proven innovations rather than developing them from scratch.

Now, let’s look at emissions. Around 45-50% of emissions in India stem from transportation, food production and consumption, and waste management. These areas are our primary focus, and within them, we see immense potential in sectors like EVs and their ecosystems, food and agritech, plastic circularity and sustainable waste management. Scalability in these areas will heavily depend on technology, with disruption and digitisation serving as two critical pillars of our investment strategy. No serious investor in India’s climate space can disregard these pillars.

The government, too, is pushing this transition so that India emerges as the largest and fastest-growing green economy. Both central and state governments foster this vision and provide a robust policy framework to support climate investments.

What matters most at this point is India’s vast potential to grow as a green economy. Take EVs, for instance. Despite strong unit economics and product-market fit, less than 3% of vehicles on the road, particularly two-wheelers and three-wheelers, have been converted to EVs. This indicates a massive growth opportunity.

Inc42: What will be the funding trends in climate tech as we move into 2025?

Sandiip Bhammer: Well, the startup ecosystem is getting back on its feet after two years of funding constraints. This pause happened because many technologies took a long time to show returns, and it frustrated investors. In India, these challenges are compounded as implementing Central policies across states faces roadblocks due to different priorities [political or otherwise]. But a greater alignment between the states and the central leadership now ensures smoother execution, signalling a positive shift.

Globally, thighs are also looking up. Now that the uncertainties over the U.S. Presidential polls are over, we may see lower interest rates, potentially boosting investments in long-term assets like venture capital. Besides, businesses prioritising climate protection are gaining momentum as people realise the urgency to combat the climate crisis.

However, we must do something quickly. Without decisive action, we risk losing some of the most beloved destinations. Iconic places like the Maldives, the Seychelles and many other low-lying countries will cease to exist in the next 30 years if we don’t immediately address global warming and rising sea levels. And we are already VERY late.

Funding climate initiatives is a step in the right direction. Climate-focussed funds serve as strategic filters, channelling capital towards the most promising technologies that deliver maximum impact within the shortest timeframe.

Inc42: What is your advice for Indian startups specialising in climate tech?

Sandiip Bhammer: Follow your passion and don’t be afraid to fail. Focus on India and the global South, where you will find the biggest growth opportunities. As these regions are among the largest emitters of greenhouse gases, there’s always a chance to make a real impact. Finally, don’t forget to use technology to your advantage to scale your business as fast as possible.

Edited by Sanghamitra Mandal

The post Decoding Green Frontier Capital’s INR 1,500 Cr Bet on India’s Climate Tech appeared first on Inc42 Media.

Impact investments or funding for positive social impact, along with strong financial returns, may not be a new concept for Indian investors. However, the dynamic model only gained traction in the past decade. Earlier, the landscape was dominated by not-for-profit organisations. But by 2010-2011, investors realised that creating a lasting impact required a more sustainable structure, something akin to the venture capital model. That shift in perception boosted domestic funds like Capital 4 Development (C4D) Partners, which has been making waves since 2017.

C4D’s journey began in 2013, when it was known as ICCO Investments, a subsidiary of the Dutch NGO ICCO Cooperation. Backed by the Dutch Ministry of Foreign Affairs, it started with a $20 Mn fund and focussed on small and medium enterprises (SMEs) across Latin America, Africa and Asia. By 2016, it had invested $15 Mn in more than 30 companies but ran into a host of challenges like regulations, limited partners’ lack of enthusiasm for evergreen funds and the need for stronger management ownership.

The team spun out in 2017, rebranded as C4D Partners and hit the ground running. By 2018, it closed the $30 Mn C4D Asia Fund, while ICCO Cooperation was later acquired by Cordaid Investment Management.

Today, C4D Partners stands out as an early stage impact investor with a private equity mindset. Unlike the shotgun approach of investing in dozens of companies, it carefully picks 15-20 businesses which can become profitable within 18-20 months.

C4D prefers businesses that grow steadily, around 40-50% annually, without relying on aggressive sales tactics. It also uses stress-test models to ensure portfolio companies can weather harsh conditions and remain cash flow-positive.

“We don’t need 100x growth,” said founder and CEO Arvind Agarwal. “What matters is manageable, sustainable growth and profitability within a year or two.”

C4D Partners has zeroed in on agriculture, waste management, the circular economy, climate action, skilling, education and rural-focussed businesses as its primary focus areas. Financial inclusion is another critical area, although it steers clear of microfinance, a sector that has already matured.

The fund house does not invest in EV-as-a-service models (think of delivery startups using electric two-wheelers) or any industry on its ESG-negative list. In essence, it maintains a well-chalked-out and disciplined investment strategy that reflects its mission-driven but clear-eyed approach to emerging opportunities.

As part of our ongoing Moneyball series, Inc42 had an exclusive conversation with Agarwal, who discussed the evolution of impact investing in India, C4D’s investment thesis and where the industry is headed. Here are the edited excerpts.

Inc42: How has been your India journey in the past six years?

Arvind Agarwal: In the six years of India operations, C4D has invested in 13 companies and has a portfolio mortality rate of less than 20% [compared to 60-70% often seen across VC funds]. We have made six exits – three full and three partial – and returned 50% of the LP capital.

Our first fund was launched in 2017 and the second, the C4D Bharat Shubharambh Fund, came in May 2024, with a target of INR 375-550 Cr. We target to achieve its first close by 2025.

C4D’s notable exits include Ananya Finance for Inclusive Growth, Freyr Energy, Ecotasar Silk and Alpine Coffee. We have also invested in well-known startups such as Mirakle Couriers, Saahas Zero Waste and LabourNet.

We have a clear focus on sustainable growth and meaningful exits. We have also proved that impact investing can deliver solid financial returns and real societal changes. It is not about chasing the unicorns. It is about building businesses that solve real problems, and that’s where we shine.

Inc42: Did your investment thesis change between the two funds?

Arvind Agarwal: The core investment thesis has not changed. The first fund was Asia-specific and we invested in India, Indonesia, Nepal, Cambodia and the Philippines. It was a hybrid fund offering debt and equity funding. We did equity in India and debt or mezzanine investments in Southeast Asia.

Based on our experience with the first fund, we soon realised that managing a multi-country fund with mixed instruments was challenging, especially when we want to set ambitious targets for returns. So, the second fund entirely focusses on India but sticks to the same strategy as the first fund.

Inc42: C4D focusses heavily on women-led and women-owned enterprises. What is the rationale behind this approach?

Arvind Agarwal: Diversity was at the core of our strategy when we started with ICCO. As we raised our first fund, a limited partner only investing in women-owned businesses suggested that a percentage of our AUM should go to such companies to align our mission with real-world impact. We agreed, set a target to put in at least 30% of our AUM and linked it to our carried interest [a share of the GP profits]. If we exceed 30%, we gain additional carry, but falling short of the goal means losing carry, with a floor and ceiling of 15-25%.

In our first fund, 42% of the total AUM was invested in women-led enterprises; in India, it reached 58%. It was a stark contrast compared to the global VC industry with its single-digit allocation to similar companies. So, our strategy is all about setting higher benchmarks and creating meaningful change.

For us, gender lens investing [GLI] goes much beyond representation. Our proprietary toolkit helps us identify exploitative practices in sectors where women dominate supply chains. Take waste management, for instance. Most women working as waste segregators are poorly paid and face hazardous working conditions. When we invested in a waste management company, we assessed its ability to change these practices. We didn’t look at the average salary but ensured that the minimum wage paid to employees would exceed the minimum living salary of INR 16K. In this case, the company paid a minimum wage of INR 17K, a tangible improvement.

Therefore, it’s not just about funding women-led businesses but also ensuring that these investments drive systemic changes in exploitative industries. We align financial and non-financial metrics to create measurable impact.

Inc42: Isn’t it challenging to find Indian startups led or owned by women?

Arvind Agarwal: Well, finding such companies is not a challenge. It is more about refining the process to make sure that we are genuinely inclusive and transparent. For instance, we have seen that women founders don’t often approach us through investment bankers. So, we have simplified the process. Anyone looking for funding can apply directly on our website, and the entire team reviews applications to eliminate personal biases.

Again, looking closer, we have noticed something really interesting. Women founders tend to be more cautious about standard clauses like drag-along rights [a clause that lets a majority shareholder compel others to take part in the company sale]. In contrast, male founders don’t worry about the fine print. They focus on the matters at hand, the funding amount and valuation. To make things easier, we have started sharing detailed term sheets much earlier, explaining the nitty-gritty before taking these deals to the investment committee. This way, we have improved access and created a more diverse and inclusive portfolio pipeline.

Inc42: What about LP’s interest in impact funds operating in India? How has it evolved since 2015-16, a watershed year for this dynamic new field?

Arvind Agarwal: Their interest has dwindled for a few reasons. First, the line between an impact fund and a typical VC fund has blurred over time. When you look at the landscape today, you will often see a wide range of funds coming under this category, making it difficult to distinguish between the two. Therefore, many global LPs have pulled back, feeling their work in India is done. Their focus has now shifted to new geographies like Africa.

Besides, some limited partners had sub-par experiences, and they now hesitate to invest. Others with more mature strategies prefer to invest directly instead of parking their money with impact funds. These factors combined to lead to a decline in the funds available for impact investments.

As I said earlier, the challenge lies in clearly defining an impact fund, its unique role and the outcomes investors may expect.

Inc42: Talking about exits, what are the listing challenges, especially on the NSE Emerge, the SME platform of the National Stock Exchange?

 Arvind Agarwal: We are actively exploring this area over the past two years. The main challenge for SMEs looking for an IPO is valuation. These are businesses still in their growth phase. They have yet to reach the maturity or EBITDA margins typically seen in companies with a turnover of INR 100-300 Cr. This means their IPO valuations heavily rely on EBITDA multiples, a sticking point as this framework doesn’t always capture their growth trajectories and overall potential.

The best approach in such cases is to first secure the growth capital that helps them stabilise and then go for better profit margins. We are already working with a few companies which are eyeing mainboard IPOs. However, the ideal path should be to go through an SME IPO first and give themselves around three years to solidify their market position before opting for the mainboard. Of course, at C4D Partners, we always consider SME IPOs. But the valuation constraints tied to the growth dynamics of these businesses tend to pose a significant challenge.

Inc42: You have been vocal about the PE/VC fund structure. What is the core problem investors face?

Arvind Agarwal: It’s time we address the core issue in private investing: An outdated funding structure we rely on. From my conversations across the industry, it is clear that the 10-year fund life, coupled with a five-year exit horizon, is no longer practical.

There’s no inherent reason why PE/VC firms can’t shift to a 12-year fund life. But these  proposals are routinely dismissed because the market standard is 10 years. Ironically, even the 10-year model struggles to wrap up in 12 years, a discrepancy the industry is willing to overlook.

As an industry, we must come together and rethink our operations. We should align a fund’s structure with the market dynamics of each region. What works in India may not be suitable for Southeast Asia or the Middle East, and a one-size-fits-all approach is no longer viable.

We can foster sustainability and long-term success if the industry collaborates and innovates to embrace new models.

Inc42: What are the key areas impact funds should focus on?

Arvind Agarwal: Impact funds must prioritise primary and secondary sectors [agriculture and manufacturing, respectively] over the tertiary ones to drive long-term growth and inclusive development. The first two are critical for India’s progress but remain significantly underfunded.

Take agriculture, for example. Shifting focus upstream or pre-harvesting processes such as technology adoption and yield improvement receive far less attention than downstream or post-harvesting activities like storage and deployment. This imbalance is evident when you compare India with other countries like the US, where upstream investments are more robust. India should adopt a similar approach.

In manufacturing, there should be a stronger push to build small-scale industries, especially in rural areas, rather than focussing solely on large industrial projects. Small enterprises can boost the secondary sector by creating jobs and promoting balanced economic growth.

Inc42: Finally, which sectors will attract maximum impact investments in 2025?

Arvind Agarwal: Climate-related investments will likely dominate the impact investment landscape. With the global focus on climate risks and opportunities, a substantial flow of funds will target this critical area.

The circular economy is another promising sector where innovative and sustainable business models are gaining traction. Health, too, is emerging as a focus area, but the scale of investments is still uncertain. Agriculture will continue to attract interest, especially as investors try to address the gaps in upstream and downstream funding.

We are also noticing a shift in the SME space. They were content to stay small earlier but aim to scale up now. The challenge here is the capital mix. Small and medium enterprises need more debt than equity, as they have historically operated on a profitable, cash flow-driven model. Equity investments are critical to professionalise these businesses. But their growth hinges on access to affordable debt. This nuanced approach fosters SME growth, especially when they pivot towards large-scale operations.

[Edited by Sanghamitra Mandal]

The post Impact Investing Is About Solving Real Problems, Not Chasing Unicorns: C4D Partners’ Arvind Agarwal appeared first on Inc42 Media.

According to a 2023 report by the World Economic Forum, India is emerging as the key hub for impact investments.

This is perhaps the first opportunity for global investors to back businesses capable of bridging the gaps in sustainable development goals (SDGs) from the get go. With thousands of new startups and ventures emerging every year, impact investors have a significant role to play.

For those unfamiliar with the term, impact investing seeks to deliver positive social or environmental outcomes alongside financial returns.

In India, impact investing predominantly follows a venture approach, focusing on early-stage investments in for-profit enterprises that serve vulnerable and underserved communities.

However, a gap exists in growth-stage funding for impact enterprises, which limits their ability to scale solutions capable of driving substantial, global-level change. Often the core vision has to be diluted for business considerations to attract big ticket investments

While the initial wave of impact investing predominantly targeted financial inclusion—such as microfinance and affordable lending to underserved populations—the scope has broadened significantly in recent years.

This is visible in the recent impact investment data across sectors shared in a monthly report published by industry body India Impact Investors Council (IIC). The report indicates that a total of $2.3 Bn has been invested in first six months of 2024 (January-June) within the impact investment domain.

In line with this growth, India’s domestic ecosystem of impact investors has grown substantially over the years, with key impact investors like C4D Partners, Ankur Capital, Omnivore Capital and Caspian Impact Investments among others leading the charge.

Among these is Asha Ventures, an early-to-growth stage impact fund founded in 2014 by former Morgan Stanley India head and president Vikram Gandhi, and former Genpact president and CEO Pramod Bhasin.

Between 2014 and 2023, the founders invested in startups, climate solutions and financial services companies such as Adda 24×7, Vaastu Housing Finance, Avanti, Nepra, Greenway, Jana Care, Saahas Zero Waste, Swarna Pragati Housing, Varthana, Gramophone and Janaadhar.

But with the launch of the maiden $100 Mn Asha Ventures Fund 1, Gandhi and Bhasin are stepping into the institutional investor territory. Launched in December 2023, the fund has seen a first close at $50 Mn. Targeting investments in the range of $2 Mn to $10 Mn, Asha Ventures is looking to lead rounds in business built around three core themes: sustainability, healthcare and inclusion.

“We target the emerging middle class in India, a segment of around 50 Cr individuals with annual incomes between INR 2 Lakh-INR10 Lakh. This group has unique needs and aspirations that differ from the wealthier segments typically targeted by mainstream PE/VC funds,” Amit Mehta, managing partner at Asha Ventures, told Inc42.

Mehta held leadership roles at IIFL Private Equity and Motilal Oswal Private Equity before joining Asha Ventures. Currently, he leads the firm’s strategy, fundraising and investment decisions.

Through the fund, Asha Ventures has made three investments from this corpus including Ascend Capital, Truemeds and AutoMony. “Over the next three to four years, we aim to make 10–12 more investments,” the managing partner claimed.

Unlike funds that prioritise trends such as 10-minute delivery, crypto, or gaming, Asha Ventures focuses on underserved markets. Mehta told us that the firm’s thesis on impact investing is built around scalable business models that not only benefit society but also generate sustainable returns.

How different is this from building a regular VC fund and what challenges do impact investors face when raising from LPs looking for quick returns, even as impact investing by itself is a patient capital game?

Edited excerpts

Inc42: Many VCs are now adopting sustainability as an investment theme. How is Asha Ventures aiming to make a difference?

Amit Mehta: Climate change is a major challenge we all face. The world is in a crisis and India, as a large country, must urgently work to reduce its carbon footprint. At Asha Ventures, we are making significant investments in the climate space, focusing on both adaptation and mitigation.

The middle class, particularly farmers, is among the most vulnerable to climate change. We explore ways to support sustainable consumption and back innovative brands that position themselves as sustainable consumer companies. These brands are also improving their supply chains to reduce their environmental impact.

We are particularly interested in startups addressing the carbon footprint of hard-to-abate sectors like steel and cement. Innovations in these areas are critical to making a difference. Similarly, we explore bio-alternatives across various industries, such as replacements for plastics and agricultural inputs.

In the renewable energy sector, we avoid asset-heavy investments, like power plants, because of their slow growth and lengthy project timelines. Instead, we focus on enabling sectors within the renewable supply chain. For example, as India becomes less dependent on China for solar components, we see opportunities to invest in companies emerging within this ecosystem.

We’ve also invested in an NBFC that finances EV three-wheelers, helping rickshaw drivers earn a sustainable income while promoting clean energy. Although we generally avoid direct EV investments, this opportunity aligns with our themes of sustainability and inclusion.

At Asha Ventures, our goal is to back innovations that drive impactful change, whether by addressing climate challenges, supporting sustainable industries, or creating inclusive economic opportunities.

Inc42: Can you elaborate more on the other two themes: healthcare and inclusion? These are broad sectors that need widespread impact. 

Amit Mehta: Healthcare is a basic necessity and we are seeing many innovations aimed at making it more affordable and accessible. For example our portfolio company Truemeds is an online platform that focuses on generic drugs.

The likes of PharmEasy and 1MG primarily cater to upper middle-class customers who may need medicines along with services like annual health checkups or wearable devices to monitor vitals. However, millions of people across India, especially those managing chronic conditions like high blood pressure or diabetes, cannot afford branded medicines.

