Where's India Inc?

As the start-up ecosystem brims with novel ideas, expansion and growth, the need for corporate venture capital (CVC) funds is felt strongly.

Experts opine that apart from angels, venture capitals (VCs) and private equity (PEs), start-ups need a heavy dose of investment support from India Inc to propel their ventures ahead.

According to Nandu R Kumar, CEO, Spice Route Business, a management consulting firm, corporates understand challenges in their industry better than anyone else. "The objectives of CVC funds tend to be more strategic than those of a VC firm. Their definition of success is different. Investments by a corporate in a start-up are considered a success if they are able to generate an additional stream of revenue, or if they can enhance their operational efficiencies, or use some innovation or hire top talent through an acqui-hire.’’ Thus, from a start-up’s perspective, ‘product-market fit', one of the crucial tests for success, becomes simpler, says Kumar. “Start-ups gain early market access, deep industry knowledge and connections.” 

Anirudh A Damani, managing partner, Artha Venture Fund, agrees when he says that CVCs provide instantaneous access to the corporate’s vast ecosystem, through which start-ups can find mentors, partners and access to resources to scale their business.

Moreover, entrepreneurs gain credibility when they have corporate support.

“Corporate investors play a vital role in a start-up. They not only create a sense of robustness and belief in the business model, but also pack in a punch from the awareness of such ventures. The instant credibility boost motivates more investors to invest, keeping a steady capital flow. Since most corporate funds are profit-oriented, they offer guidance to ensure the capital is being channelised to the right avenues,” says Gaurav Singh Kushwaha, CEO and co-founder of online jewellery platform BlueStone.com, which has received investments from Ratan Tata. BlueStone.com has invested a significant portion of the funds in strengthening its offerings and expanding customer base by initiating investments in designs, marketing, technology and logistics, says Kushwaha. 

Indian CVCs like RNT Capital, RPG Ventures, JSW Ventures, Premji Invest have been around for a while now, alongside stalwarts such as NR Narayana Murthy, Kris Gopalkrishnan, Mohandas Pai who have been contributing towards start-ups.

However, compared to the number of start-ups that exist and mushroom out each year, Indian CVCs appear only a handful, feel experts.

Internationally, 2017 witnessed a boom in the number of CVCs, far beyond the likes of Google Ventures, Intel Capital or GE Ventures. According to CB Insights Corporate Venture Capital Report, 186 new CVC funds made their first investment in 2017, including Nasdaq Ventures, Northwestern Mutual and Aurora HealthCare. Around $31.2 billion was invested across start-ups by CVCs last year, compared to $26.5 billion in 2016. 

Indian corporates have been slow towards setting up CVC firms, say experts. “Corporate family offices have traditionally focused on control transactions or asset classes such as real estate,” says Pankaj Karna, founder and MD, Maple Capital Advisors.

Furthermore, managing a venture fund is a different ball game, both in terms of regulations and management, says Kumar. “I have worked alongside a bank which set up its start-up fund. The project failed due to the bank’s inability to change its decades-old internal practices and to set up a process to identify 'good' start-ups. It is a risky business, as without the right resources the fund may drain out a corporate’s corpus,” says Kumar. 

But corporates benefit immensely by having CVC funds. Says Damani, "Firstly, innovation requires a certain organisational culture that will most likely clash with the culture of an established corporate. Therefore, funding and keeping a start-up outside the corporate boundary is logical.’’ 

“It provides corporates with insights into new sectors, and to diversify their investments and create value, ” says Karna.

Most importantly, keeping a start-up off the balance sheet as an investment (instead of an internal division) allows the corporates with some breathing space, say experts.

If the start-up is doing well, then the corporate can continue to invest in it, or acquire it at an appropriate time, says Damani. “If things are going south, they can write off the investment without the trouble of laying off people and burning a hole in their quarterly numbers.”

CORPORATE BACKING

• Keeping a start-up off the balance sheet as an investment (instead of an internal division) allows the corporates with some breathing space, say experts
   
• If the start-up is doing well, then the corporate can continue to invest in it, or acquire it at an appropriate time
   
• However, compared to the number of start-ups that exist and mushroom out each year, Indian CVCs appear only a handful, feel experts