The Art Of A Good Unicorn | In an era of 'dumb money', here's how VC funds can differentiate themselves

Sequoia's surprise exit is bound to have an impact on the VC industry. A few tips on how to navigate the bountiful but troubled waters of the start-up ecosystem

June 2023 brought news that seemed to signal a shift in the dynamics of the venture capitalist (VC) world. On June 6, VC behemoth Sequoia Capital announced it was leaving India and splitting into three distinct entities – Sequoia Capital in the US and Europe, Peak XV Partners in India and Southeast Asia, and HongShan in China. This was a surprise to many, as it was believed that India was "the" market to be at for VCs. An official statement by the VC giant said it had become "increasingly complex" to run a "decentralized global investment business."

VC behemoth Sequoia Capital announced it was leaving India and splitting into three distinct entities -- Sequoia Capital in the US and Europe, Peak XV Partners in India and Southeast Asia, and HongShan in China. (Bloomberg)

Yet, speculation was rife. Some thought that India was collateral damage from the trade war between the US and China, others thought it may have been due to corporate governance and ethics issues that Sequoia’s Indian portfolio had been dealing with. Or was India not just that attractive anymore, no matter how much it tried to impress Sequoia?

The exit came at a time when it looked as if top global VC firms in the ecosystem were eyeing the Indian market. Andreessen Horowitz, which invested in CoinSwitch Kuber, reportedly earmarked about $500 million to back Indian startups. Tiger Global entered India about 16 years ago, in 2007. Since 2014, the VC giant has backed close to 125 Indian startups (as of February 2023). Dragoneer led a round in Indian startup Facilio, and Khosla Ventures invested in Indian startups Even and HealthifyMe.

That being said, Kleiner Perkins did seem to pull out of India in 2013 and NEA seemed to veer away from Indian investments in 2017. But, the departure of Sequoia Capital, and the creation of its new firm Peak XV does lead to another question reflecting the current VC ecosystem: Is more always better?

"A decade ago, there were two venture-backed private companies valued at more than $1 billion and $3 billion in annual venture investment. A decade later, there are 102 venture-backed private companies valued at more than $1 billion and $24 billion in annual venture investment," said Lightspeed venture partner Bejul Somaia in a Twitter thread.

I’ve been tracking the private markets for more than 15 years. There was a time when VC firms were enigmatic and exclusive; glamour, style and appeal accrued to the VC and PE space. Deals seemed to take place behind closed doors between dapper and sexy Ivy League-educated people who invested in entrepreneurs and ideas. Over time, with more and more VC firms in play, the real has become diverse. Let’s call it the democratization of venture capital.

At one point, you had large institutional funds dominating the VC scene, but over time individual investors launched their own funds, and micro-VCs and angel investors leveraged their expertise, networks, and personal capital to support startups.

Examples abound. Rishi Navani, a former partner of Matrix Partners, launched Epiq Capital, and Kleiner Perkins partner Wen Hsieh launched Matter Venture Partners in May. Other partners launched their own firms: Helion founder Kanwaljit Singh established Fireside, while his co-founder Sanjeev Aggarwal launched Fundamentum Partnership.

Maybe, this creates a saturation challenge with a surplus of VC funds, leading to more competition and inflated valuations. As a startup founder, you may now find yourself inundated with investment opportunities and it may even be harder to identify the right partners and secure terms that not only bring financial support, but also valuable expertise and network. This oversupply could dilute returns for investors and the value-add potential of VC funds may diminish.

So, how must VCs claim their uniqueness in this crowded market?

One, develop deep domain expertise and specialize in specific sectors or industries. Hone that knowledge and understanding of a particular niche to offer valuable insights and guidance to startups.

Two, VC funds could also offer value-add services to their portfolio companies, like mentorship programmes, access to industry connections, marketing support and operational guidance, amongst other services. So, with comprehensive support, they become partners in a startup’s growth and success story. If a VC fund has global reach and networks, that could be tremendously beneficial to a startup founder, opening doors for them to expand globally with access to international markets, talent, and partners; something a local-focused VC fund may struggle with.

VCs can also differentiate themselves by adopting a collaborative approach by actively engaging with startup founders, sharing expertise and building strong relationships. This way, there’s a symbiotic connection that benefits all stakeholders and this would give a VC fund a competitive advantage in a saturated market. This would make them an active partner rather than a passive investor, or what Mark Cuban, the American businessperson and one of the main "sharks" on the popular business show Shark Tank calls “dumb money” – investments in startups that don't have a hands-on approach.

Three, being a thought leader would help grow the VC fund’s reputation and appeal. Contributing to industry discussions, demonstrating expertise, and sharing valuable insights could help a VC fund become lucrative for startup founders who seek their guidance and investment.

Of course, having a great track record of successful investments and great returns helps build trust and confidence. Or maybe, a distinctive organizational culture could be a differentiating factor, with certain fund values that a startup founder could identify with, making them more inclined to seek investment from that place.

Somaia added in his Twitter post that the venture industry would have to do a better job of delivering liquidity gains, with the venture model based on learning and adapting fast, getting a path of high upside, and understanding which companies can drive economies and create enormous value. India’s potential is still compelling with a sizable market, great startup founders and technology adoption.

"India has always, and will always, test our conviction (and sometimes logic). You can't force this market, you can't time this market, you can't be short-term. Instead, you have to be patient, quality-oriented, disciplined, selective and prepared to play the long game," he emphasized.

Thus, differentiation becomes paramount in a saturated and crowded market. As a VC fund, how are you positioning yourself as the “sought-after VC fund” in a world that has more and more alternatives? And as a VC fund, is this the way to maintain relevance and make meaningful contributions to the dynamic world of startups? How can you maintain your sense of self in a world that wants to be better than you?

Shrija Agrawal is a business journalist who has covered startups and private capital markets before it was considered cool in India. The views expressed are personal