Behind the rise of micro-VCs and founder-led funds in India

As large venture capital investors prefer to tread cautiously amid the current reset in the tech funding ecosystem, the early-stage investment landscape is seeing an increasing number of micro-venture capital (VC) firms and founder-led funds that I step into the center of attention.

In the last month, two new micro-VCs have been launched – Volt VC, an Ahmedabad-based Sebi-registered Category II alternative investment fund (AIF), and AJVC, founded by Aviral Bhatnagar, who previously led software- ul for enterprises and artificial intelligence. investments for Venture Highway.

Bhatnagar said AJVC will focus exclusively on pre-seed stage investments while being sector agnostic.

In the past five years, 224 funds focused on early-stage investments have been set up in India, according to data from information platform Tracxn.

Vaibhav Domkundwar, a Silicon Valley entrepreneur and chief executive of pre-seed-focused Better Capital, told ET, “When we started in 2018, India did not have institutionalized pre-seed capital. Over the past five years, several funds have emerged with a focus on pre-seed investments. I think that’s a real opportunity and there’s a need for more funds like that and it’s a very clearly identified stage now in a funding environment like this where the bigger funds will wait for the startups to get more traction. ” Better Capital is an early investor in fintech unicorns such as Slice and Open.

Other prominent micro-VCs include deeptech-focused Java Capital, Delhi-based Sauce VC and Neon Fund.

In recent years, the startup ecosystem has also seen funds managed by individual general partners, often with entrepreneurial backgrounds. These funds typically write smaller checks, supporting startups from idea to launch stage.

Additionally, a few influential founders who have made it through angel investing from their own personal capital are formalizing their investment strategies by either becoming limited partners (LPs) or launching their own funds to support early-stage startups.

On April 30, ET reported that CaratLane founder Mithun Sacheti and Flipkart co-founder Binny Bansal have become anchor LPs in Bengaluru-based Xeed Ventures, an early-stage fund managed by Sailesh Tulshan.

Other founders and operators who have launched or backed funds include Nikhil Kamath of Zerodha (Gruhas), Sujeet Kumar of Udaan, Flipkart Group CEO Kalyan Krishnamurthy (LP in Tanglin Venture Partners) and Girish Mathrubootham of Freshworks, who heads Together Fund together with the founder of Eka Software, Manav. Garg, among others.

“Over the past decade, many successful founders have transitioned into the VC space, raising funds and leveraging their experience to guide new startups. This makes them an attractive choice for future founders. Also, the growth of micro-VCs, which now number over 100 and are still expanding, has really transformed the investment landscape,” said Anil Joshi, Founder and Managing Partner, Unicorn India Ventures.

However, this trend poses both challenges and opportunities for angel investors, as many startup founders now prefer institutional backers with strategic investment models, industry mentorship and hands-on support to enrich their capital table.

This trend is also getting a boost from the growing drive for domestic capital to be invested in Indian ventures.

Domestic capital now accounts for about 15% of total investment in Indian startups, a figure that has grown significantly over the years, ET reported in April. The Department of Financial Services has also learned that it is preparing a risk framework for direct investments by pension funds and insurance companies in local startups, hoping to increase the proportion of domestic capital in Indian startups.

Commerce and Industry Minister Piyush Goyal also emphasized the need for more domestic capital in the startup ecosystem.

This comes at a time when China is actively promoting foreign investment in its technology sector by implementing measures to attract foreign investors, including facilitating foreign investment in Chinese technology firms through an inbound investment scheme.

In June, the new venture capital council of the Indian Venture and Alternative Capital Association (IVCA) identified the growth of micro-VCs as one of its key focus areas.

Early bets

In line with the broader funding slowdown affecting the global tech ecosystem, angel and seed funding rounds in Indian startups have witnessed a decline over the past three years, according to Tracxn.

Angel rounds fell to 195 in 2023 from 560 in 2021, while seed rounds fell from 1,850 to 1,100 over the same period. So far in 2024, the Indian startup ecosystem has seen 98 angel rounds and 417 seed rounds.

“Previously, there was a significant gap between angel investors and late-stage VCs, with the latter doing much of the hard work. However, with the rise of micro-VCs, which have largely taken over the angel space, angels must adapt to remain competitive. Otherwise, they may find it challenging to get deals with these emerging micro-VCs,” added Joshi.

However, some investors see the rise of these funds as a positive development for angel investors. They said angel investors can increasingly participate in co-investment models with these institutional funds, which are proactively managed by fund managers, reducing their investment risks.

Ritu Verma, managing director of early-stage investor Ankur Capital, pointed out that while micro-VCs play a crucial role in supporting these young startups, their check sizes may not always be sufficient for a company’s needs.

“I think there is a gap in the ecosystem. While we see many deals where there could be a micro-VC, often the size of the check is not enough for the company. So conversely, if you go to a bigger fund, they say show this and that before they can talk to you,” she said.

However, the size of micro-VC funds has grown significantly over the past few years as more early-stage startups have emerged and larger VCs focus on late-stage deals.

Focusing on specific areas is also one of the strategies for micro-VC.

“If a micro-VC is sector agnostic, then there won’t be much of a differentiator because we’ll be competing against the likes of Peak XV or Accel, which will make it very difficult. That’s why we’re focusing on deeptech, climate and sustainability, where we’ve developed expertise,” said Vinod Shankar, co-founder of Java Capital.