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January 5, 2024
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“Unveiling the Indian VC Ecosystem: The Urgency of Transparency”

TLDR

  • Transparency is crucial in the Indian venture capital ecosystem to instill confidence in limited partners (LPs)
  • LPs evaluate VCs based on their understanding of market opportunities, portfolio outcomes, and exit strategies
  • Predictability in executing large-scale exits remains a primary concern for LPs in India
  • Increasing transparency by discussing clear paths to liquidity with stakeholders can build confidence in Indian VCs
  • Tech-first business models in sectors like health, education, finance, media, and commerce offer potential for LPs

Increasing Transparency in the Indian VC Ecosystem

The Indian venture capital (VC) ecosystem should prioritize transparency to instill greater confidence in limited partners (LPs), according to an article in Business Today. While much attention has been given to founders, the perspective of LPs has been largely overlooked in the Indian startup landscape. LPs, who back the VCs and indirectly fund all the risk-taking, often have concerns about the lack of a predictable playbook for exits and liquidity. As a result, increasing transparency is crucial to address these concerns and attract LPs.

Evaluating VCs and Mitigating Risks

LPs evaluate VCs based on several factors to mitigate risks and generate returns. They want VCs to have a deep understanding of market opportunities and the rationale behind founder selection. They also examine the portfolio outcomes, success stories, and any patterns in these wins. Additionally, LPs consider softer aspects such as founder engagement, referrals, and the brand value of emerging partners in the firm. LPs need to see maturity in return on investment (ROI) mathematics and exit strategies, such as mergers and acquisitions (M&As) and public offerings, to keep the capital cycle growing.

The Achilles Heel: Lack of Predictable Exits

One of the main concerns for LPs is the lack of predictability in executing large-scale exits in the Indian ecosystem. LPs are accustomed to more frequent or larger liquidity events in other markets, and the uncertainty in Indian exits hinders their confidence. The article suggests that Indian fund managers struggle to convince global LPs about a scalable, sustainable, and repeatable “exits” playbook. The lack of predictability is seen as the Achilles heel of the Indian VC ecosystem.

The Need for Transparency and Clear Paths to Liquidity

To address these concerns, VCs should engage in transparent discussions with their best companies, boards, and LPs about preparing the companies for liquidity. The lack of transparency in the past has left LPs disenchanted with mere valuation figures and limited cash outcomes. By providing a clear timeline and methodology for exits, especially once a fund crosses five to six years, VCs can instill greater confidence in LPs. The article highlights that releasing the full details of funding stories publicly, as Blume Ventures has done, can set an example of transparency in the industry.

Opportunities in Tech-first Business Models

The article also emphasizes that LPs should consider investing in tech-first business models that leverage urban growth and offer frictionless transactions and services. These businesses, particularly in sectors like health, education, finance, media, and commerce, have the potential to capture a larger market share. Additionally, as Indian technology demonstrates capabilities beyond the country’s shores, LPs can benefit by supporting VCs that focus on the India engineering opportunity for both the country and the world.

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