Generic drugs, which are non-branded versions of the same medicines, offer a solution. For instance, Crocin is a normal paracetamol drug. While the branded version might cost INR 10, the generic version could be as low as INR 1. This significant cost reduction makes essential medicines more accessible to a larger population. Our investment in True Meds focuses on tapping into this mass-market opportunity.

On the inclusion side, we primarily work in the financial sector. Despite significant progress over the past decade, there is still much to do. Our investments focus on areas like affordable housing, commercial vehicles and education, providing opportunities to underserved communities and driving greater economic inclusion.

Inc42:  Inc42 data shows that between 2021 and 2024 over 15 new impact funds were announced with a total corpus of $1.3 Bn. How do you see this competitive landscape and what is your pitch to founders given the number of new investors? 

Amit Mehta: When an entrepreneur seeks to raise funds, they look for an investor who aligns with their vision and understands their business model. This alignment often depends on how well the investor understands the target customer base. For example, take a used commercial vehicle NBFC targeting low-income individuals with a household income of ₹2–3 lakh annually in a tier-2 city.

The entrepreneur will want to know: Does this investor have experience working with such customers? Have they invested in similar businesses before? Do they understand the growth potential and risks involved? These are critical questions when choosing an investor.

When it comes to Asha Ventures, we have over a decade of experience working with companies that serve this customer base. This gives us a deep understanding and expertise that many traditional VC funds may lack. For instance, while some VCs might focus on metro-based digital models offering personal loans to tech-savvy users, we focus on understanding the needs, behaviours and aspirations of underserved, price-sensitive customers.

We know that this customer base may not fully adopt digital models and often values a strong, low-cost core product over unnecessary add-ons. Our focus is on ensuring the product is efficient, affordable and impactful. Entrepreneurs targeting the emerging middle class will seek investors who understand these nuances.

Our expertise extends beyond financial services into sustainability and healthcare, allowing us to support businesses transitioning from early to growth stages while staying connected to their customer base

Inc42: Can you share a few examples of how Asha Ventures has helped its portfolio companies nurture and scale?

Amit Mehta: Take, Vastu Housing Finance, an early affordable housing finance company founded in 2016. We invested in the company when it was just a concept on paper. Our understanding of the target customer base enabled us to help design the product and build the technology to deliver it effectively. Additionally, our credibility within the financial ecosystem played a key role in helping the company raise both equity and debt.

Today, Vastu Housing Finance has over INR 10,000 Cr in assets under management (AUM) and is highly profitable. We continue to be involved with the company and plan to take it public within the next two years.

Truemeds is another example. When we invested, the startup was generating only INR 50 Lakh in monthly revenue. Now, its revenue is nearly 100x that.

We’ve also worked with sustainability-focused companies like Greenway, which manufactures efficient stoves as affordable alternatives to traditional chulhas. These stoves not only provide value at a low price point but also earn carbon credits.

These examples demonstrate how we support our portfolio companies in transitioning from the early stage to the growth stage, leveraging our expertise across inclusion, healthcare and sustainability to help them scale effectively.

Inc42:In India, impact investments are still largely driven by international investors. Why do you think Indian impact investors have not yet created a mainstream VC-like presence?

Amit Mehta: The impact industry in India has evolved significantly over the past two decades. Historically, much of the capital has come from development finance institutions. However, we’re now seeing a growing interest from domestic investors and limited partners who are becoming more conscious about investing in impact funds.

We believe that over the next decade, domestic equity investors will become an integral part of the impact investing ecosystem. This shift is already beginning, including within our own investments.

You’re correct that offshore capital has historically led the way in impact investing. One challenge we face is the perception that “impact” means low returns. At Asha Ventures, we aim to debunk this myth and demonstrate that it’s possible to deliver strong financial returns while creating meaningful social and environmental impact.

As we continue to prove this, we expect more domestic investors to join and help grow the impact investing space into a more mainstream model in India.

Inc42: From regulatory and LPs perspective how can the ecosystem help promote impact investing in India? 

Amit Mehta: Currently, there isn’t a separate regulatory category for impact funds; they are treated the same as other AIFs. Impact funds also face generic challenges and the industry has been engaging with regulators to address them. There is potential value in creating a distinct category for impact funds and these discussions are ongoing. When regulators deem it appropriate, they may introduce specific frameworks for this sector.

From an LP perspective, the key is addressing the perception that investing in impact funds might compromise returns. Many investors still hold this belief, but it’s important to demonstrate that impact investing can deliver competitive returns alongside social and environmental benefits.

Additionally, government-backed LPs, like SIDBI and other similar institutions, could play a pivotal role by prioritising investments in impact funds. If such entities adopt a clear agenda to fund impact-focused AIFs, it would significantly strengthen the ecosystem. This would not only attract more capital but also align with the government’s push to address the needs of the mass market and drive solutions for underserved communities.

By creating the right regulatory framework and encouraging domestic LPs to invest in impact funds, the ecosystem can grow more robustly and channel capital into sectors vital for uplifting the broader population.

Inc42: How does impact investing in India compare to the global scenario?

Amit Mehta: India is one of the top markets for impact investing globally, thanks to its large population and immense market potential. Unlike other impact markets such as Africa or Latin America, India offers a more stable and well-regulated environment, making it highly attractive to both local and international investors.

Additionally, many family offices are showing growing interest in this space. While some approach it from a business perspective, there’s a broader understanding among successful entrepreneurs that doing good and doing well can go hand in hand. This mindset is driving increased investments in businesses targeting underserved customer bases in India.

Inc42: Where do you see impact investing heading in India over the next few years?

Amit Mehta: As I mentioned, the potential in this market is enormous. There are around 50 crore people in the middle-income bracket, which is a much larger market than the upper middle-class segment. With limited capital currently targeting this demographic, we believe now is a great time to invest.

We anticipate strong returns in this market over the next couple of decades, driven by the significant rise in earnings among this consumer class. They are set to become the largest consumer segment in the next decade.

Our approach focuses on the consumer’s needs. What are they seeking? Financial stability, good health and resilience against unexpected setbacks like health crises, natural disasters, or economic shocks. These challenges align with our focus on sustainability, healthcare and financial inclusion.

For example, sustainability addresses the risks of environmental shocks that can disrupt lives. Healthcare ensures people remain productive and avoid earnings losses due to poor health. Financial inclusion empowers consumers by providing the tools they need to improve and stabilise their income.

By viewing these sectors from the consumer’s perspective, we see tremendous opportunities to deploy billions of dollars over the next decade. That’s why we remain committed to these sectors and confident about the future of impact investing in India.

The post Decoding Asha Ventures’ $100 Mn Playbook For Impact Investing appeared first on Inc42 Media.

As India’s deeptech story unfolds rapidly, venture capital players are evolving their models and thesis to this segment which has its own peculiarities and risk-to-reward mechanism. It’s hard to find a single large VC fund which is not bullish on deeptech despite known challenges such as the potentially long exit horizon, the high gestation period for maturity of products and deeptech IP. 

Large VC funds may also be blind to the right networks and knowledge base needed to evaluate early deeptech startups. It’s easy to forget that deeptech is a vast umbrella sector that covers some very complex segments — everything from artificial intelligence to robotics to spacetech and of course semiconductor and electronics systems design. 

Not every fund is capable of becoming a deeptech fund, so what does it take to run one? 

For Bengaluru-based Yali Capital, a Category 2 AIF specialising in deeptech, that comes down to how much patience one has as an investor and whether the fund managers themselves know what it takes to build despite the complexities. 

Launched in July this year with Ganapathy Subramaniam and Mathew Cyriac as founding partners, Yali Capital is an INR 810 Cr (around $100 Mn) fund looking to invest across deeptech sector and in segments such as chip design, robotics, aerospace and defence, genomics, space, manufacturing, and the wide world of AI. 

Subramaniam, affectionately known as ‘Gani’ in the industry, comes with 15+ years of experience in the semiconductor space at Texas Instruments and founded Cosmic Circuits after TI. He has also personally backed listed drone maker ideaForge, and deepetch startups like Tonbo Imaging, and Aurasemi via Celesta Capital.

Meanwhile, Cyriac managed $3 Bn worth of assets as the former co-head of Blackstone India and helped companies go public in the deeptech space, including ideaForge.  

The duo was joined by Lip-Bu Tan who is a globally renowned name in the semiconductor space as the former CEO of Cadence Design Systems, a board member of Intel and Schneider Electric, chairman of Walden International, and more.

Recently, Yali Capital invested in a genomics startup 4baseCare as well as robotics startup Perceptyne Robots and fabless chip design company C2i Semiconductors. 

Subramaniam is bullish about India forging its own identity in the deeptech world, despite several comparisons to western giants. 

Edited excerpts

Inc42: What was the inspiration behind founding Yali? Give us some insight into how you built your thesis given how vast deeptech is 

Ganapathy Subramaniam: We believe that just like Silicon Valley, the Indian startup ecosystem, needs more successful entrepreneurs to become VCs. When entrepreneurs become VCs they have better ability to create larger companies as they have already walked the path. 

After years of entrepreneurial journey, starting a new company would have been an easier path for me. However, the excitement now is being able to create at least 3-4 excellent companies with Yali Capital’s investments. So, with our years of deeptech experience, we are now trying to establish a strong foundation which requires capital and a connection to the ecosystem. We are trying to get the best of LPs from the US, Japan, Taiwan, and Korea. 

To talk about Yali’s thesis, very clearly, we are focussed on deeptech in India. We are going to invest only in India-headquartered startups across the six major verticals. From this fund, we will put money in a maximum of 15 companies. 

Of the total $100 Mn fund, nearly 25% of our money will go into chip design because we have extensive experience in this sector – I have co-founded two companies, Karthik is a chip designer, and Lip-Bu, arguably, is the best chip design investor in the world. 

Similarly, we have a very strong story in aerospace and surveillance. Matthew took MTAR to the public. As a precision manufacturing company, it’s also one of the first deeptech companies to IPO in recent years. He took Data Patterns, which is a radar company, to the public. Then he helped me to take ideaForge public. 

We are going to work on two more companies to go public next year. Matthew and I have a significant understanding of this space. So, another 25% will be invested in aerospace and surveillance.

From this fund, we might invest in three late-stage companies given we can exit these investments within two to three years.

Inc42: Just earlier this month Yali Capital announced an investment in C2i Semiconductor. What drove you to invest in the startup? 

Ganapathy Subramaniam: We have always been keen to support entrepreneurs with a vision of creating globally competitive semiconductor design companies from India. The founders of C2i have a collective experience of over 100 years and have the necessary skill set to create innovative products in a market dominated by Western players.

Inc42: As a veteran in the semiconductor industry and now as an investor, how do foresee India’s future here? Are India-made chips around the corner?

Ganapathy Subramaniam: We continuously reiterate that while fabs are very important, equally important are the design companies. To give an analogy, while deploying buses on roads we also need to ensure there are passengers to board them. We are focussed on creating the chip design companies which will use the bus, that is the fabs, whenever these fabs are ready. Both need to progress simultaneously. 

However, let’s keep in mind that today, India is not creating technology in the fab. As India progresses towards chip manufacturing, it will probably start with 20-28 nanometer chips while the world is already at 3 nanometers. 

Most chip design companies here will keep getting their chips manufactured in globally renowned fabs, and as soon the Indian fabs are ready, they will migrate to the India fab. I believe that in the Initial years, the design companies in India will not bet on the fabs in the country as they might face several challenges. 

So, I think only by 2027-2028, we might see some Indian fab-made chips in the market.

Inc42: Moving beyond semiconductors, how is Yali Capital looking at the aerospace and defence market? When will India have its own SpaceX?

Ganapathy Subramaniam: From drones to the payloads in drones, which include cameras and sensors, we have a big focus across this value chain. In fact, in aerospace and surveillance, we have a big focus on advanced cameras and sensors like LiDAR, thermal. 

Besides, many software companies will also emerge here that will leverage AI to take all the complex and multi-sensory inputs to create meaningful analytics out of them. 

And I don’t think SpaceX should be our reference. India will have its own successes, and I believe, in the next 10 years, we will have good role model companies in each of the deeptech verticals – whether it’s spacetech, chip design, or GenAI.

Meanwhile, India already has a top few companies across main spacetech verticals, such as Agnikul, Skyroot, Pixxel and GalaxEye. I am not sure if there is enough room for another few additions across the sectors like rockets and satellite imaging technology where these startups are already playing in. Will you download another food delivery app after Zomato and Swiggy? I am not sure. 

So, in spacetech, India is going to be very strong for sure but we plan to invest only in the current set of companies unless a new startup comes with extremely novel technology.

Inc42: I understand that India’s deeptech story is strong given the plethora of talent and the potential for innovation, but when will we start seeing the revenue momentum?

Ganapathy Subramaniam: We already know that the revenue trajectories of the deeptech companies are very different. For example, we cannot expect a chip design company to start generating revenue at least for the first three to four years of their existence. Meanwhile, GenAI and robotics companies could probably start making revenue in the second or third years.

Some deeptech companies could take as much as six to seven years to clock revenue.

That is why we need to be patient. VCs can’t force entrepreneurs in chip design to start clocking revenue in the second year. We might not even see a big difference in the metrics of these startups between their Series A and Series B investments. 

Now, I foresee two kinds of risks to an investment – technology risk and execution risk. Technology risk is we don’t know whether the technology will work. Execution risk is assuming that the technology works but if the company is able to execute it with sufficient capital without any regulatory or geopolitical problems disrupting their models. 

Most deeptech investments are prone to execution risk because most of these founders already come with years of experience in building the same or similar tech.

In our opinion, if companies have technology risk, they could take at least six to seven years to make money. However, if their technology piece is dealt with, the ones facing execution risk might take less time, around two to four years to start clocking revenue.

Inc42: How likely is it then for deeptech startups to go bust? How does Yali do due diligence to mitigate risks, particularly on the execution side? 

Ganapathy Subramaniam: We need to keep in mind that it’s very difficult for most deeptech companies to go bust. The deeptech companies usually have an exceptional quality team working together and important patents and IPs created, which make it almost impossible for them to get bankrupt or dissipate, as someone will come and acquire them just for the team or technology.

In fact, it is one of the advantages of doing deeptech funds, they might not grow 30x or 50x but I doubt they will lose money.

For due diligence, there are two basic and generic aspects all deeptech VCs look into – a collection of diversified talents in the founding team and a large market scope.

However, we first need to know the area of growth or the emerging scope in the next five to 10 years, because these startups will take at least four to five years to get their product out and have a brand. 

Next, we need to consider the missing pieces for giants like NVIDIA, Google, AMD, Microsoft, and others. Then, we go out into the market to see which emerging companies have a reasonable chance of getting acquired by one of these giants to fill their missing blocks. It might or might not be acquired but as VCs we often have to approach the field with this mentality.

This is also why we reiterate that VCs need to have deep experience in the area to be strong in this sector. This is a key differentiating factor for funds in deeptech. 

Inc42: Tell us a little about what kind of investments we will see from Yali Capital in the next few months. Will you concentrate your allocation in one particular segment? 

Ganapathy Subramaniam: After the recent investment in C2i Semiconductors, which is a fabless chip design company focused on analogue and mixed-signal designs, our focus is on other segments. 

The fourth company we will back is in the aerospace and surveillance space. All these investments are expected to be done by the end of November. 

By December or January, we are expecting to announce one more investment in the GenAI space. In 2025, we might consider investing in a manufacturing startup as well. 

[Edited By Nikhil Subramaniam]

The post Yali Capital’s ‘Gani’ On Building A Deeptech Investment Thesis For India appeared first on Inc42 Media.

More and more venture capital funds (VC funds) in India are moving beyond the tried-and-tested fee models and exploring structures that better suit the Indian context.

The traditional ‘2 and 20’ fee structure — shorthand for the 2% management fee on the corpus and 20% performance fee on profits over a hurdle rate—has dictated how VCs run globally.

However, as the tech startup landscape evolves in India, this model is increasingly being viewed as outdated and misaligned with investor expectations.

Celebrated valuation expert Aswath Damodaran, professor at NYU’s Stern School of Business, explained to Inc42, “There isn’t a single fund manager in the world worth paying 2 and 20—or even 1 and 25—because no active investing approach can consistently deliver returns that justify such high fees. While some fund managers may have winning streaks, the idea that past performance predicts future returns is a fallacy.”

Echoing this sentiment, an ultra-high-net-worth individual (HNI) and a limited partner (LP) in a VC fund added that some fund managers have profited personally, even as their funds have performed poorly, through means like high-water mark clauses, side pockets, and insider trading.

To be clear, most LPs will not publicly talk about these aspects — the venture capital world is all about long-term relationships. But lately there’s a growing call for a review of the fee structure at the very least.

And with more and more Indian VC funds looking to raise from domestic LPs, fund managers often have to give in to these demands.

With the Indian startup ecosystem attracting over $150 Bn in investments in the decade since 2014—and once marquee startups like BYJU’s and Dunzo losing billions in value—it’s high time to rethink the fee structures of fund managers to ensure efficiency and accountability in investment strategies.

Indian VCs In Correction Mode

The year 2023 has served as a wake-up call for Indian VCs. Companies such as BYJU’s and others struggled to justify their valuations and there were a number of corporate governance red flags in large funded startups.

The pooled internal rate of return (PIRR) for Category I AIFs fell to -16.1%, according to CRISIL’s AIF Benchmark Report. The PIRR is a means to understand the returns from a number of concurrent portfolios and fund schemes.

This trend was not isolated to India though. The US also experienced a decline in venture capital activity. According to the National Venture Capital Association, fund managers in the US completed 18% fewer deals in 2023 compared to 2022.

This is largely described as the funding winter, the effects of which still linger.

In India, the compounded annual growth rate (CAGR) of VC funding between 2020 and 2023 was -6% for early-stage investments, +13% for growth stage, and -15% for late-stage funding, as per Inc42’s 2024 Startup Ecosystem Report.

Although there’s been a recovery in 2024, M&A deals remain down, and exits continue to pose a challenge, with the exception of IPOs, which not every company can aspire to.

Despite offering better internal rates of return (IRR) compared to the US in recent years, only a small percentage of these returns—around 15-20%—are actually distributed to investors as DPI (distributions to paid-in capital) after deducting fees.

