IDG Ventures India targets rupee fund from rich, sets trend

NEW DELHI: IDG Ventures India, one of the country’s most active technology investors, is raising rupee capital from wealthy Indians for its second fund, signalling a new trend in the Indian venture industry that draws most of its money from global investors.

Bangalore-based IDG expects to raise over Rs 1,000 crore from high net worth individuals and family offices whose interest in startup funding is being stoked by favourable regulation and the promise of handsome returns from this new asset class.

“The year 2014 is the starting point for rupee funds. They will be a major factor in the success of Indian technology firms,” said Sudhir Sethi, founder-chairman and managing director of IDG Ventures India. He declined to discuss further details citing confidentiality agreements with investors.

Experts estimate that there are at least 5,000 angel investors backing young ventures in India, a sharp increase from around 200 people backing startups even six years ago. “The majority of them are not even members of networks such as Indian Angel Network or Mumbai Angels. They operate very discreetly,” said Sethi.

It is this pool of investors that IDG and other early-stage venture capital firms, such as Unitus Seed Fund India and Aurum Equity Partners, are now targeting to raise fresh pools of capital at a time when global sentiment about India remains volatile.

Typically, risk capital funds active in India are backed by overseas money drawn from global financial institutions, asset management firms and university endowments.

“As of now, they (rupee funds) are a miniscule component of the overall fundraising that takes place in India. But the kicker will be once regulators allow pension funds to participate,” said Sanjeev Krishan, leader of the private equity practice at PricewaterhouseCoopers India.

For now, domestic currency funds are targeting rich Indians keen to take a bet on India’s burgeoning startup sector.

In 2013, nearly half of all venture investments went to companies that were less than three years old, according to global consultancy EY. Three new domestic currency funds raised a total of Rs 418 crore during 2013 while in the previous year a group of high net worth individuals pooled in about Rs 120 crore in the Your-Nest Angel Fund.

Change in Norms an Incentive for VCs

“There is an emerging class of investors that do not want to park their money in just the stock market. It’s a relatively new phenomenon, but we are seeing a visible shift in investor philosophy,” said Sanjay Bansal, founder and managing partner of Aurum Equity Partners.

This trend is also being led by wealth management firms that are helping clients pick startup investments. “Direct investments in startups are riskier, so we recommend investments through venture capital funds. One of these is IDG Ventures India,” said Rajesh Saluja, CEO & MD of Ask Wealth Advisors.

Capital market regulator Securities and Exchange Board of India’s recent amendments to its Alternative Investment Funds norms have also been a strong incentive for venture capitalists as they look to tap a growing pool of domestic capital.

Under the amended rules that were notified in June last year, angel funds will now be classified for registration and regulation under Category-I Venture Capital Funds.

“Venture capital has now become a new investment class after Sebi allowed Alternative Investment Funds to raise funds from investors for pooled investments in small companies,” said ASK’s Saluja. “But we don’t recommend more than 5% of the total portfolio to be in this category.”

IDG’s new fund, the second for the firm, will invest in technology and technology-enabled businesses. Its first fund has backed companies such as online fashion retailer Myntra, medical device company Forus Health and Valyoo Technologies, which owns and operates Lenskart.

Industry experts said venture capital firms have the best chance of successfully raising capital from domestic investors, compared to private equity. “VCs raise smaller funds, compared to private equity, who will continue to depend on overseas capital,” said Raja Kumar, founder and chief executive of Ascent Capital, a private equity firm that manages assets of about $600 million (Rs 3,700 crore).

“Of late, there has been a lot of action in the VC side, which is a very healthy sign,” he said.

(Additional reporting by Babar Zaidi in New Delhi)