VC firm India Quotient to raise $42.5m add-on fund to back portfolio winners

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Venture capital firm India Quotient, an early backer of startups, including social network ShareChat and digital lender Lendingkart, is raising a ₹300 crore add-on fund to invest in its best-performing portfolio companies.

“An opportunity fund becomes a micro-cap portfolio containing high growth companies validated with strong investors. So now, we have reduced mortality, reduced duration and yet retain venture (level) returns,” said Anand Lunia, founding partner, India Quotient said in an interview.

Lunia is best known as an angel investor in Rebel Foods (formerly Faasos), where he still holds a stake.

India Quotient plans to close the fundraising for the add-on fund along with the final close of its $60 million third venture capital fund by September. The venture investor has appointed Kotak Wealth Management to market the fund.

The add-on fund is targeting a base size of ₹150 crore, along with a greenshoe option to raise another ₹150 crore. A greenshoe option gives the fund an option to raise more than it had originally planned, if it receives higher subscription interest.

India Quotient will use the add-on fund to invest in companies such as ShareChat, Lendingkart, LoanTap and Sugar Cosmetics, among others. The venture capital (VC) firm started with its first fund of $5 million in 2012, followed by an $18 million fund in 2015. The third fund and the new add-on fund will take its assets under management to $125 million.

Out of its 70 portfolio companies, the new fund will invest in 15-20, over the next three years.

“For us as a fund, the biggest gain is that we can support our top performing companies for longer. It also helps us connect with domestic investors (limited partners),” Lunia said.

The fundraise comes at a time when a number of early-stage VCs, including Blume Ventures, Kae Capital and DSG Consumer Partners, have been raising add-on funds, aimed at investing in fast-growing portfolio companies.

While Kae Capital raised a ₹100 crore add-on fund in January this year, DSG Consumer Partners, which invests only in consumer-focused startups, raised two add-on funds of $10 million and $20 million in 2014 and 2016, respectively.

India Quotient plans to co-invest in startups with a valuation of $20-100 million, along with marquee funds such as Sequoia, Accel and Tiger Global, and will not invest more than 25% of the round size.

For investors, these add-on funds pose lower risk, considering that they will be investing in companies with a proven track record, besides knowing the startups they will be investing in. It also gives VCs the chance to participate more significantly in the upside of their best performing companies, have a meaningful stake, and helps improve founder relationships.

India Quotient’s existing backers include Gulf-based Indian billionaire B.R. Shetty, Flipkart co-founder Binny Bansal, and Singapore-based family office of Rajesh Bothra. It is primarily a seed stage investor, generally the first institutional investor a startup brings on board after angel investors, family and friends.

Many early-stage funds are in fundraising mode, including Blume Ventures ($80 million), Endiya Partners ($40 million) and Kalaari Capital ($150-200 million). Early-stage investments in Indian startups continue to rise in value even as the number of deals have fallen, indicating increased investor appetite to write larger cheques, but for select companies.

Between January and June, seed and Series A investments rose 23% to $505 million, from $411 million in the year earlier, according to data from Venture Intelligence.

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