In a few months, Stellaris Venture Partners, the venture capital firm launched in January by former Helion Venture Partners fund managers Alok Goyal, Ritesh Banglani and Rahul Chowdhri, will hit India’s start-up market with its debut fund. Also waiting in the wings is the yet-to-be-christened venture capital shop founded by former SAIF Partners principals Mukul Singhal and Rohit Jain.

Despite an ongoing correction in the start-up market, the founders of both firms reckon it’s a great time to start a venture capital firm in India. It is. In fact, correction or not, it’s always a good time. In the last 10 years since venture capital returned to the country, the industry has grown only incrementally, both in terms of the number of active firms in the market and funds under management.

The industry started off on a strong note. Between 2006 and 2008, about a dozen firms, both home-grown ones and the arms of overseas firms, set up shop in India. These included Silicon Valley-based funds Sequoia Capital, Accel Partners, Norwest Venture Partners and Matrix Partners and local outfits such as Nexus Venture Partners, Helion Venture Partners, SAIF Partners, Kalaari Capital (then known as IndoUS Venture Partners) and Saama Capital.

That list hasn’t changed much. Of course, the coffers of most of the early entrants have swelled. They now manage billions in India-dedicated capital. Many have raised successive funds over the years, each bigger than the previous one. By London-based research firm Preqin’s estimates, the dry powder or uninvested capital currently available to India-based venture capital fund managers is about $3.4 billion. Most of this capital is concentrated with the dozen-odd firms mentioned earlier.

Still, the scale of the industry is at odds with the scope of the opportunity that India’s rapidly growing start-up market offers. Last October, in its annual trends report on the start-up ecosystem, software lobby Nasscom put the number of technology start-ups in the country at 4,200. That, says the report, makes India the world’s third largest base for technology start-ups after the US and the UK. Add non-technology start-ups to the mix and the total number rides up to more than 10,000, by the report’s estimates. The demand and supply mismatch is one of the prime factors behind the correction that’s in play in the start-up market today. Since 2006, India’s start-ups, according to data compiled by research firm VCCEdge, have drawn more than $15 billion in capital from a variety of investors. About $8.3 billion has been deployed over just the last three years. Further, more than half of this capital is concentrated in a relatively small number of companies. In 2015, for instance, over $4 billion was spread across just 368 deals.

More importantly, most of the $15 billion has come not from venture capital investors but other sources, chief among them global hedge funds and strategic investors. Hedge funds in particular have had an unhindered run of India’s start-up markets, often closing deals in haste and at inflated valuations. Hedge funds, by mandate, take short-term and opportunistic bets on listed companies. Their sudden, though not unexpected, withdrawal from the private start-up market around the middle of last year because of pressures on global public markets has led to a tightening of funding available to start-ups.

Hedge funds are also fairly active in Silicon Valley, the world’s largest venture capital market. However, their impact on the Valley and the US start-up market in general has been more limited because of the sheer scale of the venture capital industry there. Last year, for example, venture capital investments in the US were reported at $58.8 billion across 4,380 deals, according to data compiled by the National Venture Capital Association, which represents over 300 US venture capital firms.

By comparison, the size of India’s venture capital industry is almost inconsequential. This is a disadvantage because it leaves the arena open for other sources of capital, notably hedge funds, which may not always be the right fit for young private companies. The absence of adequate venture capital has compelled the founders of several start-ups across the ecosystem to admit hedge funds as investors relatively early in their lives. A prime example is Bengaluru-based e-commerce company Flipkart, which brought New York hedge fund Tiger Global Management Llc. on board as an investor in its Series B round. Tiger Global claims to invest in start-ups from a separate venture capital fund.

Stellaris and Mukul Singhal’s yet-to-be-named firm will be welcome additions to India’s fledgling venture capital industry. They aren’t the only recent entrants here. Some of the earlier notable ones include India Quotient, Blume Ventures and Lightbox Ventures, all based in Mumbai. Then there’s Singapore-based DSG Consumer Partners, which started investing about three years ago, and is now raising a second fund. Reports say it has already received investor commitments worth $35 million. More recently there’s Hyderabad-based Endiya Partners, founded by former DFJ India fund manager Sateesh Andra, which is raising a $30 million debut fund. Bengaluru-based Prime Venture Partners, which started up as AngelPrime about five years ago, raised about $47 million last July for its new fund.

Such additions though are few and far in between. This is because, one, the industry itself doesn’t yet have the depth to churn out experienced fund managers who can strike out on their own. Two, while the market has seen a lot of money invested, very little of that has been returned in profits. Limited partners, or investors in venture capital funds, are, therefore, reluctant to back untested, new venture capital firms. Three, unlike Silicon Valley, there aren’t enough entrepreneurs yet who have got rich enough from building and exiting successful businesses to redeploy some of that capital by starting venture capital firms themselves.

Will any of that change significantly over the next few years? It really depends on how well entrepreneurs and investors are able to ride out the ongoing downturn in the market.

Snigdha Sengupta is a freelance journalist based in Mumbai and founder of StartupCentral. She writes on private equity and venture capital for Mint.

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