As internet biz slows, VC firms struggle with large war chests

Slowdown in startup investments, drop in earlystage funding put question marks on returns

BENGALURU: Most of India’s top venture capital (VC) firms raised successively large funds in 2015 and 2016, betting on what looked like an internet gold mine then. After the slowdown in the growth of the consumer internet business since the start of 2016, VCs are struggling to justify the large funds they raised.

A drop in early-stage funding, slowdown in startup investments and continued lack of exits has led to concerns that VC firms have raised too much capital and will struggle to generate returns on the funds they raised in the past two years, investors said.

India’s top eight VC firms— Sequoia Capital, Accel Partners, SAIF Partners, Nexus Venture Partners, Kalaari Capital, IDG Ventures, Lightspeed Venture Partners and Matrix Partners— have together raised $3.8 billion since the start of 2015, shows Mint research. This amount doesn’t include investments committed by other investors such as Lightbox Ventures, Blume Ventures, Kae Capital and Inventus Capital Partners and recently launched funds such as Stellaris Venture Partners, Pravega Ventures and Endiya Partners. Additionally, Matrix and Inventus Capital are in the process of raising their next funds, which will only add to the glut of early-stage capital.

The war chest accumulated by VC firms stands in stark contrast to the drop in investment activity. While startup investments have increased this year in terms of

value, the number of deals has dropped from 2016. Mint reported on November 2 that early-stage funding of India’s internet startups in 2017 has fallen to a threeyear low, indicating that there may be a shortage of deal supply for VCs over the next two years.

Privately, many VCs admit that they overestimated the potential of the internet market. They say the internet market will grow, but at a much slower pace than they estimated in 2015. “Most funds have raised too much money. Anything more than $150-200 million and you’re going to struggle to give returns. But most VCs have raised funds that are two to three times bigger. India is just not a deep enough market to absorb that kind of capital. And that will have consequences for the return profile of funds,” said a partner at one of India’s top five VC firms. He spoke on condition of anonymity.

Sequoia, Accel, Nexus and Kalaari all raised significantly larger funds in 2015 and 2016, compared with their previous funds. SAIF Partners maintained its fund size at $350 million, both in 2015 and this year.

Given their large fund sizes, some VCs have tweaked investment strategies. For instance, Sequoia, which was doing a large number of seed-stage deals in 2014 and 2015, has reduced its early-stage investments. And Accel, which was primarily a seed-stage investor, is expected to carry out both a higher number of latestage investments from its new $450 million fund and plough more follow-on capital into portfolio companies compared with its previous funds.

“New investment activity has been restricted,” said Niren Shah, MD at Norwest Venture Partners India, which invests in startups and larger companies.