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As India continues to emerge as a global hub for startups and innovation, investing in Venture Capital (VC) funds has become an increasingly attractive opportunity for both domestic and international investors. Venture capital funds offer a unique chance to participate in the growth of cutting-edge companies and potentially achieve significant financial returns. However, for many, the process of investing in these funds remains shrouded in complexity. This guide aims to demystify the steps and considerations for investing in a venture capital fund in India.
What are Venture Capital Funds
Venture capital funds pool capital from multiple investors to invest in high-growth startups and early-stage companies including SMEs. These funds are managed by experienced professionals who identify promising opportunities and provide strategic support to help scale up the returns of investors.
Do we even need to invest in Venture Capital funds when we have Mutual Funds
Private Markets today present much bigger opportunities where the pace of growth is higher compared to mutual funds. However, the risk is also higher but that’s natural. Investors can hope to earn higher rewards only when they take higher risks.
95% of the Assets Under Management which have been pooled by the investors have to be invested in the Stock Market by the Mutual Funds. In a scenario where markets get exorbitantly overvalued, mutual fund managers don’t have the flexibility to liquidate the holdings due to which they miss out on booking profits even despite exorbitantly high valuations of the stocks. There are even more additions at overvalued prices as more investors tend to put money in when markets are moving north due to which managers cannot generate great returns & as a result, returns remain subdued within a range of 10-20%. Whereas in Venture Capital Funds when prices rise exorbitantly, a VC Fund manager can book profits and distribute profits to the investors & returns generated are generally much better than returns generated through Mutual Funds. In return, these funds usually charge a management fee.
Hence, we have seen that Mutual Fund managers do not charge performance fees but VC Fund Managers do charge performance fees.
Investors must pay a performance fee only when VC Fund managers generate returns over a Hurdle rate. Usually, the hurdle rate is fixed at around 8%-12% depending upon the assets they are managing. Investors do not have to pay any fee to managers for returns generated up till the Hurdle rate.
The most common management fee structure for VC funds is known as "2 and 20" – a 2% annual management fee and a 20% performance fee (or carried interest) on the profits generated by the fund. However, the management fee percentage can vary depending on several other factors.
Are there any differences between the time horizon of Mutual Funds & Venture Capital Funds
Mutual Funds usually have an investment horizon of 7-10 years, almost the same as Venture Funds. So we don’t have any difference in this aspect. Investors need to consider an important aspect when deciding between Mutual & VC Funds i.e. India boasts a diverse range of VC funds, each with its own focus and investment strategy. Some may concentrate on specific sectors like technology, healthcare, or consumer goods, while others may have a broader approach.
Some funds may focus on Startups while other VC Funds like Planify VentureX would lay more emphasis on SME companies. Ultimately it depends on the philosophy being followed by the respective fund.
Investors are advised to conduct thorough research to identify funds that align with their interests and goals. Key factors to consider include the fund’s track record, the experience of the managing team, and their investment philosophy.
The committed capital for VC Funds usually begins ₹1 Cr. onwards, which has to be invested over 5 years. Usually accredited investors like HNIs & Ultra HNIs participate in VC Funds as they usually have an annual savings of ₹25-₹50 Lakhs whereas those investors who save less than ₹25 Lakhs usually participate as retail investors in Mutual Funds.
Are there any differences between VC funds that focus on Startups & VC Funds that focus on SMEs
Startup-focused VC funds suffer from an inherent problem in terms of liquidity as identifying correct exits from startups is usually considered difficult. Startups face a variety of issues such as a lack of product market fit, inefficient business models, high cash burn, etc.
In comparison, SME-focused funds invest in vetted SME companies that usually provide a very good exit opportunity as the shares are listed on the BSE & NSE SME exchange. Hence SME focused funds will gain more traction than startup-focused VC funds & Mutual Funds. SME-focused funds like Planify VentureX Fund have turned out to be game changers for investors who want to participate in high-growth profitable under-valued companies.
Conclusion
Investing in a venture capital fund in India can be a rewarding endeavor, offering the chance to support innovative companies and achieve substantial returns. SME-focused VC Funds like Planify VentureX Fund will present better ground-breaking opportunities than traditional VC Funds & Mutual Funds. By following the aforementioned steps and conducting diligent research, investors can navigate the complexities of VC investing and make informed decisions.