The Hunger Games: Catching Companies

May the odds be ever in your favor

One of the venture-isms you hear in America is that the best way to join the venture ecosystem is by doing the work before you get the job. If you can demonstrate access to great founders to venture capital firms before the founders formally go out to raise and said firm ends up investing it bodes well for you. But as someone who has been interested in the wonderful world of venture capital for the last decade, I really struggled with this until I learnt the structural reality of India’s startup ecosystem.

There is almost no chance an individual can repeatedly meet a great founder in India starting a company before the large venture capital firms in India do, and the reason is quite simple - our ecosystem is quite shallow. There is a term called “deal coverage” (or “coverage” for short) that the large firms obsess over in India. It is defined as what percentage of companies who are raising capital of a particular stage (i.e Seed, Series A, Growth) does a venture capital firm meet. In India, top venture capital firms have a coverage of 90%+ for seed rounds. This means every top firm in the country virtually meets every company that raises capital and they are able to do so because every year there’s only ~1,300 companies who raise a venture capital early-stage round. [Tracxn]

If a firm has 10 investment professionals, each individual only needs to meet 130 companies in a year to have total coverage of the ecosystem. Most investors end up meeting far more companies in a year, including many companies who don’t end up raising at all. Thus with a ratio of meeting 33% of companies who end up raising a seed round, an investor still only needs to meet 400 founders a year - which nets out to meeting slightly over a founder a day.

However this is not possible in the US, where there are ~10,500 early-stage rounds every year requiring the same team of investors to meet 8x the number of founders for the same coverage. [NVCA] And it does reflect in the numbers too — the top venture capital firms only have a 50-60% coverage at the seed stage. And this is further exacerbated by the fact that most venture capital firms (with the exception of Andreessen Horowitz) have smaller investment teams than Indian firms making high coverage an irrelevant statistic. This gap allows new venture firms to emerge in the US while in India that path doesn’t exist. Firms can still differentiate by picking which companies to back (to be covered in a future post), but the access edge that powers new firms in America is structurally unavailable here.

This is further reflected in the data behind which venture capital firms in the country lead rounds into outcome-creating companies. While 11 American venture capital firms led the Series A of 50% companies now worth $5B+, only 7 Indian venture capital firms led the Series A of 60% companies now worth $1B+. Similarly while 75% of all venture dollars are raised by just 30 American venture capital firms, 70% of all venture dollars are raised by just 16 Indian venture capital firms. This shows that the Indian ecosystem has a stronger concentration of capital amongst a few relevant venture capital firms

We have seen the list of important or relevant venture capital firms change over the course of the ecosystem in America. While Sequoia has been a mainstay in the industry since the 1970s NEA & KPCB have certainly lost some of it’s shine, and Andreessen Horowitz & Founders Fund have emerged as very important firms in the last two decades. However, we haven’t quite seen this change, yet, in India (albeit that the Indian ecosystem being about ~20 years old where the American ecosystem has existed for over 50 years).

In India the 7 most important historical venture capital firms have been Peak XV Partners, Accel India, Nexus Venture Partners, Z47, Elevation Capital, Lightspeed India and Tiger Global. These 7 collectively led the Series A rounds for 6 of India’s first 10 unicorns and also led the Series A rounds for 8 of India’s last 10 unicorns — showing their staying power. This is definitely a lagging indicator of who the relevant venture capital firms are at any point of time since it does take at least 5 to 7 years between raising a Series A round to becoming a unicorn.

The composition of the list of these top firms might change over the next decade but it currently seems unlikely that the size of this list will expand meaningfully. Tiger Global has been losing relevance in India, General Catalyst has entered India very strongly in 2024 and homegrown firms like Stellaris or Blume might graduate from single-stage firms to multi-stage firms. Meanwhile, old venture mainstays have split or splintered into new institution i.e the death of Helion Venture Partners gave rise to Fireside, Arkam, Stellaris and Fundamentum; while firms like WestBridge, A91 Partners and a couple of upcoming firms have come out of Peak XV Partners’ ex-Managing Directors.

After I published my last musings on venture capital in India, Utsav Somani (CEO @ Offline) asked me - “what would it take for someone to compete with the top firms in India” and the answer is a new firm that competes with the top firms head-on by having a similar fund-size and high coverage. Since there are only a finite number of early-stage investments each year that are truly important, new firms coming in to compete on those deals is the only way to displace the existing firms.