And therein lies the rub, the majority of the returns remain unrealised for the funds and its LPs, but is reflected in RVPI or residual value to paid-in capital. The RVPI makes up the bulk of the ‘total value to paid-in capital’ which is a key metric to assess fund performance.

This RVPI may or may not eventually convert into returns that land in the hands of a fund’s investors, but the management fee will nevertheless be charged on this amount.

Why The “2 And 20” Fee Model Is Under Scrutiny

As India’s family funds have grown exponentially in recent years, many HNIs and ultra HNIs are reluctant to invest through traditional VC funds due to the high 2% management fee.

Anirudh A Damani, managing partner of Artha Venture Fund, noted, “The traditional ‘2 and 20’ fee model doesn’t fit the Indian context. Indian investors are more concerned with the 2% management fee than the 20% performance fee. In a market where index returns like the NIFTY or BSE Sensex can offer upwards of 15%, fee structures need to adapt.”

Damani further explained that the 2% fee made sense when funds were smaller, around $100 Mn in corpus. However, with fund sizes now exceeding $1 Bn and lasting up to 15 years, management fees have surged. Over time, these fees can eat up 37%-38% of the capital, leaving less than 60% for actual investments. To meet investor expectations of a 5x return, funds would need to generate 9x or more on their invested capital—an increasingly difficult feat.

Globally, there’s growing concern that the “2 and 20” model disproportionately benefits fund managers while leaving LPs with limited returns. Investors are now pushing to change this model.

Localising Indian VC Funds Fee Models 

The key aspects of the Indian startup market—such as risk dynamics, compliance costs, success rates, and exit timelines—differ significantly from those of the U.S. market.

Chirag Shah, president of fundraising & strategy at alternative debt investor BlackSoil, emphasised that fees should be adjusted based on the investment stage. Early stage funds, which face higher risks, should have lower management fees but higher performance fees to incentivise fund managers.

In contrast, growth and late stage, which are considered more stable, justify higher management fees due to their larger corpus needs. However, in this case, fund managers typically have an established track record, so perhaps performance fees can be reduced.

This tailored approach is best suited to align risk, reward, and investor expectation in a still-maturing market like India.

Moreover, sector-specific funds, particularly in areas like deeptech, hardware, and fintech, could potentially adopt differentiated management fee structures to account for unique challenges. These sectors often have longer development cycles, high capital intensity, and regulatory complexities, which delay returns.

Higher management fees can cover the extended timelines and specialised expertise required, while performance fees should reward long-term value creation.

A flexible fee structure ensures that fund manager incentives are aligned with sector-specific risks and expectations, promoting sustainable performance over time, Shah added.

Sanjay Swamy, partner at Bengaluru-based Prime Venture Partners, highlighted that general partners should look at fees as a means of running their businesses efficiently and compliantly.

Fees are necessary to cover team expenses, portfolio support, travel, and minimal marketing costs. He also pointed out that compliance costs in India are particularly high. As fund sizes grow—especially beyond $250 Mn—there may be room for optimisation, but most LPs (limited partners) understand that maximising returns is the ultimate goal.

“For instance, you don’t want a constrained travel budget to result in missing out on a deal or cutting corners on due diligence by not visiting a field office,” Swamy added.

He emphasised that the potential cost of missing an opportunity or overlooking compliance is far higher than any savings from cutting expenses in these areas, which is why more experienced and knowledgeable LPs prioritise diligence over cost-cutting.

Emerging Trends In Fund Management Fees

Most of the biggest VC funds in India including Peak XV Partners (earlier Sequoia), Lightspeed, Z47 (formerly Matrix), Accel India, Stellaris, Nexus and others are said to follow the tried and tested fee structure of ‘2 and 20’. However, in the last few years, some Indian funds have experimented with the lower management fee.

For example, Artha Venture Fund has implemented a 1% management fee and a 10% hurdle rate for its seed and growth funds, Damani said. Additionally, the firm shares 50% of the carry with its team members to incentivise performance.

This includes not just the investment team but also those in operations, HR, fundraising, investor relations, legal, compliance, accounts, and finance—essentially anyone above the associate level.

Artha Venture Fund has implemented a 1% management fee for its seed funds and less than 1% for its growth or winner funds. Additionally, it has set a hard hurdle rate of 10%, ensuring that investors receive the first 10% of returns before the fund participates in the profits, the managing partner added.

One unique feature of Artha Venture Fund’s model is that fees are applied to the net drawdown rather than the full committed capital, which is more common in other funds.

Blacksoil’s Shah pointed out that a “1 and 25” fee structure might be better suited to the Indian startup ecosystem as it encourages fund managers to prioritise performance over fixed income.

In particular, debt-based funds may benefit from a higher management fee and lower performance fee since their structure and risk profile differ from equity-based startups.

The Call For A Fair Fee Structure

But valuation guru Damodaran feels the traditional as well as the ‘1 and 25’ fee structures are flawed. The latter claims to only take 25% of the winnings, it doesn’t account for the potential losses during downturns. Almost all funds will have more losers than winners in their portfolio.

Instead, Damodaran says a balanced approach is warranted. “If investors gain a share of the profits, they should also bear a portion of the losses when the fund underperforms.”

He also proposed a more equitable active investing fee structure, which reflects the costs of active management without disproportionately benefiting fund managers. His argument is that this would result in lower compensation for fund managers, but would better align with the limited value they provide in certain market conditions.

The best LPs are those that understand the importance of the end destination and not necessarily the journey. And when fund structures are aligned to maximise returns for LPs, this also maximises carried interest for GPs, creating something of a win-win.

Edited by Nikhil Subramaniam

Correction Note: An earlier version of this story featured an infographic, which has been removed while we revalidate  the data

The post Are Indian VC Funds Moving Beyond The ‘2 And 20’ Fee Model? appeared first on Inc42 Media.

Until 2020, Indian spacetech startups were not on the public radar. Space missions were primarily under the purview of the government-run Indian Space Research Organisation (ISRO), and even VC funds did not have a clear view on investing in spacetech.

All that has certainly changed with liberalised policies for spacetech investors, more public-private partnerships between startups and the government as well as the growing talent base for spacetech applications and operations.

Indian startups are today increasingly making waves at much lower costs than their international counterparts, and often with faster execution, underscoring the innovation-first mindset in spacetech in India.

For example, Agnikul Cosmos, a spacetech startup that builds customisable and mobile launch vehicles for space journeys, has found a way to 3D print rocket engines in under a week, as opposed to months.

The likes of Bellatrix – developer and manufacturer of advanced propulsion technologies and Pixxel – provider of hyperspectral earth imaging datasets are few other names that have been driving innovation in the spacetech space.

In 2022, Hyderabad-based Skyroot Aerospace became the first private Indian space company to launch a rocket into space with its Vikram-S rocket series. Such stories are becoming increasingly commonplace in India.

More than 150 spacetech startups have emerged across areas such as launch vehicles, satellite constellations, earth observation, satellite communication, space data analytics and in-space technologies among others leading to a high degree of innovation. To facilitate startup participation, the government established the Indian National Space Promotion and Authorisation Centre (IN-SPACe).

The Indian Space Policy 2023 gave further momentum to the spacetech sector. New Space India Limited (NSIL) has engaged private firms to manufacture its largest launch vehicle, LVM3, which successfully launched missions like Chandrayaan-2 and Chandrayaan-3.

Further, in this year’s budget, finance minister Nirmala Sitharaman announced the government’s intent to establish an INR 1,000 Cr VC fund. Spacetech startups also got a big boost with the 0% GST implementation in 2023.

And with the road opening up, venture capital firms, corporate venture funds and angel investors have swarmed to the spacetech opportunity.

VCs Shoot For Spacetech 

According to data from Inc42, there are currently more than 150 spacetech startups in India catered to by an active VC ecosystem comprising 50+ venture capital funds – both domestic and international.

Prominent Indian VCs backing this new class of startups include pi Ventures, Speciale Invest, Kalaari Capital, Blume Ventures, Peak XV Partners, Lightspeed, Force Ventures, and growX Ventures among others.

While the expanding private space tech startup landscape and ongoing government support present a lucrative opportunity for investors, the presence of VCs is equally vital for the sector’s long-term growth.

Vishesh Rajaram, managing partner at Speciale Invest, underscored the importance of VC investments in the development of the Indian spacetech ecosystem. Despite favourable conditions, the sector still requires substantial capital investment, particularly for upstream technologies that often have longer gestation periods and higher capital expenditure needs.

“In tandem, a robust domestic market—both governmental and private—must emerge for these technologies. Otherwise, startups will struggle to commercialise their innovations, impacting their ability to generate revenue and raise subsequent funding,” Rajaram added.

Do Indian Spacetech Startups Have The Edge?

India’s heritage in spacetech is more than six decades old. This has resulted in a strong talent and advisory pool, educational institutes with the relevant coursework amongst others.

Indian spacetech players are developing faster, more efficient, and cost-effective solutions at scale. A prime example of this is the Mars mission, which was completed on a budget smaller than that of Hollywood space movie Gravity.

“As the Indian spacetech companies continue to innovate, grow and show traction, I see more and more Indian spacetech startups going global as the problem statement is truly ‘universal’,” Laxmikanth V, managing partner, Pavestone Capital told Inc42.

At the same time, the ecosystem offers a very mature supply chain for vendors and manufacturers for space components, acting as a backbone for future growth. Inc42’s 2023 report on spacetech notes some of key MSMEs in this regard such as Ananth, Ajista, Capronic Systems and RMSI among others.

These MSMEs offer services in some of the key areas such as aerospace component manufacturing and testing; satellite component manufacturing and ground station equipment; automated testing equipment; launch vehicle engine manufacturing and assembly and GIS consulting.

As Hemant Mohapatra, partner at Lightspeed India Partners said in an earlier interaction, India has the opportunity to become a space technology partner for the world, given the mindset of building at low cost. “A lot of countries would look at India as their supplier of choice for semiconductors, spacetech, defence tech. For the first few years, this would probably be the ASEAN nations that trust India. It would be followed by friendly Western nations, and then many more countries over a period of time,” Mohapatra said.

AI Fuels Space Applications 

Where there’s innovation, AI cannot be far behind. And within spacetech, AI has a significant role to play when it comes to processing satellite sensor data, imagery and catering to next-gen solutions as spacetech matures.

A prominent example is GalaxEye, which is building a sensor that fuses synthetic aperture radar (SAR) and optical data providing earth observation (EO) data even through cloudy weather or night time for use cases in sectors such as agriculture, marine, defence and insurance. The company has signed a deal with Elon Musk’s SpaceX to launch these EO satellites.

Moreover, startups like InSpace Technologies and Digantara are figuring out solutions for in-space debris management which help maintain the safety of space assets from space debris. Mumbai-based Inspecity is building robotics, sensing and propulsion technologies that can extend the life of satellites in space, thereby increasing the amount of revenue that the satellite operator can make.

The advent of AI is expected to drive and accelerate these innovations not only due to productivity efficiency but also thanks to next-gen data analytics

Rajaram believes that AI will accelerate the design process for space systems and components, as well as optimise mission planning, fuel consumption, time of flight and other critical indicators.

Further, autonomous systems could potentially carry out more complex missions on the moon, Mars and other untouched territories, while improving processing of massive data from space and provide more relevant and accurate insights to scientists and researchers.

However, Pavestone’s Laxmikanth has a slightly different viewpoint here. He emphasises that data analytics is already being used at scale in this industry and it is still early in the hype cycle of AI / ML for its use cases to be established in an industry like spacetech.

“I believe role of AI-ML would not lie in mission critical use-cases where the data must be accurate and not probabilistic. It would rather lie in areas with huge datasets with non-mission critical use cases utilising geospatial data, telemetry data, and more,” he added.

India Spacetech Beyond 2030 

From the launch of India’s first satellite Aryabhata in 1975, to Chandrayaan-3’s historic moon landing, India’s spacetech ecosystem has made significant strides. And now startups are carrying the torch forward.

Despite these achievements, challenges remain.

It would be fair to say that across the Indian spacetech ecosystem, startups are currently in the growth stage, and no one has scaled up enough to hit the late stage and attract mega deals.

While investor interest in spacetech is growing, nearly 74% of investors have made only one deal within the ecosystem. Also, in 2024, no new fund specifically focused on spacetech startups has been launched so far.

This raises an important question: Are Indian VCs ready to increase their investments in spacetech startups with larger funding rounds, given the sector’s need for patient capital?

Roopan Aulakh, managing director at pi Ventures, acknowledges this issue. “In India, the availability of growth capital for spacetech startups remains a challenge. While seed funding is abundant, there are limited options for tech-mature, pre-revenue spacetech startups to secure the necessary capital to scale,” she said.

The potential, however, is undeniable and vast as space itself.

Spacetech is already integral to daily life, from weather forecasts to live television and navigation. Global space spending was recorded around $570 Bn+ in 2023 and is projected to nearly triple to $1.8 Tn by 2035 within the next decade.

For India’s spacetech ecosystem to thrive, it is imperative to drive adoption of space-centric applications by companies on the ground.

Unlike other sectors, spacetech can be a very unforgiving business, because the cost of failure is catastrophic. So it’s also natural that venture capital funds and investors are also playing it safe and still gauging the temperature of the ecosystem, before deploying the big cheques.

Speciale Invest’s Rajaram believes that the government’s INR 1,000 Cr fund is finally backing the talk. “It will make a bunch of other people think about this more seriously as a sector. It also sends a very positive signal internationally for investors to consider participating in the space sector in India.”

India is beginning to see more of such funds investing in deeptech sectors but it will always be a smaller market compared to the consumer market. There cannot be a one-size-fits-all model in a market of this size and magnitude, especially with the global opportunity being more clear in spacetech than in other sectors.

The post Time For Liftoff? How The VC View On India’s Spacetech Startups Is Changing appeared first on Inc42 Media.

As far as milestones go, the Indian startup ecosystem crossing the $150 Bn mark in funding in 2024 is a big moment for the investment landscape. The figure by itself may not speak volumes about the maturity of the Indian tech and startup ecosystem, but it does highlight the road taken to get there and the role played by Indian angel investors, global venture capital giants and hundreds of family offices backing Indian startups.

While hundreds of billions of dollars have been pumped into startups to get them to the point of maturity, many of these stakeholders believe it’s time for the next leg of the journey.

The maturity of the Indian startup ecosystem is playing out in terms of exits through IPOs or secondary sales or M&As, but what about backing the next generation of startups?

What often goes under the radar is that most of these exits and returns have gone to foreign investors. The share of domestic investment in India is estimated to be less than 15% over the past decade.

How keen are Indian investors — angels and family offices — to join the next wave? And in particular, are family offices the key to unlocking the domestic capital vault in India?

Behind The Family Office Wave In India

Concerns around foreign capital dominating the Indian market have lingered for years. We have seen founders and Indian fund managers bemoan the lack of domestic investor participation.

But the trigger point came around the end of 2022 when startups realised that foreign VCs were tightening their purses, and the current phase of growth for Indian startups depends on Indian investors. With this foundation laid down, VC firms and fund managers are looking to tap that all-important domestic investor pool for their fundraising.

Recent market trends, particularly around growth expectations and bloated valuations, have highlighted the importance of having domestic investors who know the Indian market and its peculiar challenges, particularly around profits and scaling up.

Domestic investors have learned valuable lessons from the period of FOMO investing and the “spray-and-pray” approach of 2020 and 2021, and now, there’s a lot more focus on value than valuation. Instances of governance lapses at unicorns have also led to some fears about a startup bubble. But fund managers claim domestic family offices and limited partners are more diligent at times because of how well they know the market.

Family offices are also realising that startups need patient capital and that they are best suited to deploy such capital, as they are more familiar with the ground reality, according to fund managers and multi-family office managers.

“So many foreign VCs are now realising that the Indian market does not have the depth for large deals, especially in deeptech. We are not creating an OpenAI or Anthropic yet, so founders need to seek investors that don’t bring the pressure of growing like OpenAI,” according to the family office manager for a Delhi NCR-based real estate giant.

Tech giants in the US and China took advantage of access to patient domestic investors who were willing to make long-term bets on new and disruptive ventures. In India, a similar shift is underway, and it’s vital for domestic capital to actively participate in this transformation to nurture homegrown innovation and create globally competitive companies.

India’s Patient Capital Pool

Startups, especially those led by founders from Tier II and Tier III towns, are increasingly looking to HNIs and family offices helmed by seasoned industrialists and entrepreneurs for funding. Unlike foreign investors, who might be focussed on achieving quick returns, domestic investors often have a more nuanced understanding of the local market and are better positioned to provide patient capital for this very reason.

This type of capital is crucial because it allows startups to grow sustainably without the immediate pressure of delivering rapid returns. Domestic investors bring the added advantage of regional market insights and experience, enabling them to offer more than just financial backing—they can offer strategic support as well.

Gaurav VK Singhvi, the founder of We Founder Circle and SEBI-registered Avinya Ventures, believes India needs a robust base of domestic investors, even those with a lower appetite for investing than global VC giants. Startups are seeing that large cheques come with pressure to grow and scale in a manner that the Indian market does not allow.

Singhvi added that the startup playbooks backed by foreign capital are now mature enough to be scaled up with domestic money. “Family offices are the true patient capital, and if we have to change the direction of Indian tech from established and mature sectors to emerging sectors, we need this patient capital. And the best way to attract more family offices is to have an established track record as a fund manager,” he told Inc42.

In this regard, Singhvi’s background as the founder of We Founder Circle as well as his record of exits as an angel investor have proven to be key propositions to attract family offices. Singhvi pointed out that with exits from the likes of BharatPe (80x returns), Rooter (32X returns), Zypp Electric (28x returns) and Coutloot (22x returns), many family offices are convinced that he is able to find the right deals.

However, bringing family offices on board for funds investing in emerging and new frontier technology is easier said than done.

