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Early investors set up dedicated funds as start-up valuations surge

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October 18-20, 2023 / Tucson, AZ
The annual summit for research institution gap fund and accelerator programs, including proof of concept programs, startup accelerators, and university venture funds

The Story

Venture Capital (VC) firms such as Nexus Venture Partners, Kalaari Capital and Blume Venture Advisors are setting up independent investment vehicles for the sole purpose of investing in their winners such as Snapdeal, promoted by Jasper Infotech Pvt. Ltd, and Simplilearn Solutions.

The firms are finding this necessary, given the surging valuations of some start-ups in which they made early-stage investments.

Nexus Venture raised a so-called opportunity fund of $110 million last year, primarily for investing in Snapdeal which has received more than $1 billion in capital over the past 18 months from Nexus, Japan’s SoftBank Group and others.

Another Snapdeal investor, Kalaari Capital, is raising $75 million for an opportunity fund this year.

Nexus, which is in talks to raise its next fund, may again raise an opportunity fund next year, two people familiar with the matter said, asking not to be identified.

These funds are separate from the core funds of the VC firms, which have a larger corpus and are primarily used for making early-stage investments.

Indian start-ups are growing and need large amounts of capital. Their early-stage investors are looking at special purpose vehicles (SPVs) to make the most out of their finds and avoid missing out on massive gains because of a lack of firepower.

“We are seeing opportunities to support our companies as they scale faster and require more capital,” Nexus Venture managing partner Sandeep Singhal said in an email. “We raise growth/opportunity funds to provide later-stage capital to such companies. The investment criteria and the nature of the reserves set aside is different for the growth fund and provides more flexibility.”

SPVs have two main benefits, said Rajesh Raju, managing director at Kalaari Capital.

“One, they allow you to continue to extract more returns from your proven investments. As an investor, you take a lot of risk by betting on early-stage companies even when they don’t have proven models. If some of these companies become big and there is significant interest from new investors to be part of the cap table, why should the early investors give up their pro rata rights? Secondly, by creating separate funds for winners, VCs also offer flexibility to LPs (limited partners, or the entities that invest in funds raised by VC firms), who can choose if they want to invest and how much they want to invest in select start-ups from a portfolio.”

Another VC firm, Blume Ventures, plans to raise separate funds for investing in individual companies that become large from its portfolio. Blume will raise its core fund later this year.

Such SPVs and opportunity funds are a new concept in India simply because, in the past, there weren’t many large start-ups. Now, companies such as Flipkart, ANI Technologies (the promoter of cab booking service Ola), Jasper and One97 Communications Ltd (the promoter of Paytm) have become large and are raising successive rounds of capital within months.

Opportunity funds also help provide comfort to entrepreneurs who are used to working with their early-stage investors. Access to large amounts of capital from early backers reduces the need for entrepreneurs to chase several new investors for cash.

“If you discover great ideas, back them early when few others are willing, provide guidance and mentorship to the teams. Entrepreneurs like the continued investors’ support,” said Sanjay Nath, managing partner at Blume Ventures.

“From an investor’s side, you want to back your winners—the key question is for how much and for how long. Entrepreneurs value continued investor support, and fund investors (LPs) increasingly also want co-invest opportunities so they can get direct exposure.”

Some VC firms that have US-based parents such as Accel Partners and Matrix Partners don’t necessarily need growth funds. For instance, when Accel’s India fund falls short of cash for follow-on investments, its US parent puts up additional cash. Accel US invested in cab-hailing service TaxiForSure last August, when its India fund was at the end of its tenure. Accel India raised its fourth fund of $305 million in March.

via Early investors set up dedicated funds as start-up valuations surge – Livemint.

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