VC/AIF Investments — Patience and Perseverance!
Venture Capital (VC) and Alternative Investment Funds (AIF) are investment vehicles pooling from HNIs / Ultra HNIs / Institutions, along with sponsor’s own significant money (skin in the game) . They invest in the startup and technology space. (Off late, have seen a considerable increase in popularity, post the Shark Tank series in India ). The AIF Industry size as a whole has commitments totaling INR 8,33,774.35 Crore (~ 102 Bn USD) as of March 2023 as per SEBI data , since AIF regulation came into existence way back when 2012 was a commitment of INR 359.5 crore (~ 0.04 Bn USD)
These funds make investments in start-up or fast-growing businesses with strong potential for growth and profit, disrupting or simplifying the current ways of doing things. On the other hand, VC/AIF investing is not recommended for beginners.
Long-term thinking, patience, and persistence are necessary.
Lets delve deeper …
First and foremost, it is important to understand that startups are inherently risky. Many startups fail, and even those that succeed often take years to reach profitability.. Unlike traditional investments such as stocks or bonds, investing in VC/AIF requires a different mindset. The typical holding period for a stock or bond is a few years, ( or even hours, if you are into Trading ), while in VC/AIF, the investment horizon is much longer, often spanning five to ten years or more. This extended timeline means that investors must have a longer-term outlook and be prepared to wait for the investment to bear fruit.
One of the reasons that patience is required in VC/AIF investments due to the nature of the businesses being invested in. High-growth enterprises and early-stage startups frequently confront major obstacles that can take time to overcome. To develop the product and services, build a clientele, and make money, these businesses need time. The company might also need to change its business strategy or pivot if market conditions are not favorable for it to survive.
Another reason why VC and AIF investments require patience is that finding, analyzing, and investing in high-growth businesses can take time. VCs are required to perform in-depth due diligence on potential investments, which may include market analysis, team evaluation, and financial analysis of the company.
VC and AIF funds frequently play a significant role in assisting the businesses they invest in to expand and scale their operations. This may require advising and mentoring the business, introducing it to possible clients and business partners, and assisting it in obtaining more funds as required. To observe results from any of these activities, all of these activities take time and require patience to see results.
Finally, why patience is critical in VC/AIF investments is that the investment returns are not realized until an exit event occurs and potential exit options are:
- Acquisition [High Probability]
- Secondary Sale [High Probability]
- Strategic Sale
- Buyback
- IPO
It can take years for a company to reach this stage, and even then, the exit may not be as lucrative as expected. Therefore, VC firms, wait for the right time to exit for multifold return for their investors.
Way forward –
In today’s world of instant gratification, we are prone to impatience syndrome, where we may take a pill to get rid of our pain and use our credit cards to obtain delivery right away.
According to Aristotle, “Patience is bitter, but its fruit is sweet.”…..
Auxano, as SEBI registered AIF in Cat-1 (Angel Fund) & Cat-2, follows this thesis to invest in Next-Gen, Tech-Led, Consumer focus business driven by subscription/secular income.
The Investment journey, from selecting investments to managing a portfolio to seeing a return, the process is long and often unpredictable. The potential rewards, however, can be substantial for individuals prepared to adopt a long-term perspective.
Author:
Rakesh Rana
