VCs count on evergreen funds for longer startup runway

They can reinvest proceeds from successful exits and continue holding promising investments without the pressure to return capital to investors within a timeframe. The model, popular in the US, is gaining traction among Indian investors as the startup ecosystem shifts its focus from growth at all costs to profitability and long-term value creation. The mismatch is particularly evident in sectors with long gestation periods.

Startups in biotechnology, agriculture and manufacturing, for instance, can take several years to establish their technology, infrastructure and commercial viability. Even otherwise, businesses can take 10-15 years to reach maturity and an initial public offering (IPO), while the average life of a fund is less than 10 years. “This does not account for funding winters, macro shocks, and other extraneous factors,” Siddarth Pai, managing partner, CFO and ESG officer, 3one4 Capital, said.

Evergreen funds can stay invested beyond the traditional fund life cycle and even after a firm lists, allowing investors to benefit from long-term compounding, he added. However, Indian regulations do not currently permit domestic Category I and II alternative investment funds (AIF) to operate as evergreen structures. These funds are required to be closed-ended, with a fixed tenure and corpus. Consequently, some Indian investment firms that describe themselves as evergreen funds follow structures that allow them to continue deploying capital and reinvesting exit proceeds, rather than operating as formally recognised evergreen vehicles.

Among the firms associated with this approach are WestBridge Capital’s Crossover Fund, Premji Invest, IAN Angel Fund and Zerodha-backed Rainmatter, according to Tracxn. “When you invest at an early stage, you are backing a founder who is still figuring out the market, building a team, finding customers and, sometimes, creating an entirely new category. Not every business will reach scale at the same pace,” Padmaja Ruparel, co-founder, IAN Group, said.

The structure allows the fund to stay invested longer where warranted, without having to evaluate every company against the same exit timeline. Evergreen funds can also reinvest returns from successful investments instead of distributing all proceeds and raising a fresh fund. However, the model requires greater discipline in valuations, governance and capital allocation, particularly in balancing long-term investments with investor liquidity expectations.

“The biggest challenge is balancing long-term investment decisions with investor liquidity expectations,” Shubham Jhuria, CFO and partner, Aeravti Ventures, said. Such structures are also more suited to institutional investors with longer investment horizons than high-net-worth individuals and family offices, Pai said. They say that foreign funds investing in the country already operate with longer investment horizons, giving them greater flexibility in timing exits. Allowing domestic funds similar flexibility, they believe, would help create a more level playing field.