How HNIs Are Testing The Waters

Waterfield Advisors’ managing director Rohan Paranjpey believes family offices in India are fortunately seeing the right indicators in many of the new AIFs launched in the past year. Fund managers are coming with unique insights and a track record that makes it easier for family offices to invest in funds. Family offices began their startup investments as a hobby, with smaller cheques of around INR 10 to 50 Lakh and limited fund allocations of 2% to 5%. But they are maturing fast.

“We are seeing in Tier II, III and IV that family offices are being created, which we had never heard of before. They are excited to invest in startups, but the first cheque may not be that large. Only when they are aligned more with the startup’s model, they are ready to invest more,” he added.

The focus was on testing the waters rather than making major commitments.

VC fund and family office managers believe there is reticence among older generations of industrialists and HNIs when it comes to such investments. However, millennial and generation Z members of a family office may want to allocate a small portion of the portfolio to such areas and sectors.

“I think with the involvement and the influence of the millennials and Generation Z [in family offices], and with the emergence of a lot of nuanced products in the market, the requirement or the ask is obviously rising,” a Bengaluru-based multi-family office manager said.

Today, family offices typically invest in startups through VC or angel funds, relying on these funds’ reputations. However, when they co-invest or invest directly, it gives them a chance to showcase their business expertise and build their own presence in the startup world.

Even so, founders often prefer to raise from established VC funds or angel funds rather than family offices, due to the perceived brand value of having such a name on their cap table. In some sectors such as insurance, having domestic investors is crucial, so these are sectors where family offices have an advantage over foreign VCs.

Why Multi-Family Offices Are Booming

Of course, running a family office is not unlike running a fund. They need the talent and the structure of an institutional fund. Often, this means hiring lawyers for various deals, getting chartered accountants to vet deals and statements, having a roadmap for the next generation in the family and so on.

This is where multi-family office managers and advisors come into play. Multi-family offices such as Entrust, Cervin Family Office, Legacy Growth, Waterfield Advisors and others are looking to become the pillars for horizontal aspects of running a family office. When it comes to cost, expertise in investments, legal compliances, estate planning and indeed rifts within the family, multi-family offices can be a good option for HNIs to test the waters.

“In a single family office, they prefer to have an in-house lawyer. But one lawyer is not enough, because one would be an expert in VC and startup investments, and another in real estate. So the moment you start adding all these layers, your cost increases.” the multi-family office manager quoted above added.

She added that in a multi office, HNIs can get access to multiple lawyers, registered experts in various investment classes as well as tax related experts.

Sharan Asher who runs Eragon Ventures, the family office for the former promoters of J.B. Chemicals and Pharmaceuticals, points out another challenge: managing family offices isn’t yet seen as a serious career option among fund managers. But having a multi-family office means the HNI family can bank on those with the right expertise and credentials.

One cannot understate the significance of IPOs and the public markets in swaying the domestic LPs and investor base towards the startup ecosystem.

In particular, the massive gains for stocks such as Zomato, TBO Tek, Policybazaar, Honasa and RateGain in the past year, as well as the boom in the SME IPO market have turned heads. It’s not just about the large brand names but also smaller promising IPOs, and with the likes of Swiggy entering public markets soon, startups and funds are likely to see more domestic HNIs and family offices queuing up to back them.

Domestic family offices and investors are more than familiar with the dynamics of public markets — some of the promoters behind these offices lead public companies themselves. For these investors, the IPO-led exit momentum is a massive validation of the maturity of the new-age tech and startup ecosystem.

And it’s creating a virtuous cycle where each wave of successful listing brings gains and attracts more family offices to the investor pool. No wonder then that there’s a lot of optimism around India’s domestic capital finally showing its true colours.

The post Behind The Rise Of Family Offices Changing The Indian Startup Investment Landscape appeared first on Inc42 Media.

The line between venture capital and private equity in India is fading rapidly. More and more PE firms are looking at late-stage deals and even growth-stage investments in startups as VC appetite wanes and as funds look to exit their portfolio companies at the right time.

The wave of secondary deals and ‘forced exits’ is driving the PE ecosystem. The likes of Kedaara Capital, Investcorp, TVS Capital, ChrysCapital are now giving a VC-like twist to the traditional PE investment thesis.

Besides global funds such as KKR, Blackstone, CVC, Warburg Pincus, Silver Lake, Carlyle Group, General Atlantic and others have also backed some of the most scaled up startups in India since 2014.

In many cases, these global PE giants came in at a much earlier stage than they might have in the US or Europe because of their experience in scaling up tech giants in the US. It was believed that having these PEs on the cap table would bring a measure of maturity to the Indian tech ecosystem much faster than otherwise.

The Blurring Of Lines

VC and private equity firms have always been fundamentally different. Venture capital comes in early, even at the pre-revenue stage, and therefore, VCs assume a lot of the risk inherent in startup investments. Over the years, the returns and investment horizons have been built around this risk factor.

As one PE fund manager told Inc42 this week, “VCs are the pioneers, but this takes time. They sit on the cap table for decades and have a soft influence. But PEs require more control. In India, PEs have long acted like VCs and have been patient with their bets, and now they are seeing these bets pay off with public listings of startups and secondary deals.”

PE firms differ significantly from VCs and are classed separately because of the stage at which they come in. “That was a trend some time ago when global VC funds used to write large cheques for growth stage Indian startups. Of late, very few venture capital firms are willing to engage in $100 Mn deals as standalone investors. The funding winter has not completely thawed and VC funds are pulling back in certain sectors,” Gaurav Sharma, head of Investcorp’s India business, told Inc42.

Take the example of Wakefit, which raised $40 Mn from Bahrain-headquartered Investcorp in January 2023 after reaching a scale of INR 800 Cr and more than 50 stores around India. Peak XV Partners invested five years before Investcorp and that investment saw Wakefit through the riskier stages and the early challenges.

Despite this, some in the PE world might call this an ‘early deal’ on Invescorp’s part, because compared to how PEs operate outside India, this is a fairly low ticket size and Wakefit does not have the solid track record that private equity players typically bank on.

Startups Reaching Maturity

Globally, PEs invest in companies that have an established track record of growing a sustainable business and look to exit in three to five years. On the other hand, some VCs stick around on the cap table for more than a decade without an exit. VCs also value companies based on potential rather than track record.

Fundamentally, PE is investing in mature companies, and with many startups showing some signs of a mature business, the Indian market is seeing a shift where PEs are eyeing growth-stage deals as well in addition to late-stage deals.

Bengaluru-based Wakefit crossed INR 1,000 Cr or roughly $120 Mn in revenue in FY24, whereas it is valued at well over $300 Mn. But with the company on the verge of profitability, it’s eyeing an IPO in the next two years and the late investors will look to exit.

One cannot deny the role played by IPOs in this because PEs like the fact that they can exit as per thesis on their exit points and still earn some value from the investment. As a result, we are seeing more small cheques from PEs, too, in companies that don’t need high capitalisation but just enough capital to get to the IPO stage.

Plus, in light of the lack of large size deals by VCs, many institutional investors are looking to invest in PE funds that are taking up pre-IPO positions through secondary deals or primary investing.

The Rise Of Indian Private Equity

Chennai-based TVS Capital Funds has a strong thesis on family-owned businesses and emerging sectors with large TAMs, which align with the PE fund’s strengths and the legacy of the family-owned TVS automobile empire.

TVS’ Gopal Srinivasan told Inc42, “Our portfolio construction is around three stages: venture growth, classic growth and late growth. Late growth is kind of moderate returns with very low risk, classic growth is medium risk, medium to high returns, and venture growth is higher risk and higher returns.”

Since its inception in 2007, the fund has invested more than INR 3,000 Cr across companies such as Nykaa, Digit Insurance, Five Star Business Finance, all of which have hit the public markets since. And often, these deals came at the venture growth stage.

But that doesn’t mean that PE funds don’t have their unique propositions. Sharma pointed to Investcorp’s $125 Mn buyout of NSEIT (the National Stock Exchange’s digital technology arm), which is completely beyond the scope of VC investing. He believes that in India, PEs are comfortable making such buyout or take-private deals as well as investing in growth stages as well, largely because of how the route to public listing has changed.

The Investcorp India head added that VCs have been instrumental in the startup growth story, but after reaching a certain scale a startup often requires a different organisational structure. Just like that companies require different systems and processes once they mature and therefore private equity deals are not just financial investments. They are inherently strategic in nature.

In a similar vein Kedaara Capital cofounder Manish Kejriwal believes that success in private equity goes beyond just delivering returns, and it’s about setting a culture of governance and systems for operations.

“Venture capital is built on identifying disruptive potential and nurturing new ideas, private equity focuses on optimising established companies for sustained growth and performance,” he said, but added that PEs cannot ignore the softer aspects of investing such as trust and mentorship and only look at the numbers.

Kedaara Capital raised a $1.7 Bn private equity fund, the largest ever in India, and is looking to bring its local expertise and deep knowledge of the key sectors to the startup ecosystem’s scaled-up companies. With the likes of Blackstone, Carlyle, General Atlantic, Warburg Pincus and others hunting for deals to exit their Indian portfolio companies, Indian PE firms are in the driver’s seat.

Kedaara cofounder Sunish Sharma has said in the past that the firm will look to provide exits to global backers that have plenty of dry powder but find themselves in need of more deal flow in India. “When you get a window for an IPO, you take it and don’t try to over-optimise it,” he said in an interview in July.

PE fund managers credit the IPO wave for the heightened PE deal activity in India even for traditionally weak sectors like consumer and retail as well as in healthcare, and core technology.

According to a report by Grant Thornton, India recorded 643 deals worth $17 Bn in the first half of 2024, with consumer-driven sectors leading the charge. Many funds are looking to reduce their exposure to China, which has definitely fuelled the manufacturing and EV sector.

There are challenges too. Most PE investors find it hard to deal with startups with overly rich valuations. This poses a hurdle for PE fund managers in securing the right deal. However, with several venture capital funds or alternative investment funds approaching end-of-tenure, they are putting their portfolio on sale and this is a particularly attractive proposition for PE firms geared towards buyouts.

The post Is The Line Between Private Equity And VC Funds Blurring? appeared first on Inc42 Media.

India’s venture capital firms and fund managers often talk about innovation, but in the age of generative AI and deeptech, such talks seem shallow.

That’s because when we look at the startups that have raised the most funds in India over the past two years, or the ones that have given exits, the innovation is only seen in the business models and commercial models, rather than technology itself.

For instance, when it comes to AI and deeptech, Indian startups have largely benefitted from the IP creation and technology created in Silicon Valley and Europe, but only a few claim to have created such an IP. And so comes the perennial question — when Indians are the ones building products and platforms for Google, Microsoft, Amazon, Meta and other giants, why have no such companies emerged from India in the past decade?

The answer, among Indian VCs at least, is the lack of the patient and domestic capital base that was needed to create those giants in the west. And as the first wave of startups mature, it’s unlikely that such large outcomes will ever be seen in India.

But large outcomes is something that VCs should be chasing. And what can be larger than creating the next Nvidia or OpenAI in India, as foolhardy as it may seem right now?

As OpenAI’s Sam Altman said in 2023 Indian startups cannot hope to build something like a large language model (LLM) for $10 Mn or even $100 Mn. Microsoft poured in billions and so did other investors, leading to  the stage where OpenAI stands today.

Even so, it’s a loss-making company — the latest projections show a staggering loss of $14 Bn even in 2026. Yet, no one can argue that OpenAI has created the groundswell for generative AI and machine learning that will have a lasting impact.

Despite the ongoing funding challenges, the sector has continuously grown in the last three years. In 2023, deeptech startups raised $496 Mn compared to $397 Mn in 2022, according to Inc42’s latest “Indian Tech Startup Funding Report 2023”.

Overall, between 2014 and 2023, deeptech startups in India secured over $1.5 Bn in funding across 343+ deals, but many of these companies are much smaller in scale versus the traditional tech giants. So what will it take for India to grow its deeptech expertise?

Deeptech Is Just Beginning

It’s perhaps not surprising to some investors that Indian companies cannot come close to behemoths such as OpenAI or Google. The DNA of tech in India is quite different from that in the West, according to a Bengaluru-based early-stage fund’s founder.

As he said, in the West, the idea in the early 1980s and 1990s was always to build something for the world to use, and export technology because the US market was limited at that time. “India began late, and therefore, we will be late on many things. When we decided to leverage tech, there was the realisation that no one is catering to Indian problems and consumers. Tech startups could only build on top of existing IP, and this also suited us because we were focussing inwards rather than outwards,” the founding partner added.

That’s something other marquee funds are also claiming. Peak XV’s Rajan Anandan told Inc42 last year that deeptech playbooks are now being written in India, and typically, Indian startups move from application to the tech side because that’s the go-to-market strategy that has worked so far. As Anandan put it, AI startups have been around for decades, and investors have backed them for years, but what India needs now is the infrastructure

And this is also why viewing AI as the primary deeptech segment is perhaps facetious and myopic. “We are seeing what’s happening beyond AI and that’s very critical for the Indian tech economy to mature beyond where we are. [At Peak XV] we have two semiconductor companies. Mindgrove is making systems on chip. InCore is building a fabless semiconductor startup, while Newtrace is working to improve India’s green hydrogen production,” Anandan added, indicating the beginning of VCs backing startups creating tech IPs in India.

The True Depth Of Deeptech

Developing a global generative AI success story from India means dealing with the reality of how expensive it is currently, even though deeptech itself allows so many varied business models, according to All In Capital founder Kushal Bhagia.

We are talking about robotics, industry 5.0, machine learning, generative AI, semiconductors, AI computing capacity and of course data refinement and enrichment. All of these are open for disruption, Bhagia said.

Most early stage investors do not have the appetite and today, startups cannot build tech IP with 10s of millions of dollars, like it was possible in the 1980s. The investor quoted above added, “The age of the garage startups is well and truly over. Today, the technology that is defining the world is being made in shiny buildings. Do you really expect Indian companies to build the same from the garage?”

What many investors are asking for is not just domestic capital, but domestic capital that is patient. To extend the analogy, Indian startups are building with a garage mindset and competing with giants. While it’s commendable, this cannot be done on a small pool of capital that demands an exit in six to seven years.

But at the same time, there is a bit of a chicken and egg problem. As one fund manager who has backed companies like LLM maker Sarvam AI, semiconductor IP company InCore and other startups in the deeptech space told us, “Till there is a big outcome from India, all deeptech bets will seem small. Just like till Flipkart, Indian ecommerce was just an India story.”

What about VCs that are very bullish and long on deeptech. The likes of pi Ventures, Bharat Innovation Fund, Exfinity Ventures, Speciale Invest, Bharat Innovation Fund among a host of other funds are specifically looking at deeptech sectors. BIF’s Ashwin Raguraman is one of the most optimistic investors when it comes to deeptech in India.

He told Inc42 that startups are more than capable of resolving some of the most pressing problems in India — from access to healthcare to agriculture to education to social welfare and governance. So far they have not been given the foundation that is needed. With the introduction of the India AI Mission, which promises compute capacity, besides access to data and network, some of the foundation is being taken care of.

“As civilisations evolve, things are bound to become complex. The more complex the problem, the deeper the technology you need to resolve them. I’m certain that the deeptech built by talent from India is going to play a big role in solving complex global problems,” Raguraman, one of the founders of the $100 Mn deeptech focussed fund, said.

Patient Capital In The Age Of Exits

This group of investors, which has put the wagon behind deeptech, surprisingly believe that deeptech investments will outlast and outperform consumer-facing sectors in the long run. These are the models that are creating foundations — both hardware and software — for the future.

“When a deeptech startup goes past the initial stage of product creation and achieves product market fit, follow-on generalist investors are willing to come in because there’s tech acting as a differentiator, thereby offering strong moats and better opportunities to scale,” BIF’s founding partner added.

But he also acknowledges that getting there is not for every deeptech startup. Finding the product-market fit is hard in the deeptech space because these companies are creating the very technology that is rapidly evolving all the time. So deeptech is not for investors without the tenacity to last this course.

Unfortunately, the current attention of most of the VC ecosystem is on outcomes such as public offerings and exits through secondary. Over the past two months, we have written about this movement, which has been necessitated by the upcoming fund closure deadlines of some of the most prominent funds in India.

Exits through IPOs are also being heralded for multibagger returns and vindication of investment. Zomato is one example, but ask any deeptech VC and they will tell you the opportunity is larger on the IP and tech innovation side than what most investors even understand.

The narratives around exits and IPOs will not be seen in deeptech for at least a decade. Do investors have the patience to endure another decade of limited outcomes, just as they are reaping the fruits of the past decade?

The post India’s Deeptech Problem: Where Are The VCs Backing Startups Creating IP, Innovation? appeared first on Inc42 Media.

With one quarter to go in 2024, we are beginning to another inflection point in the Indian startup ecosystem, with VC funds and investors, in particular, displaying a lot more optimism than just one year ago. And in particular, we are seeing a shift from valuations to value.

Much of this bullishness was on display at MoneyX by Inc42 last week, but even outside the spotlight of the stage, conversations revolved around true valuations, monetisation and profits, the IPO frenzy and exits. When just last year, perhaps the mood was a bit more sombre.

Indeed, over the past two months, we have delved into the factors that have given Indian venture capital firms this brighter view of things — including the improving outlook for exits through IPOs and the secondary market for startups.

But what’s often unspoken in these conversations is the rationalisation in startup valuations. The discussion around valuations is usually restricted to the public markets where we have seen debates on Zomato’s staggering rise to $30 Bn and beyond, and on the flipside, Paytm currently trading at over 70% lower than its listing price.

These fluctuations in valuations are pretty much expected in the world of publicly listed companies, but for startups, the conversation has pretty much always been about rising valuations, or when things go pear-shaped and there’s a big erosion — think, BYJU’S or Pharmeasy.

That’s until now. In 2024, there is a more measured and rational view on valuations and the fact that many startups are now coming closer to their true value than before. In particular, the fact that even smaller IPOs are gaining a lot of traction and interest is also a great sign for startup investors, and another factor behind the shift from vanity valuation to real value.

From Vanity Valuation To Real Value

Several noted investors told Inc42 last week that if the past decade was about backing the potential of Indian startups, the next few years will be about backing the value that has been created from this potential. And for many VCs, the age of unicorns is over, or perhaps the metric by which a unicorn is defined has changed.

