The counter view – BW Businessworld


Of the more than 100 unicorns in India, none are funded by Indian VCs, says Venture Gurukool & Ankurit Capital founder Mahendra Swarup, as he cites lack of institutional support and experienced talent as reasons why capital national hit a snag in India in this conversation with BW Businessworld’s Noor Fathima Warsia.

One could say that the lack of domestic capital in Indian startups has a significant negative impact. Why have Indian VCs, PEs and others not caught up with startups in India despite the availability of wealth?

The domestic venture capital (VC) space in India is relatively new. Private equity (PE) funds came out on top and domestic PEs started to take off in the early 2000s when the dot-com bubble burst. This prevented national money from entering the digital space. Over the past decade, India has become a hot investment destination for foreign players and sectors such as telecommunications, mobile and data have boomed. India’s IT talent was also honoured.

This attracted venture capital funds to Indian shores. This is how the story began, but the regulatory framework surrounding alternative investment funds (AIFs) and related issues was unclear. Therefore, the domestic industry did not take over.

It was only when large amounts of foreign money started flowing into startups and tech and digital assets that regulators woke up and AIF regulation kicked in. This was also done to increase the pool of national funds.

Most high net worth individuals (HNIs) and family offices at the time could only invest their surplus in gold, real estate, or stocks. When pressured by regulations and bodies such as the Indian Private Equity & Venture Capital Association, some HNIs diversified their investments in IAFs. But it wasn’t enough.

The national capital is less than 10% and, to support the ecosystem, it should reach at least 30-40% in the next few years.

How do you see domestic capital working differently for a startup than foreign money?

Domestic capital drives growth because it is patient and understands local dynamics. Foreign money is hot money, looking for faster gains. The startup ecosystem is fragile in all countries and can only be supported patiently.

Any upheaval in the Western world can upset the plow in India. Even the most invested startups are vulnerable and need sustained support and subsequent funding. If the current investment winter continues, most of the 100+ unicorns will fall by the wayside. VCs that play big in the country will be very selective among follow-on investments.

The Indian investment philosophy is also different because Indian investors look at a seven to eight year time frame for returns. A short-term view forces young entrepreneurs to spend money aggressively and when this happens, not only do deviations and problems arise, but slow organic growth cannot be achieved.

What are some of the big challenges you see in the Indian venture capital ecosystem?

A big problem is the complete lack of talent. We don’t have enough experienced venture capital fund managers. Some of the foreign companies have been around for almost five decades and bring depth and experience. Indian fund managers cannot compare to this.

Barely 10% of the funds raised are profitable. Some of the independent reports show that the returns of Indian venture capital funds are pathetic. This is a very high risk area with a shortage of talent, it is difficult for domestic capital to take off.

Institutional support is also lacking. The government does not mandate investments up to a certain percentage of PSUs or provident funds into national funds, which could be a huge source. For them, it is a small part of the overall prize pool and therefore they will also have the required risk-taking capacity.

The government is making efforts but going the wrong way with its SIDBI fund of funds for startups. They cannot manage it, which is evident in the fact that the Rs 10,000 crore fund has been around for a few years but has barely been disbursed. I’m told the backlog is almost three years old.

Instead, the government should come up with a plan to attract institutional investors to venture capital funds. It will also give confidence to private investors and develop the ecosystem.

What is your advice for growing national capital as soon as possible?

The domestic capital funnel still has a long way to go. It’s something that comes with time, experience and growing up in the ecosystem. Of the current unicorns, none are funded by Indian VCs. Early rounds would have had angel investments, but later rounds have all been foreign VCs, walking away with the cake. In a way, we offer our ecosystem of startups on a platter to foreign funds.

If the startup ecosystem has enough capital, it can contribute $1.5-2 trillion to the Indian government’s vision of a $5 trillion economy. The government needs to realize that investing in startups is like investing in infrastructure—it’s a long-term game. Today’s startups are tomorrow’s big industrial houses. They need the right support and time to grow.


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