Indian Venture and Alternate Capital Association (IVCA), the country’s apex industry body for alternative assets, recently launched a knowledge-sharing programme on fund management, #VC101, for emerging venture fund managers. In an interview with Ashley Coutinho, Rahul Khanna, co-founder and managing partner, Trifecta Capital, and co-chair, Venture Capital Council, IVCA, talks about the opportunities in the micro venture capital space and need to educate VC fund managers. Excerpts:
What are the opportunities in the micro VC space?
The challenge for a venture capital firm is to raise capital. It can be difficult to straightway start with a $300-500-million fund. It may be much easier to start a $10-20-million fund, stay focused on a particular niche, may be in a particular geography. I met an interesting company the other day. They are a micro VC in the gaming space and the founders had built and sold a gaming company. They do game development studios and they are based in Kochi. There aren’t too many gaming-centric VC funds in Kochi. So, this was a unique example. As markets mature, you start to see opportunities around specialisation. As technology evolves, you move from a more generalist type of investing to a more specialised one. So, if a VC wants to invest in crypto, it probably requires a very good understanding of block chain, which may or may not be available in a generic VC firm. Or if it’s artificial intelligence, you need someone who can understand how those complex neural networks work and how large language models are written in order to be a credible investor in that space. It may be harder for a general-purpose VC to do that.
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Why does the IVCA feel the need to educate VC fund managers?
Unfortunately, there is no school of venture capital. But, in effect, it is like any other business. For many of us, we had to learn by doing, and sometimes that takes longer, sometimes you make mistakes. Because this is a business where it takes a long time to get a feedback loop, often for the first five-seven years you don’t even know if you are doing a good job because outcomes in venture tend to be very back-ended. We now have a ecosystem with many first time managers wanting to enter the VC space and those with an experience of 15 years or more. So, it was important for those with considerable experience to codify that experience as managers and as people who have built franchisees that have been tested through time. The idea was to help people understand that venture investing goes beyond just investing. There is business to be built around raising capital, making investments, managing portfolios, delivering consistent returns and building a brand. So, in a way, a VC fund manager is also an entrepreneur. A lot of support till now has been directed towards entrepreneurs who want to build more traditional businesses. There isn’t really a programme that teaches you to be a VC. So, we felt it was important to educate first-time and aspiring fund managers on what their 10-, 20-, 30-year journey looks like. Investment comes with a fiduciary responsibility. How do you build capabilities to raise capital, how do you originate great opportunities, how do you make good investment decisions, how do you ensure that your companies are maintaining high standards of governance and then eventually how do you get exits. We have roped in mentors with some life cycle experience and have build a curriculum from ground up.
What are the challenges for building funds in the current environment?
The AIF regime is quite mature and the mechanics of fund formation are quite straightforward. The challenge is to convince investors to give money. At the end of the day, the business has to deliver great returns to the people who provide us capital. Those people have many choices. So, when you go out to start a fund, the single biggest challenge is to have a clear value proposition as it relates to a risk-reward profile and convincing investors that you can deliver against that. Managers may not have enough of a track record to justify raising capital. So, the key is to articulate a value proposition and convince a set of investors who would be willing to take a leap of faith.
Is India still attractive to foreigners?
Venture investing is really about taking long-term bets. And there are multiple factors that work in India’s favour from a long-term perspective. The demographic dividend, a stable political climate, a relatively stable currency vis a vis other emerging markets and a changing world order with countries looking to lower their dependency on China are some of the positives.