#6 Capital Inflow Trends For Venture/ Early Stage Deals in 2017
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When the investment world talks about trends, I am instantly reminded of this quote from my finance guru at Massachusetts Institute of Technology, US, “Is it madness of the mobs or wisdom of the crowds”. Whatever it is, the momentum is usually strong enough to give the world a few great businesses even while many blow up in the explosion.
And then there are trends reflecting growing stakeholders’ confidence. Here are a few capital inflow trends we’ll see for venture/ early stage deals in 2017 even as entrepreneurs and investors focus on building operationally efficient and financially sustainable businesses.
ENHANCED COMMITMENT FROM GLOBAL LPs
With advancing technology, mobile penetration, and a rapidly evolving early stage investment ecosystem, the ability of limited partners (LPs) to back strong fund managers is more enhanced than ever. These LPs bring with them patient capital, best practices in corporate governance and transparency, lessons of learning from other markets; thus, adding to the maturing of the ecosystem. This forms a nice symbiotic relationship.
RISING CORPORATE-FUND ENGAGEMENT
Partnering with an early stage fund allows corporates in a manner to ‘outsource’ a corporate venture program. This gives them access into disruptive technologies. For start-ups, this has similar benefits as that from a direct investment, such as opening up the doors to customers willing to test and adopt their products. This also brings sales and marketing support, strategic mentoring, and chances of possible acquisition. For example, Unilever, Intel, and Google have been strategically engaged with funds in India for some time now.
SEED STAGE FUNDING PROFESSIONALIZING
Participation of accelerators and incubators is increasing and first cheques are turning institutional. New fund managers will continue to enter India as early stage fund raising increasingly attracts a larger part of LP capital flowing into India. This includes spin outs, angels and entrepreneurs turning fund managers, and technology professionals. An increase in the number of fund managers means that newer and smaller players will have to work that much harder to differentiate themselves.
DIRECT INSTITUTIONAL CAPITAL GROWTH
Corporate venture programs will continue to be active in backing start-ups that promise long term strategic value. In addition, direct investments into businesses by large institutions and strategics/ corporates are on the upswing. There are a number of start-ups with unique and innovative models that have achieved the scale to attract the likes of IFC, Tencent, and Facebook.
HARD TECH GAINING GROUND
There is an increasing interest in the core technology sectors including artificial intelligence, machine learning, robotics, and Internet-of-things by early stage investors. That said, capital will continue to flow towards consumer and enterprise technology, as a function of the size and scale of the available opportunity.
HNI – FLAVOR OF THE YEAR
With the “Startup India” program, and clarity in taxation, the regulatory environment has developed quite favorably for early stage funds. Domestic institutional capital is becoming available in addition to high net worth individuals (HNIs), and entrepreneurs themselves stepping up to support early stage funds and start-ups. HNI capital is quicker in taking decisions than institutional capital, comes with seemingly fewer processes and terms and conditions, and is best for smaller fund raises. So HNI-backed funds will continue to be there.
(This article was first published in the December issue of Entrepreneur Magazine. To subscribe, click here)