Increasingly, fund managers and key partners are leaving venture capital firms to launch new funds or even startups
The likes of Orios, Lightbox, Rebright Partners and Together Fund have seen partners step down in the past few weeks
New funds being launched by experienced fund managers add to the growing dry powder pile and increase density of investors at the the early stage
The startup venture capital (VC) ecosystem in India is going through an unprecedented churn. Even as new funds are lining up for SEBI approval, the portfolio disarray of the past 24 months has caught up with VC firms in India, leading to partner exits and talks of fund mergers.
In other words, the VC ecosystem is mimicking the trends prevalent among startups in the past year which has seen consolidation, founder exits and second-time entrepreneurs starting new ventures. The biggest indicator is the departure of fund managers from some of the most prominent VC firms in India.
As startups go through the current funding slowdown, leadership changes have become commonplace. Similarly, now, we are increasingly seeing fund managers leaving existing firms and launching new funds, or even startups.
Partners Part Ways With VC Firms In India
Last week, Orios Venture Partners saw the exits of managing partners Anup Jain and Rajeev Suri, both of whom stepped down to pursue other opportunities, leaving behind the sole managing partner, Rehan Yar Khan.
The outgoing managing partners of the early stage fund had joined Orios in 2018. The duo led key investments for Orios in startups such as BatterySmart, Kenko Health, Beato, Zupee, NxtWave, Werize, Karbon, Varaha and Hypd.
Orios is not the only VC firm in India that’s going through a partner-level churn. Earlier this month, Rebright Partners’ general partner Brij Bhasin quit the VC firm to launch a new startup.
Major changes are also afoot at Lightbox Ventures, one of India’s most seasoned VC firms. The firm is in the process of a breakup at the very top. Partners Siddharth Talwar, Prashant Mehta and Jeremy Wenokur are leaving the Mumbai-based VC, according to sources close to the firm.
Lightbox cofounders Talwar and Sandeep Murthy are likely to separate the fund’s portfolio and part ways. The departing trio is looking to set up a separate fund comprising some Lightbox portfolio companies.
In March, Together Fund partner Avinash Raghava stepped down from the SaaS-focussed fund to take up the role of CEO at SaaS collective SaaSBOOMi.
Together was launched in July 2021 by Freshworks’ cofounder and CEO Girish Mathrubootham and Eka Software Limited’s Manav Garg, Shubham Gupta (ex-Matrix Partner) and Avinash Raghava with a corpus of $85 Mn.
Fund managers also move to different funds in pursuit of newer focus areas or those funds that cater to niche sectors. For instance, Sistema Asia Capital’s Dhruv Kapoor moved to Anicut Capital as a partner last year and Tej Kapoor joined IvyCap Ventures as the managing partner from Fosun.
In the past too we have seen senior-level executives also quit VC firms, such as in the case of A91 Partners, which was formed in 2019 after VT Bharadwaj, Abhay Pandey, Gautam Mago quit Peak XV (then called Sequoia) to launch the new fund.
Slowdown Disrupts VC Firms
So, what explains some of these high-profile departures from funds?
Firstly, the slowdown in investments in the past nearly 24 months and the troubles in various portfolio companies have together created a perfect storm for VCs and fund managers. And these headwinds have led to reshuffling at marquee firms in Silicon Valley and other geographies.
For instance, Sequoia’s partner Michael Moritz quit the firm in July after 38 years. Similarly, Tiger Global senior partner John Curtius quit late last year after serving five years to start his own venture fund. Earlier this month, Prosus & Naspers CEO Bob Van Dijk stepped down from the investment major.
These are of course, the bigger names in the VC industry and other smaller funds have also seen similar exits. The trend has now crossed over to India.
The second major factor for the changes at the top are the limited partners and their affinity to particular fund managers. Fund managers are not only evaluated on their portfolio bets but also on how they bring in the capital for fundraises from their LP base, in some cases.
A strong LP-fund manager relationship is critical when partners break away and start new funds. Most experienced fund managers will typically drag a few LPs away from funds when they leave, even though LPs may not completely give up on the previous fund.
“An LP who may have been investing $5 Mn in one fund will take that to another fund floated by their preferred fund manager, and as a result, their allocation to the older fund will reduce. Every fund manager has their list of LPs they will bank on to start a new fund or raise new capital,” says the founding partner of a Delhi NCR-based early stage fund.
LPs are also tiring of problems in the portfolio of existing funds, ranging from slow growth, losses, corporate governance blunders and even outright admission of fraud. Instead of continuing to back funds that have such issues in their portfolio, LPs are turning to the fund managers and general partners they trust to start new firms.
