Venture Capital (VC) investments by India-dedicated funds totalled more than half a billion dollars in 2014, a three- year high. In comparison, VC investments by foreign funds in the country added up to below $200 million. But guess what? Most of the India-dedicated funds have been raised from offshore investors and nearly all the capital is raised in the US.
So why can't VC funds raise money in the country and in rupees? They can - Exfinity Technology Fund has raised Rs 125 crore domestically - but most VC firms say it is difficult, in terms of the money available, investor maturity and government support.Foreign investors who invest in Indian VC funds get tax exemptions depending upon the jurisdictions that they invest from, points out Sharad Sharma, founder of software product think tank iSPIRT and an angel investor. Indian rupee investors, however, are subjected to capital gains tax in India.
"The key challenge is the investors comparing this high risk, high reward illiquid asset class with that of the stock market, which generates anywhere between 15-30 per cent per annum without capital gains tax," says TC Meenakshisundaram, Founder & Managing Director, IDG Ventures India Advisors. "Hence, to bring a level playing field as well as give impetus to this value and job- creating investment, it is important to sweeten the deal so long as the investor is willing to take the risks associated with this." The Budget is an opportunity to set things right. (See Policy Prescription.)
Meenakshisundaram also points to the need for investor education. India is still not a mature market where high net worth individuals (HNIs) allocate their savings to VC funds. "There are only a limited number of (HNIs) and family office investors who are comfortable with this asset class. Also, the long-term sources of capital, including pension funds, insurance companies, and banks, have not yet done VC investments except in government funds with significant restrictions on investment criteria," adds Meenakshisu- ndaram. Family offices are private wealth management advisory firms that cater to the super rich. Indian family offices who invest in venture capital include Azim Premji's PrejmiInvest and Narayana Murthy's Catamaran.
Ashish Gupta, Senior Managing Director, Helion Venture Partners, which operates three funds in India with a combined corpus of $600 million, says it is a matter of evolution. "Venture capital in India is about nine years old. Venture funding is 50 years old in the Silicon Valley.
The next stage of evolution in India will happen when the markets get deeper," he says. By deeper, he means more number of start-ups, the primary investment conduit for VC funds.
When the number of investment-worthy companies increases, even family offices will change. They may then prefer placing their funds with professional VC companies and that could help raise a sizeable rupee fund.
Till such time that happens, venture funds in India will continue to depend on offshore investors.