Indian start-ups have been on a roll since January with a series of fundraise announcements that catapulted 11 of them into the Unicorn club with a valuation of over $1 billion. Despite the raging pandemic and the consequent business disruption, how are venture capital and private equity firms raising money from LPs (limited partners) to fund the start-ups? LPs generally consist of Pension Funds, Sovereign Wealth Funds, Institutional Accounts and HNIs.

VS Kannan Sitaram, Venture Partner at Fireside Ventures, said LPs are typically not very emotional people but look for hard evidence as to whether the VC firm is able to give good returns for their money. “They need to know that this is not just some pipe dream but there is real substance in the strategy that a Fund like ours is setting out to implement. Our Fund I was closed at ₹340 crore but we closed Fund II at ₹863 crore and are still seeing a lot of demand for our kind of strategy.”

Fireside story

This was not the case, when Fireside started out in 2017. “At first, it was not so easy to convince LPs to invest in our fund. They would ask us two questions — if there are enough consumer start-ups to invest in as we were a consumer-focused fund, especially because investments were all about tech those days. Second, if we could build large digitally native brands with digital-first strategies. Those two questions were answered quite convincingly during our Fund II raise in 2019/early 2020 with our portfolio start-ups like BoAt and Mamaearth — both digital first brands that have scaled up with revenues of over ₹1,500 crore and over ₹500 crore respectively,” recalled Sitaram. Fireside is expected to exceed its typical 5-6 deals per annum as it has a larger deal pipeline to review this fiscal.

On a similar note, Vinay Bansal, founder and CEO, Inflection Point Ventures, said: “For micro-VCs like us, our LPs are individuals who are CXOs of various companies and businesses. They understand what is working, what is the need of the hour and what society is going to need in the next few years. We have to present real data in the context of what is happening around us. Once they understand the business opportunity, the quality, ability, integrity and history of the founders, they are willing to commit their money to back such ventures such as, an electric vehicle company.” IPV has already closed 13 start-up investments in calendar year 2021, and plans to close a total of 60 investments at an investment of ₹155 crore, up from 30 in 2020.

The recent start-up deals are not from freshly raised capital but what is already there in the kitty of earlier funds, which is being deployed during the pandemic by PE firms, observed a partner from a PE major, requesting anonymity. “Ours is not a brick and mortar business to get affected daily. We have a well oiled, fund-raising machinery in place, and will continue to raise funds and write out cheques after conducting our due diligence remotely. If our existing investors are giving us a second round of investment, they already know our track record therefore, it will be faster. But if we approach a new LP, it will take longer, as they cannot physically meet the senior management or check out our platform during these turbulent times,” he said.

focused approach

Amit Ratanpal, founder and MD of VC firm BLinC, which recently announced the launch of its ₹100 crore SEBI-registered Category-II AIF and its first close of ₹30 crore, says they are lucky to receive commitments from all their investors. “I believe they were encouraged by our focused approach of investing in sectors such as Edtech and Fintech, being selective in our investments, and working closely with the founders. This has been consistent with our superior returns in BLinC Fund I.”

Stride Ventures raises capital from large PE Funds, institutions such as SIDBI, Family Offices and HNIs. “The model that prevails in Venture Debt Funds is our investors don’t have to wait for exits to happen. They get regular returns in the form of interest that is charged from our portfolio companies from day one and the principal is returned in 3-4 years depending on the commitment period,” said Ishpreet Gandhi, founder and managing partner, Stride Ventures.

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