Tips for strategic fundraising by first-time fund managers in India’s startup ecosystem

The Indian startup ecosystem’s success cannot be delinked anymore from the growth and success of emerging homegrown venture capital (VC) funds, including first-time fund managers (FTFMs).

All signs indicate that the startup ecosystem is attaining maturity and showing healthy signs of long-term outperformance compared to other global markets where VCs have invested.

A few years down the line, the AIF industry has the potential to reach a collective size of Rs 40 lakh crore—a scale corresponding to the current size of the mutual funds industry. Considering India can soon become the leading fund management hub of the world, empowering FTFMs with crucial fundraising and fund management skills is an urgent necessity.

With the wealth of opportunities emerging in the ecosystem, the audacity of Indian entrepreneurs to build global-scale profitable and enduring businesses and strategic fundraising (for the VC asset class) is vital for the country’s growth to reach even greater magnitudes and achieve more significant milestones.

Indeed, fund managers can be likened to the captain of the entrepreneurial ship, ensuring with crystal clear purpose and keen foresight that the vessel adheres to its predetermined course and completes its journey successfully.

Correspondingly, strategic fundraising for funds will enable the smooth running of entrepreneurial machinery, particularly in times of wariness in capital commitment in this asset class.

At times, FTFMs—with limited experience of the many demands of fund management—overlook the strategic nuances of fundraising. This approach is counterproductive.

Having select, high-value, high-conviction limited partners (LPs) on the cap table—well-versed and aligned with the fund’s investment thesis—takes the load off one’s mind when one is also occupied with formidable tasks, including building investment and portfolio management teams, sourcing of differentiated deals, portfolio construction, and firm-building activities.

With nimble and focused teams, micro VCs bridge critical lacunae in the PE-VC ecosystem. They have more appetite to invest in smaller, innovative startups and can help more founders take their ventures off the ground before they are ready for seed funding.

Backing innovative startups ensures deal flow for FTFMs and ensures their contribution to advancing India’s vibrant entrepreneurial ecosystem. 

Although somewhat generic, “play to your strengths”, “use your advantages to your advantage”, and “build a firm strategy and culture like a test match rather than a T20 match” are the best fundraising strategies available for FTFMs.

Funds can be of many types, sizes, and positioning. Each targets a specific part of the risk-return spectrum, but the common element for success is the support of engaged and long-term committed LPs.

Having the backing of a notable group of LPs, a robust sourcing strategy, smart portfolio construction, and high standards of corporate governance and portfolio value-add will help FTFMs infuse stability and growth into their investment business.

Most funds have around 50 to 200 LPs, and it is crucial to forge close relationships with each and understand their goals and vision to find a high degree of alignment with them.

A vibrant entrepreneurial landscape is also equivalent to a united, unwavering, and nurturing investor community. The onus of ensuring investor solidarity lies with FTFMs, as they are shepherds of the capital provided to them.

One of the primary things to consider before launching a fund is gaining deep, incisive knowledge of both the entrepreneurial and LP capital ecosystems.

In India, there are vast pools (and high growth) of domestic capital. Even the Indian government is playing an active role, having established multiple initiatives, fund-of-funds, and facilitating capital from large balance sheets (such as insurance and pension funds) to make capital available for aspiring fund managers.

It is better to secure funds from these sources early on, as it helps build credibility. Then, FTFMs will be more likely to capture the interest of private LP pools such as family offices and HNIs.

Domestic capital pools deployed in domestic businesses are likely increase in the long term for FTFMs, especially if fund objectives are rightly communicated and followed with high discipline.

India has substantial multi-generational wealth, and family offices have become keen on investing in hopes of diversifying their assets while staying at the forefront of technological disruptions. FTFMs should definitely capitalise on these domestic opportunities while raising their funds. India’s high-potential startups are primarily indigenously sustained, and domestic capital is where true value lies.

Finally, a well-defined and well-differentiated investment strategy enables FTFMs to stand out from the crowd. Different LPs have different charters. For example, some may simply want higher returns, while others may be looking for early access to innovation or strategic partnerships. It is essential to customise the narrative when speaking with LPs.

India is a land of diversity, and a one-size-fits-all approach will lead to flawed decision-making. LPs recognise that genericity is anathema to returns and, thus, have a low tolerance for GPs parroting clichéd constructs.

Moreover, pitching helps FTFMs gain entry into exclusive LP networks. Relationships are currency in the investment ecosystem, and networking enables wide access to opportunities. FTFMs should remember this fundamental aspect—entrepreneurial vibrancy is not achieved in isolation. It requires a concerted effort on the part of all stakeholders. 

With global uncertainties receding gradually and a bullish outlook emerging, India is expected to regain buoyancy in its entrepreneurial ambitions. Considering how MVCs and FTFMs have helped fortify and sustain the homegrown startup ecosystem in recent years, expectations for their future capacities are rather high.

With a higher risk appetite than traditional asset classes, FTFMs can substantially advance the domestic innovation economy. However, before that, tactical and prudent fundraising strategies are required to help FTFMs play an instrumental role in taking India to the next level in global entrepreneurial and innovation leadership. 

Manish Kheterpal is the Co-founder and Managing Partner of WaterBridge Ventures, and Lead Mentor at #VC101 by IVCA.