Emerging Entrepreneurs

Public sector financial institutions: Keeping venture capital firms in funds

Thillai Rajan A | Updated on February 19, 2018 Published on February 19, 2018

PSFIs preferred to invest in funds that had a flexible investment strategy

In the glamorous world of venture creation, the role of public sector financial institutions (PSFIs) has often been understated. But like the glue that binds despite being barely visible, PSFIs have played a remarkable role in the development of ventures in India. Often the Central Government implements various fund of fund programmes through PSFIs. For example, SIDBI is the fund manager for the Fund of Fund for start-ups announced by the government. Similarly, the Electronics Development Fund set up by the Ministry of Electronics and Information Technology is managed by Canbank Venture Capital Funds.

However, the predominant role of PSFIs has been as a general partner in venture funds. There are at least 30 PSFIs, which have contributed to the corpus of VC funds. Insurance majors LIC and GIC have been the biggest investors in VC funds – investing in more than 250 of them. The aggregate corpus of VC funds in which the PSFIs have invested exceeds $20 billion, which underlines the catalytic leverage effect of the contribution of PSFIs. Like a boxer who punches above his weight, commitments from PSFIs have helped VC funds mobilise larger amounts of capital from other sources.

 

 

Venture lifecycle

But more than the capital, what has been important is the thrust that comes with it. In general, the average size of the VC funds in which the PSFIs have invested is in the range of $60–70 million. This indicates most of these funds invest in the early and growth stage of the venture lifecycle. In addition, more than 50 per cent of the funds were sector agnostic, indicating that PSFIs preferred to invest in funds that had a more flexible investment strategy.

Among the funds that had a sector focus, technology and industrials accounted for the largest proportion. While the focus on technology is natural, it is interesting to note that industrials, which are essential for core industrial development has been a major focus area for PSFIs.

For example, PSFIs have contributed to 10 funds that focus on oil and gas sector. This sector does not get significant venture funding and PSFIs supporting ventures in this sector is an indication that they are prepared to support ventures in those sectors that fall in the rain shadow region of traditional VC funding.

 

 

We analysed data on 587 ventures that have received VC funding from funds in which the PSFIs have invested. Average round size was $12 million and the average stake acquired was 22 per cent, implying a post-money valuation of about $50 million. Interesting differences could be observed in the composition of portfolio ventures between PSFI invested VC funds and the overall VCPE industry. First, more than 27 per cent of the ventures are in the technology sector, which includes IT, software and core technology hardware products. This is lower when compared with overall industry trends. Technology segment accounted for 45–50 per cent of the companies that received VCPE investments.

Non-tech sectors

Seen in that context, PSFIs are selecting funds that have a higher focus on non-technology sectors. Second, about 26 per cent of the ventures are in the industrials category, which includes segments such as construction & materials and industrial goods and services. Comparatively, industrials account only for 13 per cent of the overall VCPE investments. Third, consumer goods and services sector account for about 13 per cent of the number of ventures that receive VCPE funding. But, in the case of VC funds that have received capital from PSFIs, the sector accounted for about 23 per cent of the ventures. These differences indicate that apart from financial returns, PSFIs have a preference to invest in those VC funds whose investment objectives are in alignment with the agenda of national development.

The entry of PSFIs has definitely increased the odds ratio for success for the start-up – by able to attract more capital for VC funds, focussing on early-stage start-ups, and accentuating core sector development.

(Research support provided by Ramesh Kuruva, Ph.D. Scholar, IIT Madras).

The writer is a Professor, Department of Management Studies, IIT Madras and Associate, Harvard Kennedy School, Harvard University

Published on February 19, 2018
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