India’s venture capital firms are adopting smaller fund sizes in response to market changes and a scarcity of high-quality startups. Noting that overvaluation had previously led to inflated funding, firms like Stellaris Venture Partners and Blume Ventures are holding their fund sizes steady or making minimal increases. As pressures mount from limited partners for exits and performance, VCs are becoming more selective in their investments, refining their strategies to react to a more cautious investment climate.
On Thursday, Stellaris Venture Partners, an early-stage venture capital firm, introduced its largest investment vehicle to date, a $300 million fund. The fund was notably oversubscribed; however, the partners opted not to increase the amount. Partner Alok Goyal stated that this fund size is optimal for deployment over the next four years within India’s seed-to-series A startup funding landscape.
Blume Ventures, known for investments in notable Indian startups such as Battery Smart and Unacademy, also intends to maintain its next two funds at around $290 million rather than raising further. Similarly, Peak XV reduced its $2.85 billion fund for India and Southeast Asia by $465 million to lower its cost of capital, primarily due to insufficient growth opportunities for its strategy.
Other venture capital firms are adopting a similar approach, either planning minimal expansions or slightly increased corpus sizes. This reflects a more cautious outlook on the Indian startup market, where many venture capitalists now hold substantial dry powder—unallocated capital—they are evaluating investments more carefully.
Anup Jain, founding partner of BlueGreen Ventures, indicated that the adjustments in fund sizes are largely influenced by past performances of previous funds. Funds that were raised in 2013-14 will conclude by 2025, with limited partners now demanding exits, demonstrating heightened pressure for returns on investments.
Limited partners, who invest in venture capital firms, anticipate that their investments will yield profit typically within a 10 to 12-year cycle. Jain noted that the returns, whether in cash or shares, will now be measured alongside public market performance, which currently averages at 15% compound annual growth rate. He remarked, “The earlier interest driven by FOMO for the new asset class has now changed into actual performance and team longevity and governance inside the funds.”
Jain and his co-founder Rajeev Suri recently announced the launch of a $75 million fund targeting early-stage startups. He emphasized the importance of adjusting fund sizes to reflect more realistic startup valuations, which have seen a notable decrease of 25-30%.
Several modest fund sizes are now being directed toward growth-stage investments, reflecting the need for a careful approach given the current lack of investable startups in an inflated market. The previous ease of securing funds has diminished, revealing vulnerabilities in the Indian startup ecosystem.
Abhishek Srivastava, general partner at Kae Capital stated that the inflated opportunities during the 2021-22 bull market have normalized. He remarked that the emphasis now is on companies reaching essential milestones and aligning more closely with credible upstream capital sources. This shift is influencing early-stage investments as well.
Venture capital firm 3one4 Capital is also considering only a slight expansion of its fund corpus, indicating that its next fund may be around $250 million. According to Siddarth Pai, the firm’s founding partner, the focus remains on maintaining investment discipline despite significant investor interest.
There exists a notable dissonance between the availability of dry powder and viable investment opportunities, prompting many VC funds to reevaluate and right-size their fund corpus. The trend of secondary transactions is rising, where funds engage in selling stakes to other investors, alongside an increasing push for earlier public listings of portfolio companies.
For fund managers, the ideal size for early-stage funds is typically in the range of $200-250 million, while very early-stage funds may remain at $80-120 million. Larger ventures, such as Accel, have raised significantly larger funds that encompass all of India and Southeast Asia. Over the last several years, the capacity for early-stage funds to effectively deploy capital has grown noticeably, as indicated by Suri, adjusting to shifting market dynamics.
Limited partners generally seek enhanced returns on their investments, an objective more readily achieved through right-sized funds. The disciplined management of funds is crucial for optimizing returns and minimizing deployment pressure, as larger funds risk diluting overall return multiples.
Recent shifts in the structure and expectations of venture capital in India have led firms to reconsider the sizes of their funds. As the startup ecosystem faces challenges, particularly following a period of inflated valuations during the pandemic, venture capitalists are moving towards more prudent fund sizes that reflect current market realities. This trend is also influenced by the need for better performance metrics and accountability to limited partners, the investors backing these funds. Consequently, many firms are scaling back or holding steady on fund sizes to ensure sustainable growth and investment returns.
The venture capital landscape in India is witnessing a trend towards recalibrated fund sizes, with firms opting for more disciplined and modest investment strategies. This shift is motivated by a more realistic appraisal of startup valuations, pressing demands from limited partners for tangible returns, and the ongoing challenges within the startup ecosystem. Overall, venture capitalists are adopting a cautious approach, emphasizing performance and alignment with credible business opportunities.
Original Source: www.livemint.com
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