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The rise of micro venture capital funds in India

Written by Moulishree Srivastava Published on     4 mins read

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The number of micro VC funds in the world’s third-largest startup ecosystem has increased to 88 in 2020 from 29 in 2014.

In January this year, Satvik Jagannath, co-founder and chief executive of Vitra.ai, a four-month-old deep-tech startup that helps translate videos in multiple languages, virtually showcased his product to more than 500 investors, corporate houses, angels, and family offices.

On the pitch day, organized by Mumbai-based micro VC fund 100X.VC, Jagannath said Vitra.ai can translate an hour-long video in 50 languages with voice and lip-sync in just 15 minutes while making the process 96% cheaper.

Vitra.ai, which addresses the USD 56 billion language translation market globally, is a part of the third batch of startups that were seed-funded by 100X.VC earlier this year. Nine out of 10 startups of this batch are close to raising their next round of funding, as per 100X.VC.

Jagannath and his co-founder Akash Nidhi P S are not alone to get backing from a micro VC that is enabling them to connect with bigger VC firms.

A growing number of idea-stage startups are finding mentors and first investors in micro VC funds that have bloomed over the last few years. According to a recent report by the Indian Private Equity and Venture Capital Association (IVCA), Amazon Web Services, and Praxis Global Alliance, the number of micro VC funds has increased to 88 in 2020 from nimble 29 in 2014 in the world’s third-largest startup ecosystem.

Typically, micro VCs are funds that have a corpus of less than USD 30 million and primarily operate in the pre-seed and seed space, with only a few of them participating in post-seed rounds. In the last three years, micro VCs have pumped in USD 341 million in the Indian startup ecosystem across 566 startups in 730 deals, the report stated.

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While 2019 saw eight such funds including 100X.VC being set up, there were six micro VC funds that were founded in 2020. Some of the other recently launched micro VC funds in Indian include 9Unicorns, iSeed, Waterbridge Ventures’ Fast Forward, Pitchright Ventures, July Ventures, Pentathlon Ventures, and PointOne Capital.

The momentum has continued this year as well. Earlier in February, Sequoia was reported to be raising its second India-focused seed-stage fund to strengthen its efforts to back early-stage startups. Similarly, Delhi-based Eximius Ventures on Thursday announced the first close of its maiden USD 10 million fund.

Eximius plans to write checks worth USD 300,000 each in 25-30 pre-seed stage startups operating in edtech, fintech, gaming, health tech, B2B SaaS, and online media, over the next three years.

“As a fund investing in the pre-seed stage, we would primarily focus on addressing funding and accessibility gaps faced by startups and extend our support beyond capital to offer unconditional network access, expert guidance, help with future fundraising, and more,” Eximius founder and managing director, Pearl Agarwal, said in a statement.

Over the past decade, micro VCs have emerged as promising players in India’s startup-investor landscape providing much-needed risk capital as well as hands-on mentorship to their portfolio companies, the IVCA report notes.

“They are giving the much-needed risk capital as businesses seek to achieve product-market fit and become ready to scale with stable business models,” it added. “The increase in number is driven by India’s booming startup ecosystem, micro VCs’ ability to fill the funding gap between institutional and angel investors, and increasing domestic LP interest in startups.”

Bridging the gap

Indeed, the micro VCs have nestled themselves between accelerators, incubators, and the larger VC ecosystem.

“We saw that there were a lot of incubators and accelerators on one side, and on the other, there were VC funds. And there was this gap of very-early stage VC funds,” Yagnesh Sanghrajka, founder and chief financial officer at 100X.VC told KrASIA.

“Most of the large investors were cutting bigger checks. But there weren’t too many companies that were kind of eligible for those larger checks. None of the VCs wanted to talk to incubators because their founders are too raw,” he explained. “So what they’ve done is, they have tied up with funds like 100X.VC, wherein they evaluate our portfolio companies for their deal flow.”

Sanghrajka feels that post the peak of the pandemic last year, the VC ecosystem in India has started to chase very early-stage deals aggressively, and that trend is going to continue. Although he feels, this is not an easy segment to crack.

“You have to work with founders, who probably are very raw. They are not sophisticated and knowledgeable enough to be able to raise funds immediately. So most of these deals get rejected. And we do that hard work of finding gems out of the stones, and polishing them.”

Rajat Tandon, President, IVCA believes these are high-risk, high-return seed checks that have been yielding good returns.

“The micro VC stage of investments, with a smaller fund size is the highest risk capital asset class, that is supporting India’s next-gen innovation-driven entrepreneurs,” Tandon said in a statement.

While most of these micro VCs are sector agnostic, they lean towards investing in the sunrise sectors. In 2020, over 60% of micro VC investments were in SaaS, AI, consumer apps and platforms, e-commerce, and listing platforms, the report found.

“Micro VCs are playing a crucial role in the Indian startup ecosystem, making contrarian bets and supporting untested ideas,” believes Madhur Singhal, managing director, Praxis Global Alliance.

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