Indian venture capitalists need to pivot to a new model of investing

Welcome to a new edition of Full Stack, a place where you’ll find unfiltered commentary on all things technology.

Please keep the bouquets, brickbats and suggestions coming. You can reach me at samidha.sharma@timesgroup.com and follow me on Elon Musk's Twitter (sorry X) @samidhas.

A big trend in venture investing is emerging, something that’s been simmering for a few years now in the post-Covid era. This trend surfaces each time a downturn hits this buzzy asset class, which is far more in the news than its PE peers.

Indian venture investors, focused on spotting the hot fledgling tech startup that will yield the next significant outsized return, are turning to safe havens. Think of non-tech, consumer, public markets, multi-stage vehicles, and whatever it takes to get exits and show money to their sponsors – ‘limited partners’ in the investing world. As early-stage VCs who pride themselves in being risk-takers broaden their bets, this cycle will forever change how the venture industry functions in India.

Recently my colleagues Digbijay and Ratna wrote about VCs going big on brands in traditional sectors. Direct-to-consumer luggage brands seem to be catching the interest of these 'risk investors'. Handbags, beauty, and apparel brands are all finding takers. But these don't give VC-type returns. The lure of backing scrappy tech startups is what makes this business what it is.


'Larger fund sizes, focus on profitability, and slower growth in these companies will make venture capital funds look similar to what we used to call mid-market private equity earlier. Their portfolio will include companies in manufacturing, offline consumer, healthcare services and lending businesses…,' an investor told me recently.

We’ve written a string of stories capturing how the VC focus is moving towards diversifying their bets beyond tech.

• How VCs are backing scions from old business families
• The rush of venture capital in food brands
• New-age consumer brands pulling in funds, tech no bar

Zoom in

With a corpus of $2.8 billion to deploy, Peak XV Partners (formerly Sequoia Capital India) has stated that it wants to allocate funds into an 'evergreen' pool of capital consisting of partners' funds. This, the firm said, will invest in companies beyond the typical remit of a pure-play VC firm. It may even include public markets, possibly. One of the country's oldest VC outfits, Nexus Venture Partners' MD Sameer Brij Verma left a few months ago to launch a multi-stage and multi-sector investment platform with a diversified approach, as I'd reported.

This isn't the first time that Indian venture capitalists have taken PE type bets to tide over tough market conditions. These tend to be in traditional sectors, as evidenced in any downturn.

In 2016, when the markets turned, a similar trend played out. I had written then how VCs were lining up to back non-tech companies after a tech gold rush.

But that period was short, for most of the past decade, barring some small blips, gobs of VC money has flowed into tech startups with few exits to show in India. What’s unfolding now is a continuation of two years of cautious unravelling, and the kind of tech reset not seen before.

AI to the rescue

So, while AI investments have been the go-to in Silicon Valley, in India, VCs have moved to the offline space and spread themselves in the PE territory due to a lack of local AI innovation.

While things may not be dire, what's going to start happening is Indian VCs will go back to smaller-sized funds in the $300-350 million range, build more diversified portfolios, which include a big chunk of non-tech companies, and back entrepreneurs beyond the top cities.

Indian VCs had it easy in the zero-interest era. Massive funds meant indiscriminate spray and pray, especially in the Covid years. While most of the actors involved in that drama have disappeared from India, the venture firms with dedicated teams here have seen a surge in people movement. Many partners have left to start their funds, while others have very little to show on their scorecards of exits or wins.

Deal flow has not picked up for almost two years, making it hard to keep the momentum going for an industry that thrives on pace. There is a sense of existential crisis that refuses to go away.

The answer, therefore, lies in finding a unique India VC model different from what has worked in the past decade. Each time this is a possibility, a new funding blitz takes the industry back to its not-so-great ways of investing. Hopefully, this time will be different, a cliché so widely used by VCs themselves.

Samidha Sharma is Editor - ETtech. She’s been covering the tech and new-age digital economy for over a decade, and has had a ringside view of the industry and its people.