Until FY23, only a handful of unicorns were profitable. But this tide seems to be turning in FY24 as companies have figured out ‘comfortable’ monetisation models. Zomato, Honasa, OYO have shown that companies can scale up and yet remain profitable.

It’s no longer the choice between profits and revenue that it used to be, and valuations, therefore, are not the metric by which to judge the startups that need to be celebrated.

Peak XV Partners’ managing director Mohit Bhatnagar admitted to having a problem with the term unicorn, because as an investor, it gives the wrong signal. He believes that valuation only truly matters at the time of an exit, and to get this valuation, investors have to back value.

“It’s time we look at redefining what it means to be a unicorn. While surely, it cannot always be about profits, we have to judge companies on how much revenue they are generating and are they closing the gap when it comes to going breakeven. This is the real metric and the days of chasing these vanity valuations are over,” he added.

In a similar vein, early-stage and angel investor Rajesh Sawhney believes that the wave of smaller IPOs, which have also delivered the returns to pre-IPO investors, shows that valuation was never the right north star for founders.

“Of course, valuations are important when you exit, but that cannot be the reason you invest in startups. Founders bargaining for a higher valuation is a red flag in most cases, and only in a fraction of investments does this pay off. But why take that risk at all? Venture investing is already risky,” Sawhney told Inc42.

Why Valuations Don’t Matter For Some VCs

Others such as Hiro Mashita, founder and director of Singapore-based m&s Partners, had a different take on valuations. Mashita said that as early investors, the potential upside can be so big that valuation at the time of investing is often immaterial.

Mashita pointed to his experience of investing in Razorpay’s seed round in 2015, when the company had just started out and was not making much revenue to its current valuation of over $7.5 Bn. He claimed his investment has grown by over 700X since the seed round. So for him, it was not about the valuation but the value that Razorpay could unlock.

Interestingly, Mashita also cited the example of Y Combinator founder Paul Graham, who once said, “Valuation matters far, far less than the decision of whether to invest or not. The spread between bargain and outrageous startup valuations can’t be more than 5X, in a world where the best investments can return 1,000X.”

Incidentally, Y Combinator also invested in Razorpay’s seed round, and the company is now looking to list in India by FY26 or next year.

IPOs & Indian Startup Valuations

Speaking of IPOs — many VCs have seen the writing on the wall for a number of years, and have held onto the belief that private valuations are just a number on a paper that does not matter for many years.

The fact is that many VCs feel vindicated about their thoughts on valuations today, than a few years ago, because of the fact that today startups are at the stage where they can grow into their valuations more easily.

The ripe market for IPOs is a big part of this vindication. Relatively small size of some new-age tech public listings this year and the spate of SME IPOs (even accounting for the potential bubble there) have also justified their patience.

When criticism around bloated valuations first came up in 2021 during the ZIRP investing bubble, Blume Ventures’ partner Sajith Pai wrote, “VCs found that the techniques that public market investors used couldn’t hold for younger, fast-growing companies with unpredictable revenue. Through long years of iteration, they came with the practice or protocol of playing long-term multiparty staging games to take the company from idea to IPO.”

At the time, Pai claimed the VC valuation process has been honed and has evolved over the years, and can at times lead to situations where certain startups seem to have ‘absurd’ valuation for their particular stages. But also he warned that comparing these valuations with public markets misses a big point.

“Over time, these ‘derived valuations’ correct themselves out, and in the long run, as the startups move to an IPO, the values converge with those of their public market counterparts,” Pai wrote in 2021

This seems to have presaged what we are seeing in 2024. A lot of the private market valuations are either sobering to meet public market benchmarks and when private companies go public, their valuations reach more rational levels seemingly automatically.

In many ways, this too is a sign of maturity of the market, of a necessary step in the evolution of Indian startups. Even the most absurd valuations tend to get corrected in the long run. And when they do, as they have now, the real value comes to the fore.

The post From Valuation To Value: Indian VCs Shift The Gears appeared first on Inc42 Media.

India’s startup ecosystem has seen over $150 Bn in funding in the past decade. That is a phenomenal number by itself, and it’s something a lot of the ecosystem stakeholders seem to forget when talking about why India is such a major destination for tech investors.

But it perhaps might not surprise anyone to know that almost 90% of this funding has come from overseas investors — sovereign wealth funds, large private equity players, crossover funds and venture capital giants that began their journey in Silicon Valley.

As the Indian market matured and evolved, an infrastructural substrate was formed that has become the bedrock for the Indian startup story. So far, the story has been about finding the customers and the consumers. Over the past 10 years, startups have gone from novelty to must-haves in many cases. And that has led to this moment in time — where the maturity and the patience of the past decade are translating into profits, consistent revenue growth, clarity on monetisation and exits.

In fact, the experience of the past two years has also put to rest some of the grave concerns around FOMO investing, spray-and-pray approach and governance lapses. The value erosion seen in the past year is being called a blessing in disguise.

So naturally, many VCs and investors believe that now is the time for domestic wealth to capitalise on this maturity. It’s by no means a new call-to-action.

Domestic Funds Stepping Up

When we launched MoneyX last year, this was a trend just about to start bubbling. But now, 14 months later, as we sit on the cusp of another edition of MoneyX, there’s little doubt that many Indian HNIs, family offices and institutional funds are finally alive to the startup opportunity.

The Department for Promotion of Industry and Internal Trade (DPIIT) currently houses more than 1.5 lakh startups, up from a few thousand startups just a decade ago, which also highlights the pipeline of entrepreneurial activity in the country. And many of these entrepreneurs are now turning to solve problems that are closer to Indian investors than global funds.

These founders — from Tier 2 and 3 towns — are turning to HNIs and family offices led by small and large industrialists and entrepreneurs for funds.

This trend has already played out in other geographies, where startups have dominated the tech discourse. When we look at the United States or China, tech giants in these countries built their foundations on a strong base of domestic capital.

“Take Apple, for instance, where Sequoia Capital was an early backer. The very same Sequoia came into India in the mid-2000s and created a massive portfolio of Indian startups. But now the times are changing, which is why they are sharper on the India thesis and have created an India-specific identity with Peak XV,” a general partner at SEBI-registered alternative investment fund told Inc42.

The GP added that there is a clear need for a domestic base of investors because we are no longer in the moment where Indian startups need the deep pockets of foreign funds for customer acquisition. Many of these playbooks that have been fuelled by foreign capital are now mature enough to be used without the need for that massive capital infusion.

“Of course, there are unicorns like Zepto or Rapido which have courted US-based funds in 2024, but by and large, the needs of the early-stage and growth-stage market are being funded by domestic investors. Even large pre-IPO rounds such as Swiggy’s are seeing a lot of Indian HNIs which will have a halo effect on the market,” the same partner added.

Startup IPO Boom Attracts Domestic Investors

Indeed, one cannot understate the significance of IPOs and the public markets in swaying the domestic LPs and investor base towards the startup ecosystem. In particular, the massive gains for stocks such as Zomato, TBO Tek, Policybazaar, Honasa, RateGain, Awfis, Zaggle and others highlight the variety in the size and scale of companies that have listed and made gains.

It also shows that it’s not just about the large brand names but also smaller IPOs which are showing promise. No surprise then that there is a queue of celebrities and HNIs backing Swiggy in its pre-IPO rounds at the moment.

For domestic HNIs and family office investors, who are more habituated to the dynamics of public markets, IPO-led exits and the promise of large IPOs mark a significant turnaround point. Exits create a virtuous cycle where each wave of successful listing brings in gains that help fund emerging startups.

A new wave of domestic investors is great, but a revival in overall startup funding will truly crown this moment. According to WaterBridge Ventures founder and managing partner Manish Kheterpal, Despite the rise in funding raised by India-focussed funds over the last few years, domestic capital accounts for around 15% of all funding for Indian startups.

He added that today, family offices and their investment managers have plenty of options and they can diversify their investments based on their liquidity needs. “From a point of view of financial risk diversification, family offices have access to experienced fund managers that have a good track record in India. On the other hand, those with higher risk appetite can go for direct investing and more granularly control their exposure,” Kheterpal said.

Government policy has looked to encourage more domestic investments in the venture capital and startup ecosystem. The INR 10K Cr SIDBI Fund of Funds is the biggest signal. Launched in 2016, the FoF was aimed at providing a boost to the Indian startup ecosystem and increasing capital inflows into the space.

As of November 2023, it has facilitated investments worth INR 17,534 Cr in 938 startups, according to a CRISIL report. And in recent years, there has been an effort to focus on particular sectors to back this holistic fund.

For instance, following the privatisation of the space sector in 2020, and after introducing 100% foreign direct investments (FDI) for spacetech in February this year, the Indian government announced an INR 1,000 Cr state-backed venture fund for the space economy.

This underlines an ambition on the part of the government that needs backing from domestic investors. The 2024 union budget also included a key reform to reduce the long-term capital gains (LTCG) tax on unlisted equities, bringing the tax rate down from 20% to 12.5%, which is another major boost that domestic investors have waited for.

These developments are a great way to encourage more domestic investors to participate in the startup ecosystem. Mobilising more domestic resources is key to helping startups grow without the pressure that usually comes with such large foreign investors.

It’s going to be many years before foreign capital becomes less relevant for startups. The globalised nature of many emerging sectors such as semiconductors or AI means that foreign capital will continue to dictate the course of startups.

These are areas where Indian startups are competing in a high-pressure environment.

In contrast, Indian investors and family offices tend to have a more patient approach to exits and growth targets since they realise how challenging it is to scale businesses up in the Indian context. This understanding of the constraints on Indian founders is another key advantage of domestic capital and will play a role in the growth of consumer tech, fintech and other areas that address uniquely Indian problems.

Having said that, the Indian ecosystem needs a better balance of both overseas investors and a domestic pool. It would be folly to overlook the role of foreign investors in the Indian startup story, but perhaps, the next few chapters need Indian investors as the lead authors.

The post Why Indian Startups Need More Domestic LPs, Funds appeared first on Inc42 Media.

Festive season sales are right around the corner, and it’s not just ecommerce marketplaces offering discounts. In fact, many of the startups running these sales are also being put on the market at steep discounts, thanks to the spate of secondary deals involving prominent Indian startups.

The wave of secondary deals in the first half of the year saw more than a dozen such deals, which gave early investors exits from the likes of Capillary, ixigo, Urban Company, Porter, and Pocket FM, among other startups.

Many of these deals came at a discount. Other similar deals such as Meesho are reported to be in the works as well which would see the ecommerce unicorn raise funds at a 20% valuation cut, while giving an exit to some of its existing shareholders.

And there are dedicated secondary funds being floated to accommodate this wave of secondary rounds. For instance, former Peak XV Partners managing director Piyush Gupta set up a secondary-focussed fund, which intends to work closely with Peak XV to facilitate secondary transactions involving the latter’s portfolio companies.

Similarly, asset management company 360 ONE Asset launched the INR 4,000 Cr Special Opportunities Fund-12 to invest in late-stage startups. The company claimed that this is India’s first alternative investment fund (AIF) dedicated to the private equity secondary market.

And many of these funds are coming into the picture for startups at a critical stage, closer to the exit point than early investors. This has given a lot of comfort to LPs that have been stung by the long-horizon primary investment route at the early stage.

Plus, the entry of new micro VC firms with tighter entry and exit points is also attracting attention from LPs, who are looking at returns through secondary deals in a couple of years, or even smaller IPOs on the SME board of the Bombay Stock Exchange.

The secondary market has several dimensions, with angel investors in the mix, as well as early-stage institutional funds, incubator-style funds (for example, Y Combinator), and family offices. And when we talk about VC firms or funds, it goes without saying that limited partners (LPs) are just as keen on getting the right secondary structure.

Incidentally, many of the angel investors that have found exits through secondaries in 2021 are also LPs in funds that executed these secondaries. In these cases, their investments as angels could very well have netted them a better return in 2021 than the capital they invested through a fund after that.

Exits are more readily available for angels since these investors enter very early in the company’s life cycle. Even some seed and growth funds might want to clean up cap tables during subsequent transactions. Angels are typically the first to get exits if the company is performing well. This is the key factor:

“That doesn’t change in any market or any stage. That, obviously, is a precondition or a given. But three years ago, the market had a fairly heady period post-Covid. Most of the funds are sitting on huge amounts of dry powder and have slowed down deployment. This has repressed some of the value that would have gotten unlocked with more consistent funding,” according to an angel investor, who runs a pan-India real estate company.

So today, these clean-ups are happening at a discount.

Raining Discounts For Secondary Investors

To put it plainly, secondaries are beneficial for outgoing investors in a good market. But with even primary capital slowing down, the current secondary market is heavily skewed in favour of buyers. Even in the case of strong assets, investors often face discounts, which is difficult for many to accept.

Today, the question isn’t whether there will be a discount, but how steep it will be. In late-stage deals, incoming investors are almost guaranteed a significant discount.

“Older funds want to exit, and they know they have an overvalued asset, so a small discount is palatable. But it’s not one or two companies that have gotten tremendously high valuation — pretty much every company did during the 2021 capital rush. Now many of these without a successful product-market fit have that money in the bank. The company’s valuation doesn’t get challenged because the company doesn’t come to the market for funds. If you’re not in the market, your valuation is not relevant. But as soon as you go to market, your valuation is shredded,” a general partner at a consumer-centric fund claimed.

We’re not yet past this phase. Over the next 6 to 12 months, more companies will likely seek funding, which will challenge their valuations. Some companies have realised that it’s better to manage valuations proactively by talking to current investors to create an exit path, even if it requires some sacrifices.

There are multiple instances of funds cutting valuations and companies raising secondaries during down rounds. We will see some of this continue to play out over the next 12-14 months. Many of these startups raised large amounts of capital in the 2020-2021 period. For them, secondaries are not very easy to come by.

“Many of these companies are going at a discount compared to their on-paper valuation, and this is not the liquidity discount that one typically sees in a good market. Whereas in a bull market, the discount ranges from 10%-20%, nowadays companies are being put on the secondary market for as high as a 50% discount,” a principal at a Mumbai-based growth and early fund told Inc42.

As one investor puts it, this is more of an “erosion” than a discount, but this is the reality for many venture capital firms looking to close the books on existing funds under SEBI guidelines.

Valuation Correction Or Erosion?

Many investors played their cards well during the liquidity boom of 2021, but by 2024, those same investors are struggling to exit their overvalued assets.

“We got a very good exit and with very good founders. There was a startup, which wanted to clean up the cap table. They wanted all the angels gone. So there are times when the incoming investor wants to clean up the cap table, especially the non-institutional players that have been around since the pre-seed days,” the principal quoted above added.

In many instances, angels would have preferred to remain on the cap table, but contesting larger investors could lead to greater value erosion. In the past, early investors may have fought against forced secondaries, but today, few are contesting them. Most companies pursuing secondary rounds are backed by funds nearing the end of their term.

“VC firms are sitting on dry powder, and if they are investing primary capital into the company, they like taking a little bit of a bite from the secondary as well. From that perspective, it helps them get a slightly better blended valuation. Here we are seeing lower discounts so even the outgoing investor is happier. It helps the new shareholders manage the valuation a little bit better,” said a Mumbai-based angel investor who has backed more than four unicorns at the seed stage.

The Tricky Secondary Market For Startup VCs

However, from an LP perspective, the outlook is less optimistic. Secondary deals are trickier for funds, as few companies can maintain their peak 2021 valuations. With many funds approaching the end of their lifecycle, they’re listing their best-performing companies for secondary sales.

“But the reality is that they have to sell off at least a large chunk of their portfolio, if not the entire portfolio. That’s where we are seeing some of the funds are either trying to create a continuity fund or buy out their own assets. But these are getting different kinds of responses from LPs,” added a Kolkata-based entrepreneur, who runs a family office that invests in funds and consumer brands.

As is often the case, some deals succeed, while others don’t. Opportunistic entities are stepping in, with LPs supporting secondary funds that buy the most attractive portions of existing portfolios. But this is easier said than done. Many companies with potential lack a clear exit path for large institutional investors.

The situation may improve over the next year or two. Even in a market ripe for secondaries, more capital is still going into primary investments. “No incoming institution will consider giving exit to outgoing investors as a primary objective. They will first look at the underlying investment, which means they want to allocate their resources to the company rather than the earlier investor,” noted a multifamily office manager in Delhi NCR.

This presents a significant challenge in the current market. SEBI has also increased pressure on funds regarding extensions, performance, and liquidation timelines. While the secondary market is becoming more significant for startup investors, many older funds will struggle to reach favourable resolutions.

The post Equity On Discount: How The Startup Secondary Market Is Shaping Up For VCs, LPs appeared first on Inc42 Media.

India’s private equity (PE) and venture capital (VC) landscape is already bracing itself for a slew of changes — from skill-based certification for key personnel at AIFs to more transparency in how their funds are being liquidated. Many of these, of course, don’t affect Indian VC firms run by professional fund managers, but the latest demand by SEBI is likely to change that.

According to an ET report, SEBI recently asked AIFs or Indian VC firms to reveal which of their investors or limited partners (LPs) have entered into deals with preferential terms or a bigger say in the deal making process. Of course, this has opened up concerns about whether VC funds are being fair and equal in courting the interest of HNIs, family offices, corporate funds and institutional investors alike.

As per SEBI data, India is home to over 1,200 AIFs and many of these have launched multiple schemes or funds over the years, and much of the investment in Indian startups happens through these AIFs, which raise capital through LPs across classes as mentioned above.

Sources in the industry tell us that SEBI has received complaints from some influential LPs about preferential treatment to other limited partners. The practice in question is called a side letter or a contribution agreement, and in many cases, it governs terms for preferential returns timelines as well as exposure of the LP to certain kinds of assets.

In some cases, limited partners want to pay lower fees, which could be the case for corporate LPs or institutional funds, whereas HNIs and family offices might be asked to pay more. Fund managers claim this is typical practice because the former class of LPs contributes more to a corpus, whereas the latter are more in number.

