The growth of the startup ecosystem in India has led to the emergence of micro venture capital (micro VC) funds, a new and promising asset class. In 2020, India had 89 micro VC funds, up from 29 in 2014, according to a Praxis report. These funds have infused $346 million in 574 startups through 741 deals from 2014 to 2020.
The trend of micro VC funds started when individuals who wanted to invest in startups felt the ecosystem was evolving and could be a good opportunity. They pooled their funds together, bringing different areas of expertise to the table, allowing them to manage their time efficiently and work closely with their portfolio companies. The potential for high returns made it an attractive asset class for both investors and startups.
Micro VCs typically invest early in a startup’s fundraising life cycle, which helps them get a meaningful stake. They focus on early-stage startups with high growth potential, offering a higher potential for higher returns. The relatively low cost of setting up a micro VC fund compared to a traditional venture capital fund has also made it easier for new entrants to enter the market.
It is believed among the investment community that both micro venture capital firms and angel investors will persist and maintain their significance. The micro VC market in India still presents ample chances for startups in their initial stages. Despite the rivalry for top-notch investment opportunities, micro VCs can still differentiate themselves in a competitive market. Startups seeking funding and support at an early stage can benefit from this alternative.
Experts also believe that there will sometimes be overlap between angel investors and micro VCs, but both will play their role in building ventures. Angel investors are better placed in the long term as they don’t have the stress of exiting companies like micro VCs, who need to wind up the fund in a fixed time period of 8-10 years. However, startups now have more avenues to raise money.
Once startups start generating early revenue, they may attract the attention of micro VCs, although angel investors will still play an important role, especially in the very early stages. Micro VCs can offer more support and resources, while angel investors tend to provide significant amounts of capital and bring their networks and experience to the table. Start-ups vary in their needs, so some would benefit more from angel investors who provide a more hands-on approach, while others could take advantage of the resources and expertise offered by micro VCs.
The micro VC market in India is witnessing a surge in investment from Limited Partners (LPs) as more firms join the space. The majority of the money comes from high net worth individuals (HNIs) as the size of micro VCs is small, and funds are mainly subscribed by HNIs and fund of funds. Micro VCs not only attract independent investments but also those from growth VCs and larger institutions seeking out specific sector-based possibilities. Moreover, active angel investors join in too as it gives them access to more qualified opportunities.
The investment made directly by experienced business owners or family offices into a company is seen as a strong signal of their confidence in the venture’s success prospects. This also adds them to the company’s capital structure. The Indian market is increasingly benefiting from the emergence of Micro VCs, but they do not necessarily have to replace angel investors. This is because angels still prefer to put their money in riskier, pre-seed and seed stage startups rather than those further along in their journey.
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In conclusion, the rise of micro VCs in India is a promising development in the startup ecosystem, offering startups more options for early-stage funding and support. Micro VCs and angel investors will co-exist and continue to play their respective roles in building ventures, serving different purposes and playing different roles in the ecosystem.
