FOMO drives a new breed of limited partners to startup investments

Sometime early last year, a businessman from the north Indian city of Dehradun — known for its scenery and tourism — reached out to early-stage venture capital fund Venture Catalysts through their website. This businessman was hearing a lot of chatter around startup investment and windfall investor gains, and wanted to get in on the action. He was keen to withdraw some portion of his money from fixed deposits and mutual funds and divert it to the new-age tech companies in India, but did not know how.

“He told us that sitting in Dehradun he does not have access to deals, so he wants to invest in startups through our fund,” said Apoorva Ranjan Sharma, co-founder and managing director of Venture Catalysts. “He was part of the industrial revolution, setting up companies and now with technology taking over, he wanted to be part of this revolution.”

This business owner has since then invested Rs 25 crore across two funds.

Typically limited partners or LPs who contribute to the corpus of venture capital funds are corporates, high net-worth individuals and family offices, among others. But, over the last year, a new breed of LPs — such as this businessman from Dehradun — have started to populate Indian funds as they now look at startups as a new asset class to invest in. These include business owners, traders and merchants from smaller cities in India such as Dehradun, Bhavnagar and Coimbatore; C-suite executives from startups who have built companies from the grounds up and have made money during ESOP (employee stock ownership plan) buybacks, and the non-resident Indian community.

Venture Catalysts, which closed over 200 deals last year, had approximately 1,000 new investors join their network in 2021, of which around 300 were this new breed of investors. “These would be SME owners, MSME owners, senior corporate professionals, etc,” said Sharma. “And we saw this phenomenon play out across other funds as well.” Sharma further said that while they were not surprised about LPs from these regions wanting to participate, the speed and magnitude at which they came in was unanticipated.

Indian startups raised around $ 38 billion in 2021 across all deal stages, highest ever and three times more than the $ 11 billion raised in 2020. Experts say that a lot of this was because of the new LPs joining the startup investment bandwagon. These also include traditional mid-size businesses across real estate, infrastructure, manufacturing, consumer brands, trading etc. who have set up family office investment teams.

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“There is a massive positive change where we see traditional business owners as well as people from the tech world who have been encashed from ESOPs have become active investors either through angel syndicates or VC funds – with some of them investing as much as half of their liquid wealth into startups, ”says Manish Kheterpal, managing partner at early-stage fund WaterBridge Ventures.

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This, he says, is also visible through the quantum of money that has been raised by Indian funds – many of whom have raised more than they initially started out to. Sixth Sense Ventures, which has invested in companies such as Bira and Veeba Foods, is in the process of closing a Rs 2,500 crore fund, mostly from domestic investors, according to a Money Control report. It was initially going to raise Rs 900 crore. WaterBridge Ventures, an investor in startups like Nymble and Doubtnut, also closed a $ 150 million fund in November, 50% larger than they planned to raise. Half of the $ 150 million has flowed in from domestic LPs. Fireside Ventures, an early-stage fund dedicated to consumer brands closed its second fund worth Rs 863 crore last year.

Investors in the space say that this is a sign of maturity of the ecosystem where more domestic LPs are putting money into funds, allowing tech companies to grow further. “Most other startup ecosystems – be it the US or Europe or China, have had a lot of domestic LP capital that has helped funds and startups grow,” says Rahul Chowdhri, a partner at early-stage venture capital fund Stellaris Venture Partners. “It has started to happen in India now and if they get good returns, this is only bound to grow further.”

Then, there is the Shark Tank effect. With Shark Tank India — the Indian franchise of the global startup pitching show — coming to Indian living rooms, industry experts expect the LP pool to widen further over the coming years. “With Shark Tank India becoming popular in India, more and more people will understand what entrepreneurship, startup, equity, angel investing, etc is all about,” added Sharma.

(This article is the first installment in a two-part series about new LPs turning to startup investments.)

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