“The biggest comfort came from the fact that Sidbi trusted our ability quite early when we didn’t even have commitments from other investors, and were only at a concept stage,” said Singhal, who is targeting to close his deep technology focused fund at Rs 195 crore. He has commitments from several overseas and local high net-worth individuals (HNIs) and funds, such as the early-stage Flipkart backer Accel India.
He adds, “We did not go through the experience that SIDBI did not understand what we were doing.” Singhal is not alone. First-time fund manager Rema Subramanian, who runs the Rs 60 crore Ankur Capital, Stellaris Venture Partners, founded by former Helion executives and counts Infosys as a limited partner, and seasoned players such as Blume Ventures, Kae Capital and IDG Ventures are increasingly looking up to SIDBI, which has emerged as the homegrown fund of funds.
The trend in capital sourcing marks a silent revolution for the domestic venture capital industry, which has hitherto been majorly dependent on overseas cash.
“With external money, there is always a fluid situation. Sometimes, it is in one economy, and sometimes it is funding another destination. Also, overseas investors end up bearing the currency risk as much of their returns get eaten away due to currency depreciation. Additionally, the flavour of investments keeps dangling between the early and late stages, and across favourite sectors,” says Ajay Kumar Kapur, deputy managing director at SIDBI.
The rising interest in SIDBI as a source of capital is evident in the increase in the number of sanctions and capital commitments to fund managers in the last couple of fiscal years. The number of sanctions to funds rose to 37 in FY17 over 11 in FY15, and capital commitments in the last two years have nearly quadrupled — from Rs 314.4 crore in FY 2015 to Rs 1,202.5 crore in FY17.
“The overall funding to startups from the SIDBI-supported venture funds this year could be in the range of Rs 3,000 to 4,000 crore. This is because most funds that got sanctions last year are likely to achieve full closure this year,” says former Infosys director TV Mohandas Pai, who is also a member of SIDBI’s Venture Capital Investment Committee.
Raising a fund is a highly sensitive and gruelling exercise for fund managers, and there are several reasons for native capital helping change the startup investment ecosystem in the country.
Fund managers are discovering different comfort zones in having a financial backer at home. “You can invest while you do the fund raising (at home), compared with the situation that needs you to travel overseas, and you have to do road shows for about a month (raising money from foreign investors),” says Sanjay Nath, managing partner at Blume Ventures, which had SIDBI as a participant in its first fund and a key domestic anchor investor for its second fund.
Furthermore, fund managers say that local money gives them more independence and decision autonomy, compared to financing by larger venture funds such as Sequoia Capital and Accel Partners, which largely run as affiliates of US entities. “There are studies to show that in China and India, local managers have given better returns to LPs than funds dominated by foreign capital,” says Nath.
The modus operandi at SIDBI is more of a facilitator than of an investor. Fund managers piece together their plans and come up with a detailed memorandum wherein they declare the size of the fund, areas they would be investing in, timelines they will follow for investments, terms for managing the fund, and the returns they would expect. Proposals are then vetted by the Venture Capital Investment Committee, or VCIC, which includes Naukri Founder Sanjeev Bhikchandani, IAN co founder Saurabh Srivastava, software lobby Nasscom’s Kiran Karnik and Mohandas Pai, among others. SIDBI commits to invest about 15% to 25% of the fund corpus, post which fund managers have to secure commitments from other entities, and SIDBI then releases the funds.
Unlike the international connotation for fund of funds that have a closed life and a formal structure, SIDBI has majorly been investing over the past two decades from its balance-sheet and government contributions.
It plays fund of funds under various heads: A Rs 10,000-crore fund of funds sponsored by the government and managed by SIDBI, the Rs 2,000-crore India Aspiration Fund, launched in 2015 and investing in micro, small and medium enterprises, the Rs 60 crore Aspire Fund that invests in agri businesses, and funds received through budgetary allocations. The institution also manages Rs 200 crore from the Life Insurance Corporation of India.
For several funds, commitments from a domestic institution help build credibility and make drawing funds from other investors easier. “SIDBI investing in a fund significantly increases the confidence of all other investors worldwide,” says Sudhir Sethi, Managing Director at IDG Ventures which often likes to brand itself as the ‘desi’ VC of India. “It also gives sectoral comfort to international investors, given the fact that in sectors such as agriculture, if there is an Indian financial institution willing to take the bet, then they are more than happy to come in,” said Rema Subramanian, Managing Partner at Ankur Capital, which has raised a Rs 60 crore fund focused on agritech, health, and education with contribution from SIDBI.
To be sure, SIDBI usually doesn’t make the first commitment, and requires fund managers to get firm promises from other investors before they approach SIDBI. “It depends on the quality of the team and market scenario, but if SIDBI makes the first commitment then that portion of the money is blocked before the fund manager goes around and gets commitment from others, so disbursement ends up taking more time,” said Harkesh Mittal, head of the National Science and Technology Entrepreneurship Development Board at the Department of Science and Technology.
“SIDBI would usually take about three to six months to consider a sanction – and that is a fair pace.” Monetary returns from funds are still a mixed bag.
“We call it the hockey stick curve. All taken together, we have been able to get returns in high single-digits. Some funds have given returns of 20%, while some have not been able to give returns at all because of the kind of bets they have taken on startup companies. The bad apples come first and the multibaggers usually come at the end of the fund life,” said Kapur, who refuses to disclose the names of the funds that haven’t done well.
The biggest challenge so far, however is the difference between the amount committed by SIDBI and the amount disbursed. Some fund managers are able to leverage SIDBI’s name and commitment for traction from other investors; others are not. Therefore, there is often a huge time lag – of five years or even longer –between SIDBI giving a commitment and the fund closing the entire intended corpus. The total commitments from SIDBI so far have amounted to Rs 3,521.29 crore for 125 funds, although the actual amount disbursed happens to be Rs 1,273.26 crore in 82 funds.
“Generally, about 15 to 20% of the money committed per year is actually disbursed,” says Kapur.
Some experts believe that the institution should be better known internationally to help drive the credibility of fund managers backed by SIDBI. They also would like the institution to support much larger funds than the average $15 to 25 million corpus it has backed so far.
“There is an abundance of seed capital in the country, but there is a serious need for more Series B and Series C funds. The key issue is limited participation from larger institutions such as LIC, Employees Provident Fund and other private insurance companies. They need to expand their exposure to this asset class,” says Mohandas Pai. For India’s venture capital industry, there’s, perhaps, a lesson to be borrowed from its northern neighbour.
The government in China, which is home to one of the world’s most valued startup companies in the last few years, has enhanced its role in startup funding through investments in venture funds.
According to the consultancy company Zero2IPO, Chinese government-backed venture funds tripled their money under management in a single year to 2.2 trillion Yuan ($330 billion) in 2015.
Last year, the Chinese cabinet sought an increase in the fund flow to startups from government-funded venture funds.
Early this year, the government established a 100 billion Yuan (US$14.5 billion) state fund, called The China Internet Investment Fund, to back Internet companies and technological innovations.
Contributions to the fund largely came from state-owned banks and companies.
Source: ET Tech