Big Hunt for Small Deals( 11:00, 19-Feb-16)
“Most bigger (venture capital funds) have very small investing teams and that limits their domain knowledge,“ Anand said. “In early-stage investing you need to know a very wide range of domains.“
Utilis represents a new crop of investors rushing in with micro venture capital funds having corpuses of $15 million to $25 million and cutting cheques of $100,000 to $250,000-smaller than the startup investments by regular venture capital firms but larger than those made by wealthy individuals, or angel investors.
That's to say micro venture funds like Utilis, Unicorn Ventures and Endiya Partners meet a crucial need, making the first institutional investment in a startup just about when it figures its product-market fit. They help companies grow their ideas into viable business models. The risk is high. But the returns, if the bets don't sour, can be rich, typically 20-30 times the investment.
These new micro VCs mark the second coming of seed, or early stage, investing to India. Seedfund, an early investor in bus aggregator redBus, was among the pioneers, venturing into this space in 2006 with its maiden fund of $15 million. Presently, there are 12 micro VCs operating in India.
In a way, these funds serve to keep deal flow alive for later-stage VCs like Sequoia Capital, SAIF Partners and Helion Advisors that make growth-stage, or series-A, deals in maturing startups.But these VC funds, too, have been treading into the micro venture investing space, hoping to scoop up the next billion-dollar startups, or Unicorns, early. As are traditional early-stage, or seed-stage, investors such as Blume Ventures and Kae Capital.
“Funds like us are hybrids of accelerators and venture funds, providing both mentoring and startup capital enough to scale up,“ said Anil Joshi, founder of Unicorn India Ventures, an early-stage investor that has struck four deals from its $17-million fund.Joshi, a former operations head at Mumbai Angels, said while incubators and accelerators do a good job of mentoring companies, the `5 lakh to `15 lakh they invest in startups is adequate only to cover logistics costs. He's looking for Unicorn Ventures to have a portfolio of 20 to 25 startups.
This year, a small number of investment professionals have quit large venture firms to start early-stage funds. In January, Sateesh Andra, former managing partner at Ventureast, launched Endiya Partners along with Ramesh Byrapaneni and Abhishek Srivastava, who were also from Ventureast.Endiya, which has invested in foodtech startup Innerchef and analytics firm Hansel, has raised $15 million and expects to double its fund size this year. Mukul Singhal and Rohit Jain quit SAIF Partners in January to launch a micro venture capital firm.
“Micro venture investing is a huge opportunity in India,“ said Alok Goel, partner at SAIF Partners. “We have seen angel investing picking up significantly over the last few years, and it's the right time to institutionalise it through funds.“ Angel investments, or startup investments by wealthy individuals, leaped to 673 deals in 2015 from 360 in the year before, data from startup deal tracker VCCEdge show.
If venture capital firms are going smaller to tap the early-stage opportunity, seed investors such as Blume Ventures, which started with a $20-mil lion fund in 2011, are growing their fund sizes to be able to write bigger cheques.In December, Blume raised $30 million for its second fund, which it aims to double to $60 million this year. Kae Capital, too, raised a second fund of $30 million in February with final close expected to be at $40 million It's the lure of mega returns that pushes funds to high-risk territory.“Sometimes, one company can return up to three-to-four times your entire fund size,“ said Bharati Jacob, managing partner at Seedfund. The micro investing market, though, is very different from what it was about a decade ago. “Now there are many more (startups) to compete for good deals. At the same time, for startups, there are multiple investors to weigh their options and choose from,“ Jacob said.
Returns of such large size could take a while coming, though. Anand Lunia, who quit Seedfund in 2012 to launch early-stage investment firm India Quotient, said none of the startups in his portfolio raised series-A funding in the first two years. Only in 2015 did seven of these startups raise follow-on funding.
“One major challenge such investors will face is fewer series-A deals hap pening... Also, the best deals will go to bigger VCs like Sequoia or Kalaari (Capital), which recently launched their own seed programmes,“ Lunia said. “Also, most newbies are professionals who neither have a star entrepreneurial background nor a thorough understanding of how venture capital works, so they will find it tougher.“