And this has resulted in a glut of new funds, particularly at the early stage, adding to the dry powder mountain.
Governance Issues, Losses Makes It Tougher
Many of the firms that have been caught in partner exits are those that have seen problems in some of their key investments.
Orios had to write-off GoMechanic after the company’s well-documented revenue misreported problem. Pharmeasy, another Orios portfolio company, has seen a severe devaluation in the past year and is currently struggling to raise new funds.
Lightbox is dealing with problems at Dunzo, which is unable to pay salaries to employees and is looking at a bleak and uncertain future.
These portfolio problems impact internal processes at VC firms, where questions are asked of the partners by limited partners. In many cases, fund managers who did not lead those investments also see some pushback and flak from the market.
LP Dynamics Play A Role
Partners leaving VC firms is not unprecedented in the Indian startup ecosystem. The most noteworthy one is the controversy at Helion Venture Partners that led to the departures of three partners in 2016.
The exits of Rahul Chowdhri, Ritesh Banglani and Alok Goyal from Helion were reportedly over not being elevated to the position of managing partner, which would have entailed a higher share of the carry or the profits for the fund.
Essentially, this shows that while on paper, many fund managers may be partners, their share of the carry and the performance bonuses vary.
Founding partners get the bulk of the carry, while managing partners and other partners get a smaller share. Sleeping partners in the fund are another issue and can also complicate the profit share.
Given that agreements between partners and founding partners are not governed by any government regulations, discord between these two classes of decision-makers can directly increase the risk profile of the firm for any limited partner.
When evaluating a fund, limited partners look at the overall fund performance, but each of the partners lead investments separately. Issues in one part of the portfolio spill over to the entire fund.
“LPs should be able to view partner-wise performance of the portfolio. Fund manager performance should be made more transparent like in the case of mutual funds,” an industry stakeholder told us.
A Call For Transparency
Given some of the major lapses when it comes to governance practices at VC firms or potentially even due diligence processes, there needs to be some mechanism or framework that protects the interests of limited partners, as the regulators do for public markets.
As more funds come into the market, it widens the base of LPs and increased transparency on individual partner performance is only going to strengthen the case of startups as an investment asset for the future. This is no different from various fund managers of public market mutual funds being under the scanner individually.
Other ecosystem stakeholders believe that — as a regulator, SEBI should step in to bring more transparency in inter-se commercial agreements that directly impact the longevity of non-founding partners.
Interestingly, PE/VC industry insiders claim that even institutional investors like insurance companies, banks, fund of funds of GOI do not look into these inter-se agreements, which directly impact risk and returns for them. Perhaps it is time such agreements are made more accessible for more transparency on what happens on each of the decisions that impact risks or returns, such as talent, investments, sharing of management fees, exits and share of profits or carried interest at VC firms.
Dry Powder Pile Grows With Few Places To Go
Since the beginning of 2022, startup investors have announced new funds with a total corpus of over $22 Bn to back Indian startups. Well over $4 Bn comes from funds that have been announced in 2023 alone. But Indian startups have only seen about $6.5 Bn in investments this year, well below pre-2021 levels. The slow dealmaking has not stymied the launch of new funds, however.
While several new funds have been announced, many haven’t been able to close the corpus. In fact, it’s hard to estimate the actual corpus raised by many of these new funds and how much capital they have ready to deploy is also unclear.
Most of these funds are looking at the early stage with long horizons, so they are pretty much going after the same bunch of startups. Even VCs that otherwise focus on late-stage investments have looked to capitalise on the potential upside in early-stage investing in 2023.
New funds are coming from seasoned fund managers as well as startup founders looking for new challenges, and angel investors setting up a small corpus as a formal AIF or micro VC.
Indeed, the launch of these VC firms in India mirrors the rise of second-time and repeat founders setting off for new opportunities. Fund managers are able to bring a fresh perspective with their differentiated thesis and this can result in outsized returns for some LPs who are looking to diversify into new or emerging areas.
“Increasingly, the startup LP network has started to recognise that emerging fund managers are actually some of the biggest value creators in the market. LPs also need to see that fund managers have very clear guardrails in terms of the stage and are not just swayed by momentum investing,” says Ankur Pahwa, founder and managing partner of PeerCapital.
Like in the case of A91 Partners, which came to the market with a differentiated thesis of mid-stage investments but at ticket sizes between $10 Mn and $30 Mn.
Sometimes it’s easier for partners or investment directors to step away from their current funds and bring a fresh perspective with a new venture fund or tap into a new thesis.