NAVIGATING THE VENTURE CAPITAL PRODUCT MATRIX

Navigating The Venture Capital Product Matrix

Each investor will have to approach the startup frenzy with adequate caution

Startups are booming. Markets are flush with liquidity and are piling in cash into both early-stage and growth-stage companies. Even some loss-making startups are getting valued at thousands of crores at the IPO counters. This amount of buzz, the number of headlines and the sheer amount of interest has never been witnessed in the Indian markets. Naturally all the investment intermediaries are focusing on this space; from the biggest multi-family offices right down to even retail distribution houses and brokers.

Accessing the opportunity: Investors are obviously excited. The hope of high-teen IRRs (internal rates of return) coupled with the constant FOMO (fear of missing out) are making sure that every investor wants to dive into the party. But how each investor accesses this buzzing market will be vastly different.

Family offices and ultra high net-worth individuals: They usually have their own internal teams or may be advised by a multi-family office. Due to the sheer size of the portfolio, they do attract deal flow and have access to quality venture capital funds. They also have the capability to conduct proper deal/fund assessment and hence are best suited to have a combination of direct startup equity investing in select sectors and a portfolio of both early-stage and growth-stage AIFs. The allocation to direct deals versus funds is usually a much-debated topic with these investors. These days, most India-based VC funds are open to taking investments from Indian LPs (limited partners). Hence, access is never an issue for this class of investors. Also, most India-based VC funds are very actively reaching out to this category of investors and hence this group of investors does not need the fund-of-funds platform as they themselves can achieve the same outcome and that, too, with the whole fund space at their disposal.

HNIs: This category of investors still has a fair bit of options available. The primary criteria for HNIs would be their own ability (or their advisers’ expertise) to assess direct equity and fund opportunities and have a basic diligence process. They are best suited to have a combination of direct VC funds, fund-of-funds and some direct deals either in domains that they have knowledge in or deals sourced from crowd-investing platforms wherein each deal is led by an experienced lead investor. Most Indian VC funds take the necessary 1 crore minimum commitments, but some funds target a minimum of 3 crore and above. Also, since the drawdown periods are usually between three and five years, an investor committing 3 crore will need to allocate about 75 lakh to 1 crore only every year as per the drawdown schedule. The HNIs will have to just plan the cash flows adequately. HNIs can also access direct investing opportunities using the fast-growing angel networks, crowd-investing platforms and even some new-age fractional ownership platforms that are taking shape.

Plan your venture capital portfolio: Both the above categories of investors also need to have a proper planning process and not rush into the market. An ideal way of approaching this high-risk space can be a combination of some direct investments in sectors or domains where the investor has some knowledge or wishes to have a more hands-on approach. Slowly, you may increase the sectoral width of your direct portfolio but only after ascertaining your own risk tolerance. Other sectors can be best covered by investing with quality fund managers. While vintage fund managers (third fund and beyond) are the most popular targets, you may also look for first-time managers who come from an industry domain experience or are a breakaway team with prior fund management vintage.

Whether the current frenzy around startups is a bubble will be something we will come to know in the future. Till then, each investor will have to approach it with adequate caution, keeping his/he loss tolerance in view, and not fall prey to fancy marketing of products and induced FOMO.

Originally published in MINT on 26 July 2021

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Anay Malgaonkar

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    • Phone: (91) 22 44764663

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    • CIN Number : U74999MH2019PTC324434
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