SIDBI Growth in Indian VC Funding

Small Industries Development Bank of India (SIDBI) has grown as a domestic investor in VC funds. India's VC industry has increasingly found SIDBI to be on the ball with funding and understanding VC needs and this is a good step forward for India's domestic venture capital industry, which has mostly been dependent on overseas investment.

"With external money, there is always a fluid situation. Sometimes, it is in one economy, and sometimes it is funding another destination. Also, overseas investors end up bearing the currency risk as much of their returns get eaten away due to currency depreciation. Additionally, the flavour of investments keeps dangling between the early and late stages, and across favourite sectors," says Ajay Kumar Kapur, deputy managing director at SIDBI.

The rising interest in SIDBI as a source of capital is clear as there is an increase in the number of sanctions and capital commitments to fund managers in the last couple of years.  "The overall funding to startups from the SIDBI-supported venture funds this year could be in the range of Rs 3,000 to 4,000 crore. This is because most funds that got sanctions last year are likely to achieve full closure this year," says former Infosys director TV Mohandas Pai, who is also a member of SIDBI's Venture Capital Investment Committee. Domestic financing may give VCs more independence and decision autonomy rather than financing by venture funds such as Sequoia Capital and Accel Partners. 

Proposals are put forward by VCs which are then vetted by the Venture Capital Investment Committee of SIDBI, which include Sanjeev Bhikchandani, Saurabh Srivastava, Kiran Karnik and Mohandas Pai. SIDBI commits to invest around 20% of the fund corpus, post which fund managers have to secure commitments from other entities, and SIDBI then releases the funds.

For many funds, commitments from a domestic institution, such as SIDBI, help in building credibility and make getting funds from other investors easier. SIDBI doesn't usually make the first commitment, and requires fund managers to get firm promises from other investors before they approach SIDBI. 

A big challenge is the difference between the amount committed by SIDBI and the amount disbursed. "There is an abundance of seed capital in the country, but there is a serious need for more Series B and Series C funds. The key issue is limited participation from larger institutions such as LIC, Employees Provident Fund and other private insurance companies. They need to expand their exposure to this asset class," says Mohandas Pai. 

Looking to China which has recently enhanced its role in startup funding through investments in venture funds. According to the consultancy Zero2IPO, Chinese government-backed venture funds hugely increased their money under management in a single year to $330 billion in 2015. The Chinese cabinet, last year, sought an increase in the funds to startups from government-funded venture funds. This year, the government established a US$14.5 billion state fund, called The China Internet Investment Fund, to fund Internet companies and technological innovations.

SJP @DigitalAsian - ShareYaar - IdeaIndia.Com


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