So consider the example of some Indian VC firms which have existed for well over a decade. In these cases, the corpus size typically grows significantly from one fund to another. In these cases, the increase in the corpus is more likely to come from institutional or corporate LPs rather than several dozens of HNIs.

“It’s not surprising that SEBI is asking now about LPs and the private placement memorandum (PPM). PPM should be standard for everyone, but we all know that’s not the case. In fact, even those LPs that may be complaining now knew about it,“ says a Bengaluru-based early stage fund manager.

The Question Of Side Letters

It’s very possible that such side letters were allowed by SEBI when startup investments and AIFs were not everywhere. But that’s not the case anymore. The biggest example is Shark Tank India, which will soon go into production for its fourth season.

The show was well-timed, coming at the tail end of 2021, when the pandemic had turned many Indian startups such as into household brands. And it garnered plenty of attention due to bombastic angel investors or sharks.

And this is just my opinion — since then Shark Tank India has matured and it’s no longer a shouty reality show. Its third season actually merited some praise for how it dealt with critical aspects of building a brand or startup. But that’s just one example.

We have also seen a proliferation of micro VC firms — a trend we covered a couple of weeks ago — and family offices looking to diversify. It’s only right that some of these family offices backed by traditional and legacy businesses might have some concerns about how AIFs and VC funds invest their money.

One multi-family office fund manager told Inc42 that typically large institutional LPs get a 25% discount on management fees, 1.5% vs the 2% that other LPs pay. To compensate for those LPs that backed a fund during its first close, investors in subsequent round closes are charged an equalisation premium.

Larger conglomerates such as Reliance and Tata are also LPs in funds, and such large corporate venture funds tend to get favourable terms in the market from funds, especially those run by pedigreed fund managers.

 “Having a large CVC as a corporate LP means your portfolio gets direct exposure to the LP’s network, which then allows them to scale up and grow faster. It’s a win-win for the fund manager and the other LPs. But it’s a problem when large corporate giants become acquisitive and acquire companies in the fund’s portfolio in distress situations.”

This leaves other LPs holding the bag of losses. Such a case gained prominence in 2021 when Reliance invested in Kalaari Capital on the heels of acquiring four companies in Kalaari’s portfolio, with Urban Ladder acquired at a 75% discount to its last valuation.

How SEBI’s Ask Impacts Indian VCs 

“Asking for more transparency from the entities it regulates is SEBI’s prerogative. But as an investor I also want to have the right kind of diversification in my portfolio, so now it will become tricky for me to invest in pooled funds if SEBI bars side letters,” according to a principal at a Mumbai-based private equity firm.

This is where side letters are used as leverage by fund managers to bring on large LPs. These LPs may have investment policies that forbid investments in certain business sectors, so fund managers have to accommodate their requests if they want their capital.

All the capital raised ends up in a blind pool, but with side letters in play, the pool is not so blind. It means fund managers have enough visibility of the pool to know which LPs to draw down or basically call in the commitment.

So when the fund is investing in an EV startup but the large automobile OEM that is a major LP does not want that exposure, the fund is forced to ask for a bigger drawdown from its other LPs to fulfil the round. The argument can be extended to any disruptive startup that is seeking capital from funds that have incumbents as LPs.

If SEBI bars side letters, many of these rounds might indeed fall through the cracks as the fund will be unable to meet the commitment.

The Push For Standards

In recent times it has become clear that SEBI has looked to standardise AIFs and startup investments. Side letters and special deals run contrary to this direction.

Since side letters govern terms related to management fees at times, many LPs feel short changed when there is disparity in these terms. It can lead to friction between LPs and this could lead to reputational damage to the VC firm and the fund manager.

More importantly SEBI’s rules are likely to be harder on existing large funds since they have a longer track record and have the potential to have the same LPs over multiple funds and therefore a higher likelihood of side letters.

While AIFs might find it easier to manage all LPs with one agreement, it does make it harder to raise large corpuses.

Will SEBI bar side letters? That’s unlikely to happen, according to some of the fund managers that we spoke to, because that will severely impact fundraising. “SEBI will probably want more transparency. It has asked for performance reporting to some degree so now next it wants LP reports. Some clauses may be targetted but it’s not likely that the practice will be disallowed,” the PE investor quoted above added.

But SEBI has a track record of doing that with public markets, even though these were not really side letters. Before July this year, stock exchanges offered brokers discounts on fees based on their trading volume. Simply put, higher trade volumes for a broker meant lower fee costs and more profits. But SEBI introduced uniform charges in July, to effectively end volume-based discounts.

That is quite different from standardising the PE and VC world, since their structures are so different and they cater to investors with longer horizons.

A crackdown on side letters means large institutional investors — particularly those that want to avoid exposure to particular sectors — might park their money elsewhere. And that doesn’t help Indian VC funds or startups.

The post Indian VCs Asked To Spill The Beans On Deals With LPs  appeared first on Inc42 Media.

When we looked at the state of exits for venture capital funds in India last week, several fund managers — former and active — texted me about how many of these funds on the exit path are acting out of desperation. To add context, my sources pointed to SEBI’s changes released in April around the one-year extension for funds to begin their liquidation process.

The extension itself is not a new development, as funds have typically received a 1+1 year extension for some time now. However, SEBI also changed its rules related to liquidation in April this year after several limited partners approached the regulator about funds delaying fund closures beyond these extensions.

Before we get to these rules, it’s important to understand that all AIF schemes in India or venture capital funds in common parlance have a fixed tenure. This depends on the fund itself and what kind of exit horizon it has set for its limited partners i.e. the investors that infuse the capital which is eventually invested in startups.

Some LPs want to invest in short horizon funds that commit to returning the capital and a profit in five to six years, but on average AIF schemes have a tenure of seven years. Over and above this, there is an extension from SEBI to close the fund. So a fund or AIF scheme that was announced in 2015 is more or less nearing its expiration in 2024 and 2025.

In recent times, SEBI has stepped up its scrutiny of AIFs that are seeking to extend tenures, because in many cases these funds were simply buying time and did not have a plan to liquidate their funds. Given the explosion of startups in the years following 2015, we can surmise that plenty of AIFs are currently either in their liquidation period or have already exhausted the extension from SEBI.

Many of these funds are some of the oldest in the country and were set up between 2015 and 2017, at a time when startups were just emerging as an asset class. This vintage of AIFs has seen plenty of upheaval too with the global economic slowdown in 2018 as well as the pandemic in 2020 and 2021. But through these cycles, the likes of Orios VP, IndiaQuotient, Kalaari Capital, Chiratae (formerly IDG), Blume and other VCs have closed funds and returned capital to investors.

These and other noted VCs from the Indian ecosystem will be close to their fund expiry dates in 2025 and 2026 as well. And as such SEBI’s rules for liquidation are most applicable for these funds, as well as their LPs and portfolio companies.

Why AIF Liquidation Rules Matter

In this context, the liquidation period refers to the one-year period following the completion of an AIF’s tenure, during which the fund manager has to liquidate all the fund’s unliquidated assets and distribute the proceeds to limited partners.

This is followed by a dissolution period and this can be opted by funds to deal with unliquidated investments, as long as there is LP consent.

This is undoubtedly one of the most challenging positions for a VC fund, where it has to look for buyers for assets that may not be all that attractive for the market even at a discount.

In the past, SEBI had allowed funds the flexibility to roll over unliquidated assets to a new scheme or fund, but this was not a route that limited partners were happy about. LPs would not only have to bear the risk of the asset remaining unattractive even under a separate AIF scheme, but also would have to bear tax expenses out-of-pocket with no other recourse under tax and foreign exchange laws. This option has been rescinded because of the tax implications for LPs and the fact that AIFs can exploit this loophole to keep limited partners on the hook for their returns.

The other option, i.e. pro-rata distribution of the asset to limited partners, was also a no-go as this would put private companies in a tricky position regulation wise.

Pro-rata distribution also known as in-kind distribution means LPs will get equivalent securities to avoid capital gains tax on liquidated holdings. LPs will have access to all information on the available bids prior to choosing between an in-kind distribution or a dissolution period, during which the assets will be opened for bids to the open market.

As per the Companies Act, 2013, a private unlisted company cannot have more than 200 shareholders and the number of LPs in any fund can go as high as 150. If each fund allocated shares from unliquidated assets to individual LPs, then the company would have to convert into a public limited company, which is simply not possible for most of the startups.

Given these challenges, SEBI brought in the new rules earlier this year, which give AIFs some leeway and flexibility in terms of closing their funds and giving returns to LPs.

Is SEBI Simplifying Fund Liquidation?

As we were told by a number of fund managers, closing a fund at one time was a major headache, but the new rules do make it simpler for VCs to manage this process if not get the best outcomes.

Under this, AIFs can avail a dissolution period with the consent of 75% of its LPs by the value of their investment in the scheme being liquidated. Such consent has to be sought only during the AIF’s liquidation period and cannot be secured ahead of time.

This consent procedure mandates that AIF managers obtain bids, on a consolidated basis for all unliquidated assets of the AIF, from the market and offer proportionate exits to investors who do not wish to continue under the dissolution period.

If an AIF manager is unable to obtain bids from the market but has obtained the 75% consent of its LPs, then the dissolution period can still go ahead. But as a penalty, such fund managers are required to report their performance to benchmarking agencies, with unliquidated assets to be reported at a value equivalent to INR 1, regardless of finally realised value.

This move by itself does not devalue the asset but is seen as a benchmarking exercise that can be used to certify and rate fund managers in the future. This is a crucial exercise to be seen along with the NISM certification requirement, which we wrote about last month.

With these two barometers — the certification to operate a fund and the benchmarking to map its performance — SEBI is making it extremely clear that it will not accept fly-by-night AIF operations or funds that are falling foul of their responsibility in terms of due diligence and portfolio governance. That’s been one of the key concerns raised by limited partners in the past two years.

Besides clarifying some of the rules pertaining to liquidation and dissolution of funds, SEBI has sought information reporting from AIFs that want to avail of the year-long extension to initiate liquidation.

AIF managers need to submit details of the AIF, the unliquidated portfolio and its value, and pending investor complaints. Those AIFs entering into a dissolution period after the liquidation period are required to file an information memorandum with SEBI, accompanied by a due diligence certificate from a merchant banker.

Are VC Funds Relieved? 

SEBI’s requirements do increase the potential compliance burden for VC funds, but fund managers have welcomed these rules, especially given the reputational damage to some VCs in light of the value erosion in their portfolios.

However, in practice, most AIFs in India have not yet adopted the new regulations since they are so new, and as per experienced fund managers that we spoke to, there’s still a lot of uncertainty about how this might play out in the long run.

“Nobody knows whether the new regulations are better for funds because they are new to everyone. Even experienced fund managers don’t yet know whether the new regulations are better since the adoption is ongoing,” according to a veteran fund manager who has invested in startups through AIFs since 2013.

The fund manager quoted above closed their first fund in 2021-22 after availing the 1+1 year extension offered by SEBI. That particular fund delivered 5X-6X returns for LPs, an outcome that funds today might welcome with open arms.

On the flip side, some startup founders might find themselves at the wrong end of secondary deal structures as funds push to get bids for unliquidated assets.

As per one Bengaluru-based early stage and growth stage AIF founder, even in good times and at the peak of market liquidity during the pandemic, the discount for secondaries was 10% on average.

In the run-up to 2021, for instance, we saw several secondary deals led by PE funds as half a dozen startups lined up for IPOs, including the likes of Paytm and Zomato. It’s possible that many of these institutional funds were nearing end of life in 2021.

Plus, in July 2021, Tiger Global, Matrix Partners (now known as Z47) and others sold some of their stake in Ola Cabs parent ANI Technologies to Temasek and Warburg Pincus for $500 Mn. This is one of the biggest secondary deals in the Indian startup ecosystem, which also gave an exit to some investors who had backed startups acquired by Ola such as TaxiForSure.

For the above Ola example, Matrix launched its ‘Matrix Partners India II’ fund in 2011, and it invested in the likes of Ola and OfBusiness through this second fund. According to Pitchbook, the fund has been closed, and it was very likely up for liquidation by 2022. Besides Ola, Matrix saw a partial exit from OfBusiness via a secondary sale to Alpha Wave and Tiger Global in 2022.

Some of those secondaries in 2021 came at a discount even though the market had high liquidity, and now, with the future uncertain, those in the market for secondaries in 2024 enjoy the advantage of getting an even bigger discount. “In the VC world, this discount is called the liquidity discount. Even in good times when the market is pretty good, it is generally considered to be 10%. If the asset does not have super demand, the secondary buyer will always get a discount and this depends on the asset.”

Prominent examples of discounted secondaries in 2024 include the likes of SoftBank-backed Eruditus, Insight Partners-backed Postman, and SaaS startup MoEngage, among others. Bengaluru-based ecommerce unicorn Meesho is also reportedly in talks for a primary infusion and secondary deal at a discount of 20%.

But for every unicorn and scaled up startup, there are assets that have seen deep value erosion. Offloading these assets or finding bids for them in the open market might become a steep uphill battle for inexperienced fund managers and even some experienced ones.

Buyer’s Market For VC Assets AKA ‘Caveat Venditor’

Like 2021, and to some extent 2022, this is a great year for secondaries but largely for buyers. For VCs, there is a feeling of being resigned to heavy discounting.

“There is no doubt that this is a buyer’s market. Many VCs are desperate to exit their funds and show some positive track record in terms of LP returns. For many of the professional fund managers, this is a litmus test and therefore some of them might pressurise founders to execute deals quickly,” the VC firm founder quoted above added.

Fund managers are more than happy to enter secondaries as it creates a positive track record as far as their performance is concerned.

SEBI’s streamlined process penalises the AIF managers for failing to liquidate an AIF’s investments within its original or extended tenure, given the mandate on performance reporting. As a result, many fund managers are likely to be in the midst of discussions for secondary transactions and structures are being planned in light of some of these deals happening in IPO-bound companies.

On the founder side, there are concerns about increased due diligence burden as well as potential mismatch in terms of the expectations of the incoming investors and the business trajectory. But these points of friction are part of building a startup with VC money.

“Founders have to accept that if there was a time for primary rounds and capital infusion, it will be followed by a time for secondaries and exits. This is part and parcel of venture investing, and there is no doubt that some founders may feel shortchanged, but that’s the reality they have to accept,” said a third Bengaluru-based fund manager.

In fact, according to this individual, founders who pose hurdles to their shareholders in terms of secondaries are doing a disservice to the ecosystem and risk being blacklisted by VCs in the future. There’s undoubtedly bound to be some friction though.

Despite SEBI’s regulations and clarity on the liquidation path, there are practical challenges in going through this process. Plus, the introduction of performance reporting for AIF managers at the end of a fund’s lifecycle means for the first time many VCs and their track record will be out in the open.

VC industry insiders believe this had to happen because SEBI is looking at private market investments through the same lens as it does public markets. The regulator’s focus has clearly been on cleaning up the fluff from the frothy AIF market, but these regulations have second and third-order impacts.

Founders might soon find themselves with investors that don’t fit their vision, while funds might have to settle for discounts even for assets that might grow into their promise in the years to come. And for VC fund managers dealing with the liquidation process, it’s not just returns at stake but also reputation.

The post End Of Life Blues For India’s VC Pioneers appeared first on Inc42 Media.

There’s a change in the tune when it comes to the narrative around the Indian startup ecosystem for venture capital funds and their limited partners. And this time around it’s not about new deals, but exits from old deals.

Big exits with large returns have always been a sore topic for Indian VCs. Over the past decade, we have seen only a handful of such events despite over 5K funding deals recorded since the beginning of 2020. Indeed, when one looks at the data around events such as mergers and acquisitions (M&A), we are in the midst of a slow year, as of H1 2024.

Let’s also consider that many of the M&As in the past year, including in the first half of 2024, were distress sales, where returns were not on the table. Investors were happy with just a piece of their capital invested.

While some mergers and acquisition deals do end up bringing returns, VCs are not really hot on M&As at the moment as much as they love the two other ways to get exits.

For one, there is an IPO revival with startups not just eyeing the main boards but also SME boards for public listings.

The latest is D2C meat delivery startup Zappfresh, which is filing for a listing on the SME platform of BSE. The startup counts the likes of SIDBI, Dabur Family Office, LetsVenture and Keiretsu among its investors.

Ecom Express and SmartWorks have also filed for IPOs in the past month, after the listings of ixigo, Ola Electric, Awfis, Go Digit, Unicommerce and FirstCry this year on the main boards of the stock exchange. In most of these cases, investors have made a hefty return.

VC funds and in turn their LPs would be hoping that the new-age tech IPO train keeps rolling on.

And then there is the wave of secondary deals in the first half of the year, where more than a dozen such deals were recorded and which gave early investors exits from the likes of Capillary, ixigo, Urban Company, Porter, and Pocket FM, among other startups.

These events have triggered a new narrative — perhaps exits aren’t as rare in India as previously thought by the likes of Tiger Global partner Scott Schleifer who said last year that  “returns on capital in India have sucked historically,” and how the market is struggling to live up to the trajectory of the US or China.

One could not blame Schleifer or any other VC firm or their LPs for harbouring this view at the time. Besides the massive Walmart-Flipkart deal, we have not seen plenty of large exits from India outside of IPOs. And in early 2023, the IPO class of 2021 was still struggling to prove its value to public shareholders.

But the past 12-18 months have shown that some Indian startups do have the tenacity to last through tough times, and these startups are being rewarded.

IPOs Become Real

Among the three main events, IPOs are clearly the most attractive for VC funds, given the potential for huge upsides there, as witnessed by the likes of Peak XV in the post-pandemic market.

Things have changed drastically since 2021, which was the first big wave of startup IPOs in India.

Most listed companies that went public back in 2021 have cracked profits, and some, such as Paytm, were on the very brink of getting there before a major crisis unfolded at the fintech giant. More and more companies find themselves with the right playbook for public listings because of the experience of Zomato, Paytm, Nykaa, Policybazaar and others that IPOed in 2021.

