Top-up time: VC opportunity funds

"We have a very small percentage stake and the valuation of the company has grown much faster than anticipated so we didn't have the opportunity to participate in the Series C," explains Ray Yang, a managing director at the VC firm. "We would love to get more shares if we could, but we can't."

As certain companies stay under private ownership for longer periods of time and raise ever large pools of capital required to accumulate market share, what happens to the early investors? Although a degree of dilution is inevitable over time, they are sitting on potentially huge returns on what started out as relatively small bets. What, though, if they wanted to re-up and continue participating in the growth story? The problem is that doing so might go against the fund remit and exceed the maximum check size.

US venture capital firms have already found an answer - opportunity funds, which focus on later-stage investments in existing portfolio companies - and there is every reason to believe it will catch on in Asia as well. Indeed, earlier this year Indian VC Nexus Venture Partners raised a $110 million opportunity fund from its current LP base.

Nexus closed its third main fund in September 2012 at $270 million, around $50 million larger than the previous vehicle. But Snapdeal was growing even faster. Nexus and Kalaari Capital backed the e-commerce company in its infancy, providing a $12 million Series A round in early 2011. It stuck with Snapdeal through the next two rounds and then in March 2014 the company raised $133.8 million in Series D funding. This was said to be the first deal out of the opportunity fund.

A top-up vehicle is not a perfect solution. If some LPs are in both the main and opportunity funds while others have an interest in just one, it can create conflicts. Questions might also be asked about strategy drift. Investors may benefit from continued exposure to successful portfolio companies, but shouldn't Nexus be focusing on finding the next Snapdeal?

Nevertheless, the sheer size of the rounds some tech companies are now raising in Asia suggests that there will be a place for opportunity funds. AVCJ Research has records of 50 VC rounds of $100 million or more in the region, of which 33 were completed in 2013 and 2014. India's Snapdeal and Flipkart and China's JD.com and Xiaomi feature high up the rankings and multiple times in the list as a whole.

Smaller VCs can't stop DST Advisors, Tiger Global and Temasek Holdings coming in, but they might find a way to ensure these investors don't eat all of the lunch.

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• Topics
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• Asia
• Venture
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