CB Insights, a reputed tech research firm, recently came out with a report on India’s most active investors. According to this study, Blume Ventures, with 76 investments and Sequoia Capital India, with 55 investments, have been the two most active VC funds in India over the last five years.
Now activity, as measured in the number of investments, is a somewhat quixotic metric to measure a VC. It is easy enough to measure of course but is admittedly not a proxy for excellence or success. But it be a meaningful metric that can be parsed to provide deeper insights into how VCs view investing in India in general and specifically how they think through portfolio construction. The CB Insights study covers the period 2012 to 2017. History will recognise these five years as the period in which venture investing in India came of age—evolving from a somewhat arcane topic to mainstream headlines that every startup founder and observer is cognisant of.
There is another reason why the results of this study seem intriguing. Blume Ventures and Sequoia Capital India are, in essence, two polar ends of the VC spectrum in India. Blume is a relatively new firm run by first-time GPs and had a small capital base of just Rs 100 crore for its first fund. On the other hand, Sequoia Capital is the bluest of the blue chip VCs not just in India but globally with a rich lineage and pedigree and its most recent fund of $920 million (nearly Rs 6,000 crore) is the largest tech VC fund ever raised in India. And yet, both these firms ended up with roughly the same number of portfolio firms. How and why did this happen? What does this tell us about investing in India?
Against this backdrop, a deep dive into India’s most active VCs can be a valuable exercise.
Before we do that, a quick primer on the venture capital business model might be in order.
Venture capital is a pool of money that is raised from a class of investors called LPs or limited partners (usually large institutions such as pension funds or college endowments and high net worth individuals or families). This pool of capital is managed by a team of professionals called GPs or general partners for a fixed tenure (usually 10-12 years). The GPs invest this money into startups that they believe are promising with the explicit expectation that these companies become more valuable over time and provide a great return on capital. Profits from these returns are first ploughed back to the LPs as per the contractually-promised rate (known as the hurdle rate) and any excess profit beyond this is shared between the LPs and the GPs, usually in an 80-20 ratio. In addition to this 20% cut in profits (also known as carried interest or carry), the GPs also take a management fee in the range of 2% per annum.