Tata Sons Ltd chairman emeritus Ratan Tata is in the midst of preparations for entering the venture capital business. A $100-150 million fund, Mint reported this week, is in the works. RNT Associates, Tata’s privately held investment firm, has registered UC-RNT Fund (UC stands for the University of California, a partner in the fund) with markets regulator Securities and Exchange Board of India as a category II alternative investment fund.
It isn’t clear yet whether the proposed fund will invest in both Indian and foreign start-ups. Going by Tata’s track record so far with his angel investments, that is likely to be the case. Still, India’s start-up market stands to gain a great deal from a Ratan Tata-backed venture capital fund in a couple of ways.
One, out of the 30-odd start-ups that Tata has angel-backed so far, the majority are local businesses. That’s unlikely to change with the fund. If anything, a number of companies that have raised angel funding from Tata could become recipients of follow-on investments from his fund.
Two, the fund comes at a time when the chips are somewhat down for the start-up market. Investments in companies backed by venture capital investors have plummeted during the first six months of 2016, according to a recent report released by KPMG and CB Insights. Such companies raised $1.98 billion till the close of June, of which $1.4 billion was invested in the first quarter, January to March. The second quarter, April to June, has been a disaster. Companies were able to muster only $583 million, compared to $2.33 billion in the same quarter last year. The numbers put to rest any doubts that still existed about a correction in India’s once hyperactive start-up market.
The correction is largely on account of foreign investors, notably global hedge funds and assorted strategic corporate investors, taking a cautious view on the market due to overheated valuations. Venture capital investors, most of whom are also backed by overseas money, have followed suit. Since January, there has been a significant softening of valuations across companies. Just last week, for instance, fashion e-tailer Jabong was sold for a song to Bengaluru-based e-commerce company Flipkart. The deal valued the company at $70 million, a massive decline from the $503 million valuation it commanded just over two years ago.
If India’s start-up market ever needed validation of its potential, despite the odds, it is now. The proposed UC-RNT Fund offers just that. More important, it comes from a particularly high-profile domestic investor, something that start-ups here don’t often experience.
Domestic high net-worth individuals (HNIs) or family offices such as Tata’s RNT Associates still play a woefully small role in India’s venture capital market, either as direct investors or indirectly as limited partners to venture capital funds. On the other hand, globally, family offices constitute the fifth largest category of limited partners for venture capital and private equity funds after institutions such as pension trusts, sovereign wealth funds and insurance companies. The absence of a large domestic base of investors is one of the primary reasons India’s venture capital industry has grown incrementally in terms of the number of firms actively investing in the market. More than 80% of the capital that is invested in India by venture capital firms originates in markets such as the US and Europe.
Will Tata’s impending turn as venture capitalist unleash a wave of more local venture capital shops backed by domestic HNIs and family offices? Unlikely, in the short term. Most traditional family offices remain fairly conservative in their investment choices and the start-up market in its current state isn’t likely to encourage them to jump on to the bandwagon just yet. So far, most HNIs and family offices that have joined the fray hail from the information technology sector. Infosys Ltd co-founder Nandan Nilekani and chief financial officer T. Mohandas Pai are prime examples. Nilekani has lately become a prolific angel investor. Some of his recent bets include RailYatri, a mobile app designed to deliver services to train travellers, eye care services chain Drishti and e-commerce start-up 10i Commerce Services. Pai invests frequently both as an angel and through his venture capital firm Aarin Capital.
However, in the long term, given his stature and influence, Tata’s fund, and how well it does in future, could be just the nudge that other family offices and HNIs need to play a more meaningful role in India’s start-up and venture capital market.