“To be or not to be?” Remember this line from a classic … Well, the same predicament is more prevalent when it comes to venture investing.
Venture capital as an asset class is gaining traction. Many investors are familiar with more traditional investments like mutual funds, equities, and real estate, and some also invest in U.S. stocks and cryptocurrency. However, these asset classes share a key difference from venture investing (except for real estate where it’s comparatively less) — liquidity.
Venture Capital and Liquidity
Most traditional investments offer liquidity, allowing investors to sell assets relatively easily, except for real estate, which can be less liquid. Venture capital, on the other hand, has the lowest liquidity of all. For this reason, venture investments should only be considered by those who can commit to a long-term investment horizon, typically five years or more.
Investing small amounts, such as ₹200,000 (~$2,500), in a startup is not considered venture investing. It is more akin to a punt, where the outcome is uncertain, and returns can be either high or low. Even if the investment performs well, the actual cash return might not meet expectations, leading to regret over not investing more. Since such investments are usually seen as high-risk bets, larger amounts are rarely committed upfront.
A More Structured Approach
Rather than taking a trial-and-error approach, investors can consider a systematic method like investing through SEBI-regulated Alternative Investment Funds (AIFs). These funds offer a structured approach to venture investing, with minimum investment amounts ranging from ₹25 Lakhs (~$30,000) to ₹1 Crore (~$120,000).
AIFs have seen significant growth since their introduction in 2012. Initially, the amount invested in AIFs was ₹10 Crore (~$1.2 Million), but by the end of Jun 2024, this had risen to over ₹4.32 lakh crore (~$54 Billion). In comparison, mutual funds in India have assets under management of approximately ₹62 lakh crore (~$ 760 Billion).
Domestically also, the investment in mutual funds across the Indian general public is gaining traction. From less than 1% of the population, it’s now upwards of 8% and by the end of the decade should be double of that, conservatively. The increasing participation in both AIFs and mutual funds highlights the growing interest in formal investment vehicles across the country.
The Securities and Exchange Board of India (SEBI) has strengthened its regulatory framework for AIFs, making it a trusted body in the investment landscape. This regulatory oversight provides investors with added assurance when considering venture capital as part of their portfolio.
Why Consider Venture Capital?
As an investor in this emerging asset class, where
- mortality is high,
- future is uncertain,
- liquidity is low,
- access to information is minimal, why should one consider this in the investment asset allocation?
Venture investing focuses on disruption. Startups are created by entrepreneurs with vision, passion, and commitment, but they often lack capital to scale. With financial backing, these startups can grow and bring innovative products and services to market.
Success stories like Flipkart, Zepto, and Zomato demonstrate the potential of venture investments, although there are also failures and frauds in the space.
Conclusion
Investors considering venture capital should do thorough due diligence and trust their instincts. Allocating up to 5% of an investment portfolio to this asset class, with a long-term horizon of five years or more, can yield significant returns over time (disclaimer: this is not investment advice)
As with any investment, risk is inherent, but with careful selection and patience, venture capital can be a rewarding addition to a diversified portfolio.
India’s entrepreneurial ecosystem is growing, and both the country and its innovators need capital to fuel this expansion.
Author:
Brijesh Damodaran
