Shift to thematic VCs inevitable in smaller funds: Expert

Bengaluru: In April this year, Mumbai-based venture capital firm (VC) Cornerstone Ventures launched its second fund with $200 million. The VC primarily focuses on enterprise software as a service (SaaS) startups. Abhishek Prasad, Managing Partner of the VC, spoke about the advantage of early stage investors moving to Bengaluru, the shift in the AI-application business-model space to value-based payment, and thematic VCs emerging, in a conversation with DH’s Anushree Pratap. Edited excerpts:

India spawned six new unicorns in 2024, which marks a steady growth from 2023. Will this momentum continue next year?

Back in 2019, India had about 30 unicorns. It finished 2021 with about 105 unicorns, which happened because a lot of liquidity was in the market. But those valuations were a bit ahead of time. 2022 and 2023 became slow years because the Fed increased interest rates. There were large cheques which got sucked out in 2022-23. In 2024, the cash flow has started stabilising. There are specialist funds investing in venture and the private market. That is why there is a reasonable rate of five to seven unicorns a year. This should continue, though there may be a little increase in 2025 with Donald Trump coming into power in the US.

Are AI deals expected to dominate in the coming year? Which new sectors will see growth?

An area that we are also very keen on is applications of AI, which I see as the biggest mover of opportunity in 2025. The narrative is slightly moving away from foundational models to actual applications. I also see a shift in the SaaS business model. While AI is an enabler eventually, it is the business model that matters. In the tech world, the SaaS business model is going to transform to a value share model from the subscription model that we see today. That is a big shift, where your customer is willing to pay for the value created and not the number of subscriptions.

Will more specialised VCs emerge going forward?

This shift towards thematic VCs is bound to happen as India's market matures, because it is much easier to control your outcomes. If you are a generalist, you end up investing in every flavour of the season and you can't find winners in every flavour. So you end up having a suboptimal outcome. Further, you only tend to become a generalist when you've got a few billion. You can't afford to be thematic anymore because you are struggling to deploy so much capital in just one thing. But if you are a reasonable size fund with $100-200 million, it will be thematic. Plus, you can pick areas where you are strong and can add value to your founders.

More VC funds are now moving to Bengaluru or have major operations there. Cornerstone isn't one of them. Do you think there is any advantage to moving funds to Bengaluru?

Yes, it is definitely closer to your target companies. In any given week, at least one of our senior people ends up travelling to Bengaluru because there is so much happening in the companies, as well as new investments. If you are an early stage player, you have to be in Bengaluru because you want to tap founders early in their journey. Having said that, expansion has happened in the National Capital Region (NCR) a lot. Mumbai has become somewhat fintech-focused. Chennai is a SaaS-focused ecosystem, so we spend a lot of time in Chennai as well. But the focus around Bengaluru will continue. 50% of our portfolio is also from Bengaluru. In our case, it is more financial metric-driven investing so we can still afford to be a little away from Bengaluru. About 70% of what we are raising in our second fund will go into the early stage and 30% will go into the late stage. India has also reached that maturity where you can have these kinds of hybrid models.

Why are some fintechs falling foul of regulations by the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI)?

This has always been a challenge with startups because they tend to not make investments in compliance. What we do with our portfolio companies, especially in the fintech space, is to invest in regulatory reviews. If you can't create a compliance department in-house because you are very early, you can do a quarterly audit with an external agency. For us as investors, our fund utilisation should have allocation towards making sure regulation, funding, and management is taken care of. We also encourage founders to be a part of the regulatory process ahead of time.

What is the status of your second fund?

We have raised almost 25% of it. We are in the process of locking up another 30-40%, which should be done by March. By March, we also would have deployed about 20% of the capital. The focus will be primarily on enterprise tech models where new SaaS models, Generative AI use cases will come into play. We will do some new areas like quantum computing, Web3, for large enterprises. That will be a small allocation because those areas are still emerging. As for the third fund, it will probably be after we have deployed at least 70% of our $200 million, so it is about two years away.