India’s startup ecosystem has gained significant momentum and is now a top priority for the country, states, universities, and corporates. However, there are few investors who have looked to invest in this space beyond stocks and properties. Financial institutions have been mandated to pick their own thesis to invest in funds to carry on the fund management process. The government has also created a thesis and supports incubators with a vision in the space that they want to support. It is a large ecosystem that operates with a large agenda, and over the last 15 years, significant amounts of money have been spent building awareness and infrastructure for startups to thrive. Now, every state government has made it an objective and allocated budgets for registered startups in their state. State governments have their own thesis and issue grants, debt, and equity.

The ecosystem of funding, other than the government, has been instrumental in bringing interests for many entrepreneurs to venture into building companies for scale. Organizations such as TiE have created networks and awareness for building this ecosystem. Angel networks have played an active role in building the investor network as well. Though there is still a long way to go, many VC funds have started with SEBI registered AIFs. (Alternate investment funds). This has allowed even passive investors who want to participate to do so as limited partners. Institutions invested their money, insurance funds, etc., through the VC/PE.

Successful family businesses have built their own investment offices (Family offices) that have also seen potential to invest in startups as per their own thesis. A few of them invest directly, while the rest invest through fund of funds. All these investments are chosen depending on the fund manager’s experience and limitations. Most of the fund managers in family offices do not have an incentive to exit because there is no fund period like 5/7/10 years. It is also a long-term tracking and management process.

Fund managers currently come from various backgrounds – successful entrepreneurs who have seen exits, angel investors who have been mentors and lead investors, and management graduates who have an interest in this space. Most of them work for either AIFs or family offices.

The need for more fund managers and management processes to invest in government-initiated funds, small family offices, or small networks of people who have a continued interest in investment has created a huge need for outsourced fund management practices. They take care of everything from first connect screening to preparing investment memorandums and doing due diligence on the listed opportunities. Engaging with startups to understand and size the opportunity correctly and choosing co-investors in the same round and terms is a laborious job. Post-approval for investment, there is more work, like negotiating term sheets and points related to definitive documents until the money is disbursed.

The fund manager’s role begins after post-investment, with regular follow-up on the portfolio and supporting startups in all pain areas. They look for opportunities for market access, continue to help them connect with other funds to raise subsequent rounds, and keep investors updated on the progress. Many times the entrepreneurs need support in exits, and even the investor looks for optimum exit rounds.

This process is more needed for government funds that invest in startups. As bureaucrats change positions, governments change, and delays in deciding the exit price may impact the further funding process. This makes it necessary for the government, small family funds, and small angels to outsource the investment process and portfolio management process for the benefit of investors and startups. It also assumes the lead investor role.

Independent fund managers do not decide on the investment; they are service providers.