On the face of it, things in India’s venture capital market look good. In a year of valuation markdowns and shuttering startups, venture capital firms managed to mop up a record amount of capital. Led by local affiliates of Silicon Valley heavyweights, Sequoia Capital and Accel, VC funds dedicated to India raised a total $2.2 billion in 2016 as compared to $1.5 billion in the year prior. Yet, the reality is that the venture capital world is preparing for a tough year. Half a dozen investors talk on what lies ahead for Indian startups in 2017 and beyond.

Three venture capital firms—Sequoia, Accel and Nexus Venture Partners—now manage over $1 billion each in capital commitments in India. None of these firms, along with their peers in India (see graphic), have been able to give profits or even return the principle amounts put into their maiden venture capital funds to their investors, known as limited partners.

“When we go to LPs (for fundraising) they say that the best of the bigger venture capital funds in India haven’t been able to return capital yet despite having Unicorns (billion-dollar startups) in their portfolios, and paper gains haven’t shown us how to generate liquidity,” said Karthik Reddy, Co-Founder of early-stage investment firm Blume Ventures. The firm, which manages at least $80 million across two funds, has backed robotics firm Grey Orange and cab aggregator Taxiforsure, which was acquired by Ola.

To say the pressure is high on VCs to return profits to their investors is an understatement.

The total amount raised by venture capital-backed Indian companies is over $20 billion. The top eight venture capital firms in terms of assets and which manage India-dedicated funds have raised at least $8.5 billion to invest in homegrown startups. Along with the money put in by New York-based Tiger Global Management, which was the most aggressive backer of India’s consumer internet story till 2015, that amount climbs to $11 billion. Now consider this: LPs typically expect three times the returns on their investments. That means the VC firms are expected to give back at least $30 billion to their investors.

Also, the valuation markups of India’s largest internet companies are increasingly coming under pressure. Many VCs have not been able to cash in on the valuation boom of 2014 and 2015, when global late stage investors rushed to the market.

Source: Economic Times