TLDR:
- Transparency is needed in the Indian VC ecosystem to instill confidence in LPs.
- The LPs’ perspective in venture capital remains less explored in the Indian start-up landscape.
In the intricate world of venture capital, a critical aspect that is often overlooked is its dual nature of a two-sided marketplace. This ecosystem is not just about the founders, but equally about the limited partners (LPs) who back the general partners, or the venture capitalists (VCs), and indirectly fund all the risk-taking.
The venture fund LP base is dominated by long-term capital bases managing perpetual capital. These institutions want to partake in the future of innovation and technology through the venture asset class. However, they are skeptical due to the perceived lack of a predictable playbook for exits and liquidity for their investments.
LPs evaluate VCs based on their understanding of market opportunities, the rationale behind founder selection, and the portfolio’s outcomes. They also look for maturity in ROI mathematics and exit strategies such as mergers and acquisitions, public offerings, or secondary markets.
Indian fund managers struggle to convince global LPs about a scalable, sustainable, and repeatable “exits” playbook. The lack of predictability in executing large-scale exits remains a primary concern for LPs. Confidence in India’s potential to produce a sufficient number of IPO-ready companies has grown, but the significant amount of tied-up capital is still a concern for many LPs.
One solution to address this issue is increasing transparency. VCs should have clear discussions with their best companies, boards, and LPs about how to prepare the companies for liquidity. This will provide a clear timeline and methodology for exits, instilling greater confidence in LPs regarding the capabilities of Indian VCs.
Blume Ventures is setting an example by releasing the full details of their Fund I story in the public domain, which is a first globally. VCs should focus on tech-first business models that leverage urban growth and offer frictionless transactions and services. Additionally, Indian technology capabilities and the engineering opportunity in India can bring significant gains for LPs.
Constructing a well-thought-out portfolio and aligning exit outcomes with the market opportunity and the sophistication of the capital market is crucial for LPs. Transparency and clear communication are essential in building confidence in the Indian VC ecosystem.
