For smaller funds, the challenge is to either support the company through the slow years or sell out, which is not a great option at a time when valuations are down. So, what’s going to happen is that you’re going to have to put that $200 million to work across fewer companies, and that means you will not have enough capital left to be diversified across many companies. This is a challenge that we’re going to see in the US, and I am sure that we will see it in India as well at some point.
...India will pretty much experience the same thing. Liquidity here is tight too. The IPO market is shut, and mergers and acquisitions are not happening either. That said, companies will get funded, but the bar will be high. There will be fewer deals finalised, less money put out. Venture capital investors will have to stay invested longer in their portfolios and they are going to have to come up with more cash, which again is going to be somewhat problematic for smaller funds.
..I think more critical than the nature of the fund is the size. A large local fund (in the Indian context, a large venture capital fund is $200-300 million) will be able to ride out the current slowdown, much like in the US. It does not matter so much whether it is a global or a local fund. You need staying power to continue to support your portfolio companies.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at email@example.com