When IvyCap, a local early-stage VC, sold its partial stake in direct-to-consumer beauty and cosmetics startup Purplle in March for USD 45.6 million, clocking up a 22x return on a USD 2 million check it wrote in 2015, it grabbed the attention of the whole Indian investor community.
The exit from Purplle, which was valued at about USD 300 million then, helped the Mumbai-based VC firm generate a return, 1.35 times its entire fund value of INR 240 crore (USD 33 million). And more than that, it has reinforced the confidence of local investors in micro VC funds.
Over the last several years, micro VCs funds—those with a corpus of around USD 30 million and primarily operating in the pre-seed, seed, and pre-Series A, basically all early stages—have steadily gained prominence in India. The number of micro VC funds has increased to 88 in 2020 from a nimble 29 in 2014 in the world’s third-largest startup ecosystem, according to a recent joint report by the Indian Private Equity and Venture Capital Association (IVCA), Amazon Web Services, and Praxis Global Alliance.
In the last three years, micro VCs—primarily backed by Indian family offices, promoters of listed companies, high-net-worth individuals, and institutional investors—have pumped in USD 341 million in the Indian startup ecosystem across 566 startups in 730 deals.
This trend is continuing well into 2021, despite the fact that early-stage deals have slowed down since the beginning of this year. According to data collated by research firm Venture Intelligence, the number of early-stage deals came down to 86 in Q1 2021 from Q4 2020’s 144.
Betting on early-stage
Betting big on the country’s early-stage startups, micro VCs have been filling up their treasure chests after limited partners (LPs)—those who fund VCs— began warming up to the startup ecosystem again since the last quarter of 2020. In the mid-last year, LPs had put their startup funding on hold due to the market uncertainty amid the COVID-19 pandemic.
On Friday, homegrown early-stage VC firm Artha Venture Fund (AVF) announced the final close of its first fund at INR 220 crores (USD 30 million) after three years of fundraising.
AVF first launched this fund in May 2018. The VC firm completed its second close of INR 100 crores (USD 13.6 million) in June 2019, with the aim to do the final close at INR 200 crore (USD 27.5 million) in 2020. However, because of the COVID-19 pandemic last year, it had to extend the fundraising timeline for another year, Anirudh Damani, managing partner at AVF, told KrASIA.
The micro fund then targeted for the close by July 2021, but overachieved it two months early, with more than 50 LPs backing the fund.
Damani said, “90% of the fund’s capital is local.” Over 50% of the investments came from family offices and listed companies directly or through promoter entities. Moreover, the VC firm said almost half of the LPs increased their investment commitments in the last three months.
So far, it has invested more than 25% of the total corpus in 12 startups including Agnikul, LenDenClub, Kabbadi Adda, HobSpace, PiggyRide, and Daalchini. Currently, it has five deals in its pipeline in different stages of closure, said Damani.
AVF aims to invest in 40 startups from the fund by March 2023 across areas such as D2C, B2B, and enterprise SaaS, with 35% of the fund money reserved to write first checks and the rest allocated for the follow-on rounds.
Earlier this week, early-stage VC firm WEH Ventures launched its second fund with an aim to raise INR 100 crore (USD 13.6 million), double the corpus of its previous fund, to back to 18–20 startups.
WEH Ventures has already raised “well over half its targeted corpus from CEOs and CXOs of major corporations in India and reputed family offices,” the firm said in a statement.
Similarly, last month, micro VC iSeed said it would launch its second micro fund worth USD 15 million to support 50 early-stage tech startups across various sectors in the next two years. From the first fund, launched last year, iSeed has invested in over 35 startups, including PagarBook, BimaPe, GoKwik, and Velocity.
What makes micro VCs interesting for LPs is that nowadays it’s become easier for micro VCs to exit with a decent return, mainly thanks to the fact that their bigger peers are willing more than ever to buy out stakes of early backers. And they are doing so because of the country’s rapid digital adoption during the pandemic that has contributed to the speedy growth of local startups from certain areas like online commerce, edtech, fintech, and content.
The growth has underpinned their confidence in the market, which is a sentiment echoed by IvyCap’s stunning exit from Purplle.
“As a limited-size fund, you don’t have to wait for the company until they are massively big,” Damani said. “For instance, Purplle is not even half a unicorn, but this exit has returned the entire fund for IvyCap. Now every other investment for them is going to add to the profit for the overall fund.”
“If an INR 250 crore (USD 35 million) fund holding almost 25% equity in a company, valued at INR 1000 crore (USD 137 million), makes an exit, it would return the entire fund money to its investors,” he explained. “But if you are a USD 1 billion fund, holding 25% in a company, you would require the exit worth USD 4–5 billion, to get your money back.”
The micro VC model also resonates more with Indian investors such as family offices, Damani feels.
“The cost is lower for family offices when they work with micro VCs, as compared to mega VC funds,” he said. “Family offices also look for access and information, so they prefer smaller funds as they can be much closer to the fund manager.”
He added that for over 80% of the Indian family offices, mega VC funds do not make sense.