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May 04, 2016

How 26/11 caused a 2 year set back to Seedfund

At the recent Venture Intelligence APEX PE-VC Summit, Bharati Jacob, Managing Partner, Seedfund shared how the closure of Seedfund's second fund got set back by more than two years because the foreign investors who were about to invest in the fund, got spooked by the Mumbai terrorist attacks of 2008. One American LP (Limited Partner or investor in PE/VC funds) pulled out saying "India and Pakistan are eyeball to eyeball and could go to war any minute and I cannot invest in India any more."

Their pulling out caused a herd mentality among the other investors, causing almost all the LPs to pull out. Despite India's economy picking up, she recounts "we did not have LPs who understood local conditions... overseas LPs were looking at it through their own tinted lens". "Things have not changed too much now - from being hyphenated with Pakistan, we are now hyphenated with China," she added

This episode underlines the need for a deeper pool of domestic investors - who understand the situation on the ground better, Jacob said. Unfortunately, it is still difficult to close a fund that is larger than $25 million based on just domestic money.

Other Comments from the panelists:

Deepak Natraj, Managing Director, Aarin Capital

Fund raising is about 3 Ts: Theme, Team and Timing

Pitch Book for Raising from Domestic Investors: Create FOMO

"The majority of wealth created in the IT Sector ($100 B+) was 'captured' by FIIs, there were hardly any Indian investors. Now, here are Indian Startups in a healthy environment with phenomenal talent. How can you miss out on this? How can you not be a part of this?"

Sandeep Parekh, Founder, Finsec Law Advisors:

We've got everything right in India for having a thriving PE/VC fund industry in India - especially the entrepreneurial and fund management talent - except for tax. The Category 3 AIF fund for example is "dead on arrival" since such funds (that will invest at at least 50% of its corpus into listed companies) attract 32% tax - when the investor can invest directly in the public market stocks and pay zero on long term capital gains (after a one year holding period).

Abhishek Goenka, Partner, PwC:

The problem with Finance Ministry officials is that they view providing "pass through" status for funds as some kind of incentive / concession they are awarding to the industry (i.e., as something that results in a loss to the exchequer). While foreign investors are enjoying benefits through treaties, unless regulation makes domestic investing attractive from a tax perspective, it's not really going to work.

Sateesh Andra, Managing Director, Endiya Partners

"During good times, everybody wants to be an angel; in fact, there's no angel left in heaven."

"The Europe or US LPs have certain exposure to different asset classes including venture (capital), the most riskiest asset class. In Indian context, majority of the LPs do not have exposure to even the other asset classes."

In the current conditions "at best only 5 or 10 funds can raise $20-25 million dollars each from pool of (domestic) capital."

The Electronics Development Fund actually reached out to Endiya Partners to invest rather than the other way round because of expertise in EDF as well as the theme of investing (Semiconductors) by Endiya Partners.

The panel discussion was recorded at APEX'16 - Private Equity & Venture Capital Summit. Catch the discussion below

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