Big VC firms leave to start over, facing tough task of raising funds

“LPs (limited partners) are very happy with the returns they are getting in public markets right now,” said Sanjay Nayar, former KKR India CEO who retired to start his own early-stage fund, Sorin Investments, which closed its first fund in May. “If equity markets are giving 25% and private is giving around 15%, they don’t see much room to maneuver there, given that it is illiquid and high risk. So they are hedging and allocating to private markets, but at a slower pace.”

Venture capital funds are managed by general partners, or GPs, while limited partners, or LPs, invest in them.

But Anup Jain, former managing partner of Orios Venture Partners, said a correction in public markets was imminent. Jain, along with Rajiv Suri, left Orios at the same time last year and is in the process of raising the first fund for his new VC firm.

“I would expect a sell-off at some point given the US election results,” Jain said. “While the pool of domestic retail money certainly exists, it is currently taking full advantage of the stock market rally.”

Funds like Sorin have been able to raise capital more quickly because most of the commitments have come from domestic pools of capital, including the Nayar and Banga family offices. But many have struggled or taken longer to close deals as they navigate a highly competitive fundraising arena.

In addition to slower allocations in private markets, many LPs have a policy of not supporting novice fund managers. Over the years, LPs have opted to consolidate their funds and invest large sums in fewer managers.

Niche opportunities

Prominent members who left VC firms to launch their own funds include Sameer Brij Verma of Nexus, Piyush Gupta of Peak XV, Vaibhav Agrawal of Lightspeed and Atul Gupta of Premji Invest, as per recent media reports. These fund managers did not respond toMintComments are requested prior to the article going to press.

Fund managers are leaving to take advantage of niche opportunities that emerge with the proliferation of startups, experts say. Other reasons include internal conflicts and integrity issues at their previous firms and corporate governance deficiencies at portfolio companies that could damage their reputations.

This is not the first time that partners have left to strike out on their own. Around two decades ago, cross-border funds such as Helion, Nexus, Accel, Sequoia India (now Peak XV Partners), Matrix Partners and Lightspeed were formed when the country’s venture capital landscape was an uncharted frontier. Domestic funds Kae Capital, Orios Ventures and Blume Ventures also took shape then.

Over the next decade, Helion fund managers split off to start their own ventures at Stellaris Ventures and Fireside Ventures. In the past two years, fund managers have exited firms such as Nexus, Peak XV, Lightspeed, Matrix, and Orios.

Such departures have come largely as the number of startups seeking funding has grown exponentially. As the market has matured, many new general partners (GPs) have carved out niches by developing sector- or stage-specific funds, explained Alok Goyal, founding partner of Stellaris Venture Partners.

Goyal was one of the first investors to leave VC firm Helion to found Stellaris, adding that the deal funding pool has nearly tripled in five years.

However, such opportunities are rarely the only reason investors leave the safety of their established companies to plan on their own. Often, exits have occurred due to internal conflicts.

“It’s common knowledge in any VC firm that there are usually one or two ‘rainmakers’. If the founding partner who is the majority owner of both the profit share and carry is not one of those key players… it requires a fair reset in terms of trading between partners going forward,” Jain said.

Rainmakers are individuals who, through their contacts and associations, bring clients, money, or prestige to the firm. Typically, VC firms keep up to 20% of the proceeds from fund exits, with the remainder returned to the limited partners. In addition, fund managers receive an annual management fee of 2% of the fund’s committed capital.

Harmful influence

“Moreover, when you try to undermine even existing agreements and work on multiple projects in parallel, it shows a mismatch of core values,” he said, adding that such behavior is often the reason for the departure or downfall of “raiders” from “promotion-oriented” companies.

These challenges are exacerbated when portfolio companies suffer from corporate governance deficiencies that can negatively impact the investor’s and the company’s track record. It also complicates the process of raising additional funding.

The last two years have seen corporate governance issues for Indian startups like Byju’s, GoMechanic, Trell, BharatPe, Zilingo and Mojocare, leading to significant backlash from their investors.

A company’s track record is a closely watched measure of an investor’s tenacity and decision-making ability. It includes metrics such as internal rate of return, distributions to paid-in capital (a measure of an investment’s performance), invested capital multiple (the value or performance of an investment relative to its initial cost), and a loss ratio that reflects the number of companies the investor finances that go out of business or fail to raise additional funding.

With such a large footprint, investors associated with prominent VC firms or large deals are in an ideal position to strike out on their own, triggering a wave of others to follow suit. But that can often be where the wheels start to fall off.

There have been cases where fund managers have gotten into trouble because their former employers have prohibited them from using their track record. In 2019, Everstone Capital took legal action against a former employee for trying to use their track record before the first fund was launched.

Such indicators are closely watched by LPs, who have become picky in a market that is already small and dominated by a small group of about 100 wealthy individuals or investors. This is based on the assumption that fund managers have had pathetic exits with very small returns for LPs. Naturally, LPs prefer experienced managers who have left prominent VC firms or handled high-profile deals.

“Typically, LPs also have access to people across funds who have exceptional track records and are willing to back such managers,” said Ankur Mittal, co-founder of Inflection Point Ventures.

Track record

But the real problems begin when fund managers have to prove their track record once again.

“VC funds (backing) provide a huge opportunity for senior management to identify, fund and follow up with new startups and founders… However, managing funds is a different beast altogether. Between fundraising, deal sourcing, investment, post-deal support, investor relations and working towards an exit, the learning curve can be steep,” Mittal said.

After raising an initial round, proving a venture capital investment track record can include short-term metrics such as the number of growth rounds, investors said. Growth rounds are levels of funding when a company’s value increases from its previous valuation.

“The only true measure of success is cash in and cash out. That’s why we focus on metrics like DPI and TVPI (total value to paid-in capital). Until the cash is fully delivered to the LPs, nothing is proven,” Goyal added. While fundraising rounds are a challenge, many companies ultimately fail due to internal conflicts among team members.

“Teams don’t just split up based on performance; it could be that team members have different visions for the fund. Like founders in a startup, GPs may decide to split up to pursue their vision and continue separately, and the cycle continues,” Goyal said.