A FIX FOR INDIAN VC ECOSYSTEM'S ACHILLES HEEL

Increasing transparency will instil greater confidence in LPs regarding the capabilities of Indian VCs

IN THE INTRICATE world of venture capital, a critical aspect that is often overlooked is its dual nature of a two-sided marketplace. This ecosystem is not just about the founders, but equally about the limited partners (LPs) who back the general partners, or the venture capitalists (VCs), and indirectly fund all the risk-taking. While much has been discussed about the founder side of the equation, the LPs’ perspective remains less explored, particularly in the Indian start-up landscape. The ecosystem’s Achilles heel, arguably, is the scepticism of global LPs born of the perceived lack of a predictable playbook for exits and liquidity for their investments.

The venture fund LP base (in absolute dollars) is dominated by long-term capital bases managing perpetual capital. These would be institutions like university endowments, charitable endowments, pension funds, and, more recently, large family offices. All of them want to partake in the future of innovation and technology through the venture asset class. Given the scale of inherent risk in this asset class, allocations are usually in single-digit percentages of their total corpus. VCs are likely to lose a majority of their invested portfolio; in innovation financing and backing first-time entrepreneurs, this is a feature, almost by design, not a bug. This high tolerance for failure is uncommon in other asset classes, making venture capital a less understood and mostly privately discussed asset class among a select group of LPs. Given this inherent risk, how do LPs evaluate VCs and their strategies to mitigate these risks and generate commensurate returns?