This has fuelled another wave in 2024. The IPO market is expected to see more action in the remaining months of 2024. The much-awaited public offering of food delivery and quick commerce major Swiggy is likely to open this year if the SEBI approval comes on time, while BlackBuck, Ecom Express, Zappfresh, MobiKwik, Smartworks, Avanse Financial Services, and Ullu are also awaiting the go-ahead.

Beyond this bunch, the biggest prizes for investors will come from PhonePe, Flipkart and OYO’s listings, which could happen in late 2025. Among these, PhonePe and OYO have taken major steps towards profits, so they are clearly on track to get a rousing welcome to the stock markets as and when they list.

EY’s Global IPO Trends report for Q2 2024 noted that India was at the forefront of global IPO activities in the first half of 2024, accounting for more than 27% of worldwide IPOs. While there was a decline in IPO activities in global regions, including Mainland China, there were 38 mainboard IPOs in India in H1 2024 compared to 11 during the same period in 2023. This excludes the 100-plus SME IPOs where startups are equally active.

“The entry barrier for an IPO is lower than believed. Companies like Tracxn and Unicommerce (listing at approx INR 1,000 Cr / $120 Mn) have shown that the public market has a huge appetite for profitable/close to profitable tech companies with even as little $10 to $20 Mn in revenue,” VC firm Blume’s Karthik Reddy said in a recent look at the state of exits in India.

VCs Sharpen Exit Thesis

The deal activity, especially on the IPO side, is booming, believes Vinay Singh, partner at Fireside Ventures, particularly given the listings for Bikaji, GoColors, FirstCry and ixigo this year. Fireside is a consumer-focussed VC and Singh is bullish on the IPO destination for consumer brands after the turnaround shown by Honasa and Nykaa in the past year.

“This run is causing a lot of comfort among LPs and their VCs about Indian startups as a viable liquid investment asset class. For a lot of international LPs, India comes under the Asia pool of capital, and we are measured along with China. But China has had its own troubles recently, and therefore there is a lot of comfort being taken from the fact that Indian startups are trending towards profits,” Singh told Inc42.

He added that there is more positivity about Indian startups providing liquidity and the large outcomes because of the behavioural change brought about by the funding winter. After the bruising experience of 2022-23, Indian startups and their boards, including founders, have become more cognisant of the fact that they need to show profits, and as soon as they are close to profits, now startups have the option of an IPO to deliver on the exit promise.

The IPO wave and the profitability potential shown by some startups has also had a trickle-down effect on M&As and secondary sales.

Secondary Deals In Focus

“More and more PE and VC investors are comfortable with secondary deals in startups that may list in a year or two. This provides them with an easier path to exit and a view of the IPO runway. LPs are also getting more used to backing funds that only enter secondary deals,” according to a Delhi NCR-based fund manager.

Earlier this year, former Peak XV Partners MD Piyush Gupta quit the firm to set up a secondary-focussed fund. As we reported at the time, Peak XV Partners intends to work closely with Gupta to facilitate transactions at its portfolio firms.

Similarly, asset management company 360 ONE Asset launched the INR 4,000 Cr Special Opportunities Fund-12 to invest in late-stage startups. The company claimed that this is India’s first alternative investment fund (AIF) dedicated to the private equity secondary market.

Of course, these are large funds, but the entry of new micro VC firms with tighter entry and exit points for their potential portfolio is also causing a lot of comfort among LPs. And there is a lot more confidence about exits for micro VCs through secondary deals and smaller IPOs.

It’s not the era of excess any more and LPs are only keen on backing those funds that have a clear path to exit. Even if that means not backing the global VC giants and focussing on the domestic class of fund managers.

About secondary deals, Blume’s Reddy wrote, “A 1% holding can yield $750,000 to $5 Mn in cash returns, making it a sweet spot for micro-VCs. However, it is usually unattractive for large funds as the returns are much smaller as a % of their fund size.”

Incidentally, while Blume is a large VC fund today with a corpus of roughly $290 Mn for its fourth fund, Reddy wrote that the firm’s exits from Mobstac, Purplle, Zopper through secondaries were “game-changing returns” for Blume’s $20M maiden fund, which he called a micro VC fund.

This potential to cash in on ‘game-changing returns’ is also why we are currently in the midst of a renaissance of micro VC funds, which offer an expedited exit option for some limited partners.

Of course, while exits are great at the moment and the market seems to be bullish, this also opens up the risk of another era of inflated expectations. “The long-term trajectory seems fine. A lot of right things are happening as well. But the real consideration should be how disciplined can VCs stay. If suddenly we start seeing domestic VCs launch larger and larger funds, they might not remain so tight and focussed on their entry and exit points, and then we would be back to the situation we were in in 2022,” added Fireside Ventures’ Singh.

The post A Game Of Returns: Is India Finally Living Up To Its Exit Potential For Startup VCs? appeared first on Inc42 Media.

Is it a fad or the sign of the times in the Indian startup ecosystem? Whatever you may call it, we are in the midst of a micro venture capital (micro VC) renaissance in India, with dozens of firms being registered with SEBI, several more waiting in the wings, and even marquee VCs that ordinarily cut large tickets are acting like micro VC firms.

To be clear, this is not a new trend — in fact, Inc42 has tracked this for over two years now and things really started changing in late 2022, when the funding winter took root.

This past week:

• Gujarat-based Volt VC launched its maiden early-stage fund with a target corpus of INR 45 Cr
• Aviral Bhatnagar, former lead investor in SaaS, consumer, and AI sectors at Venture Highway, launched a new venture capital fund called AJVC

SEBI-registered Volt is a Category II alternative investment fund (AIF) and will focus on pre-seed investments in consumer businesses across sectors.

While AJVC will also be sector agnostic, according to Bhatnagar, it will solely focus on pre-seed bets, which is often the first institutional funding raised by startups.

These two funds represent just a drop in the micro VC ocean. Data shows that the number of new funds in India has seen an exponential growth over the past three years, and a lot of the activity is geared towards the early stage, where micro VC funds have become a distinct category similar to angel funds.

Typically speaking, micro VC funds are set apart by the fact that they have a special focus or a highly evolved thesis, thanks either to the fund manager’s expertise in a particular niche or whitespaces in the market.

For instance, in April this year, Mumbai-based Centre Court Capital rolled out an INR 350 Cr ($45 Mn) fund with a focus on sports and gaming space. Mustafa Ghouse, former CEO of JSW Sports and Asian Games bronze medalist in tennis for India, is the founder of the fund, and naturally, it has attracted limited partners from the sports and gaming industry.

A former athlete running a fund is quite unusual among larger global VCs, but such dynamism is quite commonplace in the world of micro VCs. And it’s also why most limited partners have taken to the allure of backing micro VC funds with differentiated thesis.

Micro VC Funds Punch Big 

India is a hotbed for new startup funds and there’s never a dearth of investors in the early stage, even at the peak of the funding winter. Out of the 126 funds launched in 2022, 62% were focused on early-stage startups, while last year, active Indian VCs launched 31 early stage funds with a total corpus of $1.8 Bn.

The likes of Better Capital, Java Capital, Sauce.VC, Neon VC, All In Capital, Eximius, Propell, Gemba Capital, Upekkha, Silverneedle Ventures, SenseAI among dozens of other firms have either launched new funds or announced additional funds in the past two years.

This year alone, more than two dozen new early-stage micro VC funds (under $60 Mn in corpus) have launched with a total corpus of well over half a billion dollars. While micro VC is a loosely defined category, typically, these funds have a small corpus and focus on early-stage investments.

When the term first began making the headlines in India in 2021, micro VC funds typically had very small corpuses in the range of $10 Mn – $12 Mn, and sometimes even half of that.

But in the past two years, the more attractive early-stage opportunity and the bleaker late-stage situation have pretty much forced micro VCs to launch larger funds. Such is the volume of interest from limited partners (LPs), that schemes for micro VC AIFs typically get oversubscribed.

This means, micro VC funds announced or raised this year have an average corpus of $30 Mn, a tally that excludes funds that have not announced the target corpus.

Sources in the industry indicate that dozens of firms are still awaiting SEBI clearance following which they would be launching their funds and adding to the early stage volume.

In our coverage last week, we spoke about how SEBI is tightening the rules for fund managers of new AIFs as it is currently processing thousands of applications from potentially new AIFs or existing AIFs with new funds and schemes. It is not unreasonable to assume that many micro VC funds might face some regulatory challenges in complying with these terms.

If we consider the fact that most micro VCs are not run by typical venture capitalists, then SEBI’s certification mandate seems particularly tailored for such firms.

That makes one wonder: if SEBI is not particularly keen on relaxing norms for new fund registrations, what is actually pushing more and more fund managers to launch new micro VC funds, even when these fund managers might not have the requisite skills and track record?

Are LPs Fuelling The Hype?

The answer lies in the source of VC funds, as it usually does when it comes to examining VC trends?

It’s no secret that LPs are chasing the early-stage bets and spreading capital among micro VCs with diversified thesis areas, which has made fundraising easier for early-stage funds. Moreover, this means micro VCs are occupying niches and sectors that have typically seen low investment activity, or are just emerging.

That’s also why larger VCs are spinning off smaller funds or accelerator programmes to capture some of the niche areas. Chiratae Ventures, Peak XV Partners, Accel and others have scaled up their accelerator programmes significantly in the past few years.

Chiratae’s Sonic programme has backed 20+ startups over two cohorts, while Peak XV’s Surge is close to announcing in its tenth cohort.

The number of new micro VC funds focussing on gaming, AI and deeptech is much higher given that these are the segments that investors believe have the highest upside. Moreover, there is a glut of micro VC funds that are fuelling the modern retail and D2C 2.0 wave, especially as this space has seen a post-pandemic revival and a move towards premiumisation.

“One of the things that has changed is that even limited partners are seeing that exit opportunities have grown considerably in India, from SME IPOs to M&As with established giants. They want VCs to focus on these categories that could reduce the exit horizons not only for the funds but also for LPs,” according to the founder of a prominent Mumbai-based micro VC fund, which has backed over 150 startups in the past four years.

If LPs are indeed chasing faster exits through micro VC bets, it’s a double-edged sword.

On the one hand, there is a frothy hype around startups that are developing next-gen applications in depth or AI, which could mean some of these early bets will die off sooner than expected.

Conversely and perhaps more positively, there is the fact that consumer brands that many investors are hoping will replicate the Mamaearth or Nykaa IPO trajectories.

As for the AI hype, Lighthouse Canton’s Nilesh Jasani believes that the tech industry has moved beyond the foundational elements of computing and large language models, where large investors had the bulk of the deals. Now AI’s potential is being tapped by applications that have real-world implications.

Jasani floated a GenAI-focused investment firm GenInnov Funds in April this year to tap early-stage deals. Besides GenInnov, the company runs other public and private market funds. “It’s in the downstream use cases — beyond chatbots, image editing and text formation — where the transformative power of AI is coming to life. Our fund is poised to capitalise on these advancements, aiming to surpass transient trends by investing in groundbreaking innovations that promise enduring impact and value,” Jasani told Inc42.

More New Fund Managers, More Micro VC Funds

There’s another undercurrent behind the surging wave of new smaller funds: a number of startup founders, fund managers and partners quit from their positions to float new funds. This is also why the micro VC ecosystem seems rather maverick compared to the straight-edged VC and PE class of investors.

Besides the example of Centre Court Capital, which we highlighted above, another instance is Bhatnagar and AJVC. The AJVC founding partner quit Venture Highway in April after it was acquired by General Catalyst.

Similarly, former CXOs at unicorns (BharatPe) have also floated funds in recent months that fall squarely in the micro VC category. These so-called operator-led funds fit the micro VC mould.

In a somewhat different vein, we have seen a wave of corporate-backed micro VC funds in the past two years as well, which are seen as acquisitive vehicles rather than a typical investment. FMCG majors Tata Consumer, Marico and Emami have created a playbook of investments that turn into profitable acquisitions, and others are latching on to this trend as well.

These corporate-run funds see startups not only as upside bets, but also from a strategic point of view. For instance, personal care major Lotus Herbals is close to launching a $50 Mn fund to invest in early stage beauty brands and startups.

AJVC’s Bhatnagar believes there is a significant gap in the pre-seed ecosystem, where many founders struggle to raise their first cheque, and have to court dozens of investors to secure enough capital to float new businesses.

“I want to solve this problem through a fast, approachable, pre-seed firm for Indian startups. The aim is to build a founder-friendly institution. AJVC’s first fund received SEBI approval last week. The fund is largely committed on launch day itself. I aim to bring the decade-long learnings as an investor supporting startups to build AJVC,” Bhatnagar said in a LinkedIn post.

There is some truth to the notion that promising startups and founders fail to find investors, but this is not due to the lack of investors. The fact is that seed investing has a huge upside only because it is so risky.

At the same time, we also know that VCs as a class are moving away from risk to safer bets. So it’s not unreasonable to have doubts about whether this recent influx of micro VC funds will make funding more accessible to founders.

But as many in the industry point out, the market often rewards brave bets. As larger VC firms eye low-risk bets, the next generation of innovation needs a new breed of investors.

Of course, not all micro VCs will see those returns despite assuming a lot of risk. But for now at least, we will not focus on how many of India’s micro VCs will actually raise a second or follow-on round and how many will just be a blip in time.

The post Making Sense Of India’s Micro VC Boom appeared first on Inc42 Media.

Fund managers and key personnel managing venture capital funds could soon be taking notes from YouTube tutorials and mugging up rules and regulations related to operating alternative investment funds (AIFs) as SEBI’s May 2025 deadline for certification draws near.

In May this year, the regulator said it would need existing funds, new funds and schemes to get certification for at least one key personnel in the investments team. The certification criterion is applicable for registration of alternative investment funds, and launch of schemes by existing AIFs after May 10, 2024.

The rules have been a few years in the making, but this year, SEBI has made it clear that all AIFs in India have to go through the clearly established certification process.

In addition to passing the National Institute of Securities Market (NISM) Series-XIX-C: Alternative Investment Fund Managers Certification Examination, fund managers need to have a professional qualification in finance, economics, capital markets or banking from a university or an institution recognised by the central or state government or a foreign university, or a CFA charter from the CFA Institute.

The requirement for a certification was approved by the SEBI board in March 2023 to facilitate skill-based approvals of AIFs and to bring in a measure of objectivity in the registration process.

What’s SEBI Thinking?

Over the past year, the markets regulator has been inundated with registration requests of new funds and schemes of existing funds over the past year. Plus, the rush to register new funds is unlikely to subside in the near future as startups and private companies will remain a very attractive asset class.

And when combined with the spree of startups going for public listings, the tide of new funds is unlikely to ebb for the next few quarters. This has naturally made it more challenging for SEBI to ratify and approve applications for AIFs.

There’s also the matter of many founders quitting startups and launching new funds in 2023 and 2024. Many of these funds are awaiting registration, and several of them have warehoused deals in the meantime as they wait for SEBI’s nod.

As per sources in the Indian VC industry at the peak of the rush in 2022 and 2023, some 1,300 applications were waiting for SEBI’s clearance, and only about 300 have managed to get registered, with other bids either expired or rejected.

Amid this glut, the regulator is also looking to clamp down on inexperienced fund managers joining the hype and failing to operate within the guidelines set for AIFs.

Here’s what SEBI mandates for fund managers: at least one personnel has to take the National Institute of Securities Market (NISM) Series-XIX-C: Alternative Investment Fund Managers Certification Examination, which will test the candidates on the extensive rules and regulations pertaining to the AIF ecosystem.

Plus, candidates will also have to demonstrate their knowledge of fund structures, valuation techniques, exit strategies and more. Here’s a snapshot of what the NISM would test candidates on:

Now, let’s go deeper into the problem and what exactly SEBI is looking to clean up.

How Limited Partners Pushed SEBI

The rush for new funds was at its peak in 2021, when a number of new AIFs joined the market or launched new investment funds, and sprayed capital at the height of the zero interest rate regime in 2021 and 2022.

In 2024, this wanton infusion of funds is biting many VCs, with allegations of poor due diligence and weak fund performance.

Many limited partners have alerted SEBI about mismanagement of funds invested in funds, while the exit of key general partners and fund managers from many prominent funds has also become a problem for these limited partners.

It’s easy to ignore limited partners as a powerless class in the VC equation, until one considers that even some state-backed vehicles such as SIDBI have invested in funds.

For instance, in early 2023, the GoMechanic controversy broke out where one of the four cofounders of the startup publicly admitted to have misreported revenue and inflated sales.

Sources say this was a major breaking point for the regulators as SIDBI had backed multiple funds that cut large cheques for GoMechanic. The company was valued at close to $600 Mn at the time, and counted investors such as Orios Venture Partners, Chiratae Ventures and others that had SIDBI as a limited partner.

The subsequent value erosion for GoMechanic’s investors was a major concern for SIDBI at the time, and many general partners were questioned about why due diligence did not unearth the discrepancies that the GoMechanic founder admitted to.

Similarly, BYJU’S is an example where India’s reputation as a destination for foreign investments has been tarnished by the drastic value erosion of the once-heralded edtech giant.

Partner Exodus Hurts LP Sentiments

Besides these issues, in 2024, many LPs find themselves in a situation where they invested in a particular fund due to the partner operating the fund, but exits and departures have left LPs wondering whether they even know who is managing their money.

Inc42 has covered this issue of partners quitting funds extensively over the past two years, which has further destabilised the LP-VC relationship.

One could even say that the more prolific investment activity by family offices in the past year is an indication that HNIs want to wrest control of their investments rather than investing in funds. That of course doesn’t mean that VC funds are less relevant today, but there were quite a lot of glaring issues which were overlooked at the peak of the funding and investment activity.

As public markets crashed and new models of business emerged during the pandemic in 2020 and 2021, many HNIs reduced their portfolio’s exposure to public markets, and moved towards startups as an asset class.

Many of these HNIs and even large institutions backed venture capital giants, leading to record-breaking capital raised by VC funds in India. Venture capital funds worth more than $6.2 Bn were launched in India in 2021 alone, which grew to a staggering $18.3 Bn in 2022.

