The world has been seeing a lot of growth in the VC market, especially in India. But it is interesting to see how this asset class affects us and allows professionals to encash this. However, knowing that this investment class has evolved and nothing has happened overnight is imperative.
Venture capital (VC) as an asset class has existed in India for a while. The first fund was set up in 2000, and the first exit was in 2005 when Infosys acquired BPO firm Patni Computer Systems.
The first fund to raise more than $100 million was set up in 2008; however, it wasn’t until late 2009 that VC investments took off. In 2010-11 alone, there were 136 deals worth $1.7 billion — compared to just 147 deals worth $3 billion between 2006-08!
The average return for a company that exited after 1-3 years was 24x the total fund size, while the average return for a company that exited after 4-5 years was 15x the total fund size.
This data shows us the effectiveness of a good VC fund and how people channel it to their benefit.
VC is a good asset class to invest in, especially if looking for high-risk and high returns. A balanced portfolio includes the inclusion of VCs as one of the classes. A recent example of this is the pension funds, and mutual funds, now planning to allocate around 3-5% of their investments under the VC funds.
As mentioned above, VC investments have been increasing in India. This trend will only continue as more people become aware of this investment opportunity and start putting their money into it. The most important question in our mind is what we do. Not just ourselves, but we can also think about this for our professional clients and colleagues. Diversification is the flavour for the coming 5 years; it is time to move in this direction.
Venture capital is actually a very old asset class that has evolved over the years. In the past decade, venture capital has emerged as the preferred form of financial investment for investors and entrepreneurs.
Venture capital is an alternative to stocks or bonds because it offers higher potential returns with lower risk levels than traditional investments like mutual funds or real estate. However, this comes at a cost: you must understand how venture capital works to make money from it!
This evolution has been driven by several factors, including:
A new study by Venture Intelligence and Thomson Reuters has revealed that momentum investments (startups raised more than once) have risen sharply over the past three years.
Momentum investments are also a good indicator of market sentiment because they signal an appetite for risk by investors who can afford to wait until later rounds before seeing any return on their money invested in these startups. If we look at how much capital was raised during each round over time, we see that while early-stage deals have remained flat since 2016 (from $0 million-$10 million), growth-stage deals ($10 million-$20 million) have seen significant growth since then (from $20 million-$30 million).
Venture Intelligence’s data shows that the number of new fund launches has increased from three to nine over the last decade. The company estimates that about 30 active fund managers are operating India’s VC market with total assets under management estimated at around $19 billion and growing steadily every year since 2005 when they first started tracking this information.”
The number of funds increased to 139 from 123 during this period, while the number of deals declined to 410 from 455 due to underperformance by some new funds that struggled to raise capital.
The trend is likely to continue in 2023 as well, with more funds looking at raising initial capital or expanding their existing corpus by raising additional capital. This will lead us into another period where investments will remain subdued but steady over the next 2 years until 2025, when things start getting interesting again.
With the ever-evolving ecosystem, this is one of the very good opportunities that may be considered lucrative. We have been working in this domain for quite some time and are extremely bullish.