What's helping venture capitals to strike out on their own

MUMBAI: Earlier this month, when three managing directors at Peak XV Partners (formerly Sequoia India and Southeast Asia) quit abruptly, that too when the firm was in the thick of closing a fresh billion dollar fund, it became a talking point across investment circles. Ashish Agrawal, Ishaan Mittal and Tejeshwi Sharma will start a new venture capital (VC) firm.

It is not really unusual for VC investors to strike out on their own-back in 2015, for instance, when the Indian startup and VC ecosystem was still up and coming, three senior executives quit Helion Ventures to start their own firm Stellaris Venture Partners. Quite a few other instances followed-consider Orios Venture Partners for one, which saw two executives leaving the firm in 2023.

What, however, has changed is that more VCs now have the wherewithal to start their own funds. High net worth individuals and family offices are keen on investing in hot tech startups and are more than willing to partner or back new, emerging VC funds. Besides, the govt has lent a helping hand to boost growth of the industry-the Sidbi Fund of Funds, set up with an initial Rs 10,000 crore corpus has allowed many investors some cushion. The fund essentially backs VC firms, enabling them to invest in startups. Another Rs 10,000 crore such fund was announced last year.

"They constitute around 30% of various VC funds. VC fundraising has become easier as the asset class has become mainstream," said Siddarth Pai, founding partner at 3one4 Capital. Compared to a decade ago, there is materially more capital available for technology in India. The perception of tech businesses has matured, and public markets are more receptive to tech IPOs," said Anup Jain, who left as the managing partner at Orios Venture Partners alongside Rajeev Suri to start their own VC firm BlueGreen Ventures in 2024. Large exits or profits accrued from large deals also helps investors to put money into new funds.

Starting a fund, however, has its own set of challenges. Investors, when working with established funds typically tend to focus more on investments and the returns they can generate. They do not have a lot of expertise in raising funds. "Those GPs (general partner) who have had prior experience at handling investor relations, fundraising and compliances in addition to purely investing have an easier ride than those who have only done prior investing," said Jain.

Even so, having delivered successful bets and scaling startups to growth as well as getting access to the LP (limited partners) network, many VCs are now taking the plunge and starting funds. The recent exits of Agrawal, Mittal and Sharma at Peak XV happened due to disagreements over economics and payouts, MD Shailendra Singh said publicly.

While Agrawal parted ways due to what is understood to be discontent over payouts related to Groww whose stellar Rs 6,632 crore IPO delivered big returns for Peak, the rest two followed him. Agrawal in a social media post said he led Groww investment which went on to become the second-most valued new-age public company in India.

“As the Indian venture ecosystem matures, spinouts will become increasingly frequent. That’s because there’s both more investment opportunities and more LP capital available in the market. There are too few, not too many, high-quality venture firms in India. When professionals leave to start their own firm, there’s a multiplier effect–founders have another pedigreed venture firm to go to, new investment strategies get funded, and a new class of investment professionals get groomed. Of course, like any entrepreneurial venture, starting a new VC firm is fraught with risk,” said Ritesh Banglani, partner at Stellaris Venture Partners who quit Helion alongside Rahul Chowdhri and Alok Goyal to start the fund in 2016, adding that it took the company more than two years to raise a $90 million fund. “Our own journey at Stellaris has been extremely fulfilling. In hindsight, we should’ve started years before we actually did,” said Banglani.

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