In the case of many funds, they suffered from a funding problem, just as some of the startups in their portfolio. Just imagine the place many funds found themselves soon after Covid broke out in 2020.

Suddenly everyone wanted to invest in startup-focussed funds with rampant oversubscription of schemes and new funds. And these funds had to find a destination, which often meant hype-led investments.

This is of course a gist of the past couple of years, and market dynamics are far more nuanced than this simplified summary. But consider the fate of some of the companies that raised massive capital in 2021.

Unicorns such as BYJU’S, Pharmeasy, Dealshare and others that raised huge rounds in 2021 are now struggling for various reasons. Others such as Unacademy are facing the reality of the market after burning the capital raised in 2021.

LPs had great expectations from their startup portfolio, but many blew up and others are mired in untenable situations.

Not all funds launched in 2022-23 had the pedigree to invest in the right manner. Many portfolios have crumbled in the funding winter since 2022; layoffs have decimated the most promising models and growth funding was hit hardest. Even if startups survive the course of the funding winter, they are under-capitalised and have half-baked models in many cases that cannot be scaled up without further funds,

In steps SEBI then, making it a bit more challenging for fund managers and funds, in the hope that this could relieve the VC ecosystem of some of its froth.

How does this change things for VC funds and fund managers?

VCs Scramble To Pass SEBI’s Test

Fund managers that we spoke to are of the belief that SEBI-mandated certification is long overdue, though some have pointed out glaring gaps even with these changes.

“SEBI brought in the certification criterion, as there was too much noise in the market. This is just like SEBI asking public market investment advisors (IAs) to get registered. It cracked down on many unauthorised IAs last year, and now AIFs are being brought on par with this requirement,” a former partner at a VC fund told Inc42.

With the May 2025 deadline just nine months away, funds are scrambling to train partners, principals and other investment analysts. Sources indicate that several funds are running training programmes for these roles who form their investment teams. Consultants are shopping their services to AIFs to help their personnel get the right training and certification.

One Delhi-based early-stage investor claimed that analysts are passing the NISM test, while Chief Information Officers are failing. It’s funny to think that fund managers have to think about questions and marks decades after their last exam in college.

“The test is not easy as far as we have been told. Even though it is a multiple choice question (MCQ) format, there is negative marking (-25%) for wrong answers, and the passing score for the examination is 60 marks,” the Bengaluru-based partner added.

Since SEBI has mandated that at least one personnel on the investment team needs the certificate, many funds are wondering whether they can get by with having one such certified professional and not changing much else. “There is a possibility that the system may be gamed. A fund can put in a figurehead and put them on all investment teams. But the final decision making will continue to rest with partners as it does right now,” the partner quoted above added.

What this means is that one person can be appointed by the AIF across its multiple funds and schemes as a token certified investment team member. This does not completely eliminate the problem of low-skilled or inexperienced fund managers, which has bugged some LPs.

Multiple investors in Bengaluru and Delhi claimed that individuals with NISM certification for AIFs have sensed the opportunity and are applying for open positions at VC funds. These individuals do not have the track record to run funds, but may become appointees in investment teams just to clear SEBI’s bar.

Given this loophole, many insist that SEBI needs to be more stringent.

Will SEBI Raise The Bar Further?

Another Delhi-based partner at a prominent VC fund told Inc42 the problem in the past two years is that LPs often engaged with partners who had the skill set to be a fund manager, but did not have high enough equity in the fund.

Consequently, when partners quit the firm due to internal issues, LPs are left holding a bag of loss-making investments. Now, while SEBI is ensuring that only those who have the skills and the knowledge are able to manage LP money, it is not addressing questions of responsibility and accountability.

“SEBI’s certification mandate does not completely eliminate the problem of only skilled and approved people running funds. The regulator needs to mandate that at least one partner, ideally the one with the highest equity in the partnership, needs to be certified by NISM,” the partner mentioned above added.

So on the one hand, SEBI has increased the skill barrier to entry to the VC ecosystem, but this is just the first step. Most investors we spoke to believe that SEBI needs to raise the bar further when it comes to new fund managers, as startups have become a significant asset class.

Finally, there is a risk that high compliance and certification requirements might exacerbate the elitism that is seen in the VC game. With more and more individuals joining the investor pool every year, there was talk about a democratisation moment in India’s venture capital space.

SEBI may want to clamp down on bad managers, but stopping the flow of new fund managers can be detrimental to the startup ecosystem in the medium and long term.

This is arguably why SEBI’s certification rules for AIF fund managers are currently not that stringent, and why AIFs and venture capital funds do have some leeway. Even if this may just be for the time being.

The post ⁠Indian VCs Face The Test, Literally! appeared first on Inc42 Media.

Will the glory days of fintech be back with a bang post the valuation corrections and an excruciatingly long funding winter? Despite a reasonable thaw, the tailwinds have not been felt yet, and we tend to get mixed results. For instance, the fintech sector in India witnessed a 62.45% drop in funding in H1 2024, securing $809 Mn against $2.1 Bn raised in the first half of 2023 (according to Inc42 data).

But the silver lining was there, too. The country stayed among the top three funded fintech ecosystems, right after the US and the UK. More importantly, the Indian fintech opportunity has been pegged to reach $2.1 Tn by 2030, growing at an 18% CAGR.

The global fintech market also remained muted this year. According to a CB Insight report, Q2 2024 would have remained flat had it not been for two blockbuster deals. However, a decline in deal volume and average deal size indicates investors are still cautious. Although many venture capitalists think that 2024 will be the comeback year for fintech and may soon reach its pre-Covid status, the majority seems to be looking for startups that can deliver innovative and globally competitive solutions.

Sahil Anand is one of them and he claims to have struck gold by identifying the potential of a much-neglected sub-category – banktech, to be precise. Anand has launched Cedar-IBSi Capital, India’s first fintech-focussed VC fund, and aims to secure a corpus of $30 Mn. The fund reached its first close in March 2024, raising around 40% of the target amount.

While the entire corpus will be deployed in India, the fund may raise additional capital to expand its operations in the EU and the Middle East. Cedar-IBSi plans to invest INR 4-10 Cr in 15 early stage fintech startups and primarily targets pre-Series A businesses in B2B fintech and banktech space. Currently, it is building a deal pipeline and is about to make its debut investment.

Anand began his journey in 2013 with the Everstone Group, a leading private equity firm. As an investment analyst, he specialised in buyout transactions in consumer and IT services sectors and contributed significantly to Everstone’s venture capital arm.

“I was building a funnel for the work and meeting numerous founders every week as we focussed on early stage investments. This gave me significant exposure to early and late stage private equity during my time there,” he recalled.

After completing his MBA at London Business School in 2018, Anand joined his three-decade-old family business: IBS Intelligence, a financial technology research firm, and Cedar Management Consulting International, a financial technology consulting firm. But he wanted to achieve more.

In the wake of India’s demonetisation in November 2016, the fintech landscape was evolving rapidly. As the momentum continued after a temporary setback, Anand decided to make good of this trend and set up the Cedar-IBSi FinTech Lab in 2018.

The aim was to provide a ‘soft landing’ for local and global fintech companies entering the MENA and the Indian markets. More than 45 fintech companies, including Ebix, Intellect Design, Impactsure and Infosys Finacle, among others, have joined the lab and benefited.

By 2022, Anand realised that both family firms ran smoothly without his daily intervention. However, given his investment experience and his family firms’ combined expertise of 70 years, the decision to launch a VC firm was the natural next step.

“Our goal is to provide value beyond capital. Founders who raise funding from us will benefit from the extensive support bestowed by Cedar and IBSi, which will help drive sustainable growth. Although this is a maiden fund, many high-quality founders are eager to work with us, as they recognise its impact,” said Anand during a one-to-one interaction as part of Inc42’s ongoing Moneyball series.

During our conversation, we delved deep into the fund’s investment thesis, current trends within the fintech landscape and the critical importance of banktech as a fintech wave catching on rapidly. Here are the edited excerpts from the interview.

Inc42: Cedar-IBSi has positioned itself as a pure-play fintech VC fund with the focus on B2B fintech and banktech. What’s behind this niche investment thesis?

Sahil Anand: Before we discuss that, let us take a look at B2C fintech. This segment features platforms and applications that consumers can access via their devices for all sorts of transactions, be it trading, investment, loan or insurance. Therefore, companies in this space aim to acquire millions of users for their apps but primarily distribute financial services instead of developing core technologies.

Our focus is not B2C, as it is an overcrowded, intensely competitive market. The CAC [customer acquisition cost] is high, stringent regulations are in place and government agencies compete as well. For example, with the growing adoption of UPI, the government introduced BHIM to compete with private players like Paytm, PhonePe and Amazon Pay, among others. Similarly, while Visa and Mastercard dominate the market, the government-backed RuPay card has been promoted globally.

So, we prioritise B2B fintechs as they offer better economics and we have extensive experience in this space. These companies, often involved in banking technology [banktech] and related infrastructure [core systems and financial tools through which operations are managed], provide solutions, generate revenue and are profitable early on.

But things are more complex here. Even within the B2B space, you will find horizontal platforms like Razorpay and FlexiLoans. They call themselves fintech, but in reality, these are horizontal platforms helping embed financial services across industries. They are not necessarily focussing on the BFSI sector. The other category includes pure-play banktechs, startups that primarily offer software and services used by BFSI companies worldwide. This is our primary area of interest.

We are looking at banktech startups like Credgenics, Perfios and M2P so that we can leverage our deep expertise and networks to support businesses which develop innovative technologies for banks and FIs. This strategic focus allows us to identify and invest in startups with significant long-term growth potential and alignment with our vision.

Inc42: As a fintech subsect, what are the key opportunities banktech can offer Indian startups?

Sahil Anand: There will be plenty on the cards, as banktech has recently witnessed a significant shift in focus. Earlier, the spotlight was on B2C fintech, overshadowing the critical need for robust technology within the banks. But this has changed, and globally, banks are investing hundreds of millions of dollars in their systems and software every year. They also purchase 12-13 core systems annually and integrate them to support their operations.

I would say the B2C fintech disruption has run its course, with established players like Paytm, Upstox, Zerodha and others dominating all major segments. In contrast, banktech has remained relatively stagnant in the past 20 to 30 years. Traditional IT service companies are still selling their solutions across that domain. But the sector is ripe for a new wave of innovative banktech and B2B fintech offerings to drive further disruption.

Inc42: We have a limited number of banks and NBFCs in India and a growing number of startups catering to their technology needs. Will the surge in services surpass the demand anytime soon?

Sahil Anand: I don’t think so. Banktech is a versatile platform that offers software as a service to a wide range of financial institutions. These include consumer-centric and commercial banks, NBFCs and a growing number of co-operative and regional rural banks looking for technology upgrades. Insurance companies and other financial service institutions are also part of this fast-growing market.

Moreover, banktech startups need not be confined to the Indian market. The fundamental systems for core banking, treasury and payments are similar worldwide, which means these companies can easily target international markets.

Indian banktech companies typically start by partnering with the top five to seven banks in India and leverage these relationships to build credibility among Indian insurers. Once they have established a solid domestic base, they try to enter global markets such as the GCC, where banks invest heavily in technology. Additionally, markets in Malaysia, Vietnam, Singapore, Hong Kong, Sri Lanka and the EU [the region has more than 800 banks] offer significant growth potential. That’s how the whole game can be sold to 500 banks around the world.

This approach mirrors how Indian IT majors like Infosys grew by generating revenues from global banks and financial services customers. As a VC fund, we can help these banktech startups as our strength lies in our global footprint. We have offices and tech labs in many countries and a wealth of experience across international markets.

Inc42: India’s Financial Inclusion Index rose to 64.2 in March 2024, but we are well below the coveted 100%. Can B2B fintechs play a constructive role here?

Sahil Anand: To be honest, it is more like a hit-or-miss thing. Financial institutions must extend credit and services to a broader population segment to achieve better financial inclusion. Here, the core issue is not technology but the level of credit risk banks are willing to assume. If we say that a new banking technology/system, a new treasury system or a new payment solution will be more financially inclusive, it will be too much of a stretch.

The primary goal of the new banking technology, or banktech, is to enhance operational efficiency. It is not about financial inclusion but making banking more efficient. This new-age technology has the potential to improve efficiency, productivity and core operations, which may increase overall revenue. That’s an achievement from a technological standpoint.

Inc42: In that case, what horizontal and vertical SaaS solutions will be best for banktech success in the next five years?

Sahil Anand: Let us consider these one at a time for better understanding. Horizontal SaaS [industry-agnostic, general-purpose solutions] has limited scope in highly customised sectors like banktech.

Vertical SaaS is critical nowadays as banks are increasingly looking for vendors with expertise in specific use cases rather than generic, one-size-fits-all solutions. Every financial institution, whether a commercial bank, an NBFC, or an insurance platform, has a host of requirements that need to be addressed. So, they focus on service providers with deep domain knowledge and the capability of implementing solutions quickly and efficiently.

Banktech startups will do well to excel in specific use cases and master the most promising vertical SaaS solutions such as digital automation, customer lifecycle management, digital lending, wealth management, private banking and cash flow management.

Startups’ success will also hinge on nuanced execution and outstanding outcomes. For instance, five-year-old SaaS startup Credgenics now handles 11 Mn retail loan accounts and claims to have increased lenders’ resolution rates by 20% and improved debt collections by 25%.

Service providers should also ensure that they are not location-bound and may operate like implementation wizards, when needed. Earlier, sales cycles could stretch between 12 and 18 months and things were slow-paced by default. Now that new-age solutions can be implemented within 45-50 days, swift execution remains a critical mandate.

Contrary to the popular notion that banktech will saturate in the next decade, I would say the sector is still in its early stages. Addressing the pain points of decades-old technology will take at least another 20 years if the BFSI infrastructure/ecosystem has to evolve in tune with disruptive technologies.

Inc42: Talking about banktech startups, what will be the market size or revenue estimates by 2030? Can you give us an idea?

Sahil Anand: It is difficult to ascertain the market size of B2B fintech as there are no well-defined sub-sectors here. Different players offer different solutions and services tailored for FIs belonging to different categories and each solution addresses a specific issue. It is a bit chaotic. What we see here may boil down to 20 customer types with 11 different systems and businesses varying in scale from small to medium to large and located across many countries.

However, an average bank allocates 7-8% of its budget to banktech and this is steadily rising. Again, each bank typically requires around 20 different tech systems to enhance operational efficiency. The potential market becomes huge when you multiply the average banktech spending by the number of domestic and global FIs.

As we speak, a banktech startup could be selling its softwares to any bank in India and another bank located in the Maldives, thus ensuring better business growth. Unlike B2C, that is the beauty of B2B fintech or banktech.

Inc42: Overall, what will be the key trends and challenges for fintechs in India?

Sahil Anand: Even when a B2C startup identifies a niche – say, an insurer targeting women-specific schemes – large players can easily add this as a subset of their offerings or acquire the startup outright. Although B2C is primarily a no-entry zone for Cedar, we are still looking for B2C founders with a proven track record of building and scaling innovative solutions for the masses.

There are plenty of other challenges. Given the stringent government regulations, fintech companies must exercise great caution in all areas, including compliance, fundraising and navigating the competitive landscape. Banktechs should focus on developing robust software that can scale, achieve profitability and go global. Moreover, their tech products should be able to replace outdated technologies that have persisted for years.

Inc42: What will be the role of AI-GenAI in the B2B fintech space?

Sahil Anand: These are still the early days of AI adoption in the banking sector. Given their historically different data management practices, banks are gradually becoming comfortable with AI usage. They are just beginning to familiarise themselves with various external solutions for data processing and analytics [predictive, generative and what all may come up soon]. This gradual approach will ensure a smooth transition and allow necessary adjustments and adoptions.

Undoubtedly, AI will play a significant role here. However, the consensus is that the new tech cannot entirely replace the human workforce in the highly regulated financial services industry. Anything stated otherwise is an overstatement. AI remains a powerful tool that can boost productivity and enhance efficiency by 60-70%. It may even reduce headcounts by 30-50%. But human involvement will remain essential. That should provide a sense of security when people mull over the future of this industry.

Inc42: Will there be vibrant growth markets for Indian banktech startups? Please elaborate on the kind of dynamics and alignment they may find overseas. 

Sahil Anand: Well, the Middle East is a promising market right now, as it hosts around 100 banks across six or seven countries. These institutions are technologically advanced, well-capitalised and helmed by a new generation of young leaders. They have a favourable view of India and share a strong cultural affinity. Many of these banks had earlier worked with Indian vendors and Indian IT majors also serviced GCC banks. Overall, they are familiar with our operational style and actively seek disruptive solutions from us.

Apart from ME markets, Southeast Asia is another region brimming with opportunities, especially countries like Indonesia, Vietnam and Sri Lanka. Of course, Singapore and Hong Kong are fiercely competitive, but the broader region holds substantial growth potential.

Targeting these regions may yield as many as 200 B2B clients for a banktech venture, resulting in an annual recurring revenue [ARR] worth INR 150-250 Cr. Subsequent expansions across the EU, the US and other Western markets may follow, leading to further growth.

This strategic focus offers a promising avenue for banktech companies aiming to scale and achieve global success.

Inc42: What about new unicorns and public listings in the B2B fintech space? What developments will be there in the short term?

Sahil Anand: We have recently seen three unicorns – Pigment, QI Tech and Cyera – which are fintechs or servicing the fintech industry. Two of these are in the US, where the market is mature. At a jurisdictional level, the US attracted two-thirds of all fintech funding during 2023 ($73.5 Bn), according to a 2024 KPMG report.

The B2B fintech sector in India is on a similar growth trajectory. We have seen companies whose revenues are burgeoning to the tune of INR 600-700 Cr+. These are set to attract late stage investors in the long run. Additionally, there are fintech SaaS companies like Trust Fintech opting for the IPO route. However, this is just the beginning.

So far, everyone has been distracted by the B2C wave instead of deep-diving into B2B, but we are getting there now. That’s why the industry is also excited about our fund, as we are all set to capture the first 10 waves of B2B fintech/banktech in India.

[Edited by Sanghamitra Mandal]

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