An Insight Into The Rising Popularity Of Operator-Led Funds

When venture capital started as an asset class in the early 70’s in the US, it was started as a way to provide patient capital. Emerging technologies at the time such as chips etc. needed high capex and could only truly commercialise over later years. 

So it was an innovation in the financial industry. As venture capital itself got bootstrapped and started producing results, it attracted more and more capital against a backdrop of ever-evolving technology landscape – Desktops, Phones, Internet, Cloud and now AI. Other than wealthy individuals, family offices, and silicon valley professionals, the third party funds that got started were ones that had access to institutional money. They expanded the asset class significantly through the 80s and 90s.

Similarly in India, one of the earliest venture capitals were ICICI Ventures (investors in Info Edge). The global platforms entered India in mid-2000’s as capital started globalising. Through the 2010’s the global platforms were joined by local platforms. Folks like Kae, Orios emerged from the Bombay style angel investing through 2000’s. They were part of Mumbai Angels or had seen success in early Internet ventures in India. 

For operator seed funds to rise – 2 things need to happen. There needs to be successes in the entrepreneurial ecosystem and 2, capital needs to be more available for such an asset class. This started happening in the US in the 2000’s and in India more broadly in the last 7-8 years. 

I started angel investing in 2011 in India, and in 2014, I was published as a top 10 angel in India alongside late Sh. Ratan Tata, even though I had made only 7-8 investments that year. The whole angel investment landscape exploded in the subsequent years with dozens of moderately to very successful entrepreneurs starting angel investing.

Some made 100’s of investments individually while many others made dozens. I have seen folks like Kunal Shah (Cred), Ramakant (Livspace), Abhishek (Tracxn) and several others make a number of investments.

Some of us went institutional and started funds. Of course Info Edge started investing early from their balance sheet and eventually turned into a fund.

I started the fund in 2018 and over years, few other operator led funds have started. For me, a reason to start was that as an angel my impact was limited. The companies that became successful quickly outgrew me. I wanted to align my goals and impact longer with the company and I felt a fund allows me to stay more meaningful. This has come to be true over the last few years.

I am sure different operators had different reasons to start. Another subclass of operator funds are micro VC funds, which are somewhere in between an angel and a seed fund. Several angels became successful and noticed other investors wanted to invest with them. They turned this into opportunities and started microVC funds. 

All this combined, has resulted in growth of operator led funds. As you would expect, there are far fewer later stage operator-led funds – the market needs to evolve more for that.

The above is a top down view of how the money has flowed and resulted in formation of this sub-asset class. However, there is also a bottom up view of how the market needs have evolved, which is correlated. 

Operators, who have turned investors have first hand experiences of building a business. I started Pine Labs in 1998 and gained first hand experience of working with banks. Similarly, when I started GlobalLogic and built it through the 2000’s, I gained experiences in building a business in the India / US corridor.

Many of these experiences are relevant today for startups, for example in the fintech and global SaaS space. While the technology keeps changing rapidly the market behaviors dont change at the same pace, specially in enterprises. Large banks today in India, are not that different from how they were 20 years back. The US / India Go To Market learnings are still relevant.

I noticed this at the time of my angel investing. While I was a small shareholder, some of these companies raised significant capital from large global investors.

As I observed the functioning of these founders, I noticed that the conversations that they had with me were very different from the ones they had with the global investors. They would talk to me about things that were top of their mind, usually what it would take to raise the next round, how to build the team, their own stresses and key decision points. 

The global platforms brought in a lot more top down market knowledge and connections to the table – I brought in more contextual bottom up experience. This was a great combination. 

I have seen the same dynamic play out as we have invested through the fund. We continue to try to bring the same operator-type value to be table and combine really well with platform funds. We are very contextual and bottom-up and the platforms are far more top down and breadth-first.

I now see it in companies which have even reached 100’s of millions of dollars in value and have 4-5 funds invested in them. Different investors / Board members continue to bring in different values to the table.

For founders, this is a good market dynamic. Many founders, both first time founders and repeat founders continue to see us having a seat around the table. Business building is hard work, we understand it and try to contribute meaningfully wherever we can.

Venture capital itself is evolving at a rapid pace with capital becoming more and more commoditised. There is pressure to innovate, both in positioning and action. Ultimately, this is good for the ecosystem and will drive innovation and value at all levels.

I see a place for all sorts – platforms, niche sectoral funds, stage centric funds, and so on. Operators are now a part of this across the board and bring in a missing flavor.

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