As internet biz slows, VC firms struggle with large war chests
TOO MUCH MONEY? Slowdown in startup investments, drop in earlystage funding put question marks on returns
Most of India’s top venture capital (VC) firms raised successively large funds in 2015 and 2016, betting on what looked like an internet goldmine 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 continuing 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 2015 and 2016, investors said.
India’s top eight VC firms — Sequoia Capital, Accel 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, according to Mint research. This amount doesn’t include investments committed by others 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 that 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
BENGALURU:
Sequoia Accel SAIF Nexus Kalaari IDG Lightspeed Matrix value, the number of deals has dropped compared with 2016. Mint reported on 2 November that early-stage funding of India’s internet start-ups in 2017 has fallen to a three-year low, indicating that there may be an acute 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 that the internet market will grow, but at a much slower pace than they estimated in 2015.
“It’s clear now that 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 2-3 times bigger. The fact is that India is just not a deep enough market. 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 Source: Mint research
of anonymity.
Sequoia, Accel, Nexus and Kalaari all raised larger funds in 2015 and 2016 compared with previous funds. SAIF Partners maintained its fund size at $350 million, both in 2015 and 2016.
Given their large fund sizes, some VCs have tweaked their investment strategies. For instance, Sequoia Capital, which was doing a large number of seedstage deals in 2014 and 2015, has reduced its early-stage investments. From its new $450 million fund, Accel, which was primarily a seed-stage investor, is expected to do both a higher number of late-stage investments 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.