The Rise of Micro VCs and Founder-Led Funds in India

As large risk capital investors prefer to tread cautiously amid the current reset of the tech funding ecosystem, micro venture capital (VC) firms and founder-led funds are increasingly taking center stage in the early-stage investment landscape.

Two new micro VCs have been launched in the past month: Ahmedabad-based Volt VC, a SEBI-registered Category II Alternative Investment Fund (AIF), and AJVC, founded by Aviral Bhatnagar, who previously led enterprise software and artificial intelligence investments at Venture Highway.

Bhatnagar said AJVC is sector agnostic and will focus only on pre-seed stage investments.

According to data from intelligence platform Tracxn, 224 funds focused on early-stage investments have been launched in India in the last five years.

Vaibhav Domkundwar, CEO of pre-seed-focused Better Capital, a Silicon Valley entrepreneur, told ET, “When we started in 2018, pre-seed capital was not institutionalised in India. In the last five years, several funds have come up that focus on pre-seed investing. There is a very clear realisation that this is a real opportunity and we need more such funds and in this funding environment, this is the stage where larger funds wait for startups to gain more traction.”Better Capital is an early investor in fintech unicorns like Slice and Open.

Other notable micro VCs include deep tech focused Java Capital, Delhi-based Sauce VC and Neon Fund.

In recent years, the startup ecosystem has also seen the emergence of funds managed by a single general partner with an entrepreneurial background. These funds typically put out small amounts of capital to help startups from ideation through the seed stage.

Additionally, some influential founders who have had success with angel investments from their own personal capital have formalized their investment strategy by becoming limited partners (LPs) or starting their own funds to back early-stage startups.

On April 30, ET reported that CaratLane founder Mithun Sachetty and Flipkart co-founder Binny Bansal have become anchor LPs at Xeed Ventures, a Bengaluru-based early-stage fund run by Sailesh Tulshan.

Other founders and managers who have launched or backed funds include Zerodha’s Nikhil Kamath (Gruhas), Udaan’s Sujeet Kumar, Flipkart Group CEO Kalyan Krishnamurthy (an LP at Tanglin Venture Partners) and Freshworks’ Girish Mathrubootham, who runs the Together Fund along with Eka Software founder Manav Garg.

“In the last decade, many successful founders have switched to the VC space, raised funds and used their experience to mentor new startups, making them an attractive option for budding founders. Also, the growth of micro VCs — now over 100 and growing — has certainly transformed the investment landscape,” said Anil Joshi, founder and managing partner, Unicorn India Ventures.

However, this trend presents both challenges and opportunities for angel investors, as many startup founders now prefer institutional investors with strategic investment models, industry mentorship, and hands-on support to round out their capital plans.

This trend is also being driven by a growing push for domestic capital investment in Indian ventures.

Domestic capital currently accounts for around 15% of total investment in Indian startups, a figure that has risen significantly over the past few years, ET reported in April. The Department of Financial Services is also reportedly preparing a risk framework for direct investments in domestic startups by pension funds and insurance companies, with a view to increasing the share of domestic capital in Indian startups.

Commerce and Industry Minister Piyush Goyal also stressed the need for increased domestic capital in the startup ecosystem.

This comes at a time when China is actively promoting overseas investment in its high-tech sector by implementing measures to attract foreign investors, including encouraging foreign investment in Chinese high-tech companies through the inbound investment regime.

In June, the newly appointed Venture Capital Council of the Indian Venture and Alternative Capital Association (IVCA) identified the growth of micro VCs as one of its key focus areas.

Early bets

According to Tracxn, angel and seed funding rounds in Indian startups have declined over the past three years following a broader funding slowdown that has affected the global tech ecosystem.

Angel rounds fell from 560 in 2021 to 195 in 2023, while seed rounds fell from 1,850 to 1,100 during the same period. So far in 2024, the Indian startup ecosystem has seen 98 angel rounds and 417 seed rounds.

“Earlier, there was a big gap between angel investors and later-stage VCs, with the latter doing most of the heavy lifting. But with the rise of micro VCs almost monopolizing the angel space, angels will need to adapt to stay competitive; otherwise, they will find it tough to secure deals alongside the emerging micro VCs,” Joshi added.

But some investors see the rise of these funds as a positive development for angel investors, who say it reduces investment risk by allowing angel investors to increasingly participate in co-investment models with these institutional investors that are actively managed by fund managers.

Ritu Verma, managing director at early-stage investment firm Anchor Capital, said that while micro-VCs play an important role in backing these startups, the size of their capital is not always sufficient for the companies’ needs.

“I think there’s a gap in the ecosystem. There are a lot of deals involving micro VCs, but the check size is often not big enough for the companies. Conversely, when you go to bigger funds, they ask to see this and that before they talk,” she said.

However, the size of micro VC funds has increased significantly over the past few years as more early-stage startups emerge and larger VCs focus on later-stage deals.

Another strategy for micro VCs is to focus on a specific sector.

“If micro VCs are vertical agnostic, it will be very tough as they will be competing with VCs like Peak XV and Accel as they won’t have much of a differentiator. That’s why we are focused on deep tech, climate and sustainability and have developed expertise in these areas,” said Vinod Shankar, co-founder at Java Capital.