In the meantime, international funds are scooping up early winners and reaping the benefits of startups founded by Indians in the blockchain ecosystem.
Sequoia Capital India, Lightspeed India, Elevation Capital and others are warming up to India’s cryptocurrency and blockchain industry.
The absence of a clear regulatory framework and the possibility of a blanket ban has, however, kept most Indian funds at bay, despite the heightened interest in crypto and blockchain.
Indian crypto companies have received less than 0.2% of the more than $5.5 billion invested globally in blockchain startups, according to a whitepaper published by IndiaTech, an industry association that represents the country’s consumer internet startups, unicorns and investors.
“By a conservative estimate, risk capital amounting to over $400 million is likely on the side lines of the Indian blockchain and crypto sector due to the uncertainty,” said Joel John, a principal at digital asset investment firm LedgerPrime.
Several international funds such as Pantera Capital and Coinbase Ventures, and entrepreneur investors like Mark Cuban, have been investing in blockchain and crypto startups founded by Indians.
Funding by Indian and international funds stood at $99.7 million as of June 15, according to data platform Tracxn.
While the absolute investment is modest compared to what high-growth Indian startups receive, what is notable is the interest shown by large VC funds in backing some of these companies.
Vaas Bhaskar of Elevation Capital, an investor in Paytm, Meesho and Swiggy, had a serendipitous encounter with crypto three years ago that got him hooked.
Bhaskar said he has been meeting with two to three blockchain and crypto entrepreneurs every week ever since the fund decided to invest in the sector a year ago. It is now looking to close a couple of “sizable” investments this year, he added.
India’s blockchain industry has the same potential as its booming Software-as-a-Service (SaaS) sector, he added.
“The potential of the crypto and blockchain space is very evident and is something we’ve been keenly looking to invest in. It feels like the next paradigm shift,” Bhaskar told ET. “I think we have great talent here. We will find teams that come together and build something that can be used globally. This model has worked well in enterprise tech.”
Heightened investor interest
India’s crypto industry has seen heightened interest from international and Indian investors over the past year, owing to a massive increase in retail investors and the generally bullish market.
The success of blockchain companies founded by Indians, such as Polygon and Instadapp, have put Indian players on the radar of domestic and international funds.
Polygon and Instadapp have received funding from the likes of Ethereum’s co-creator Vitalik Buterin and Pantera Capital, respectively.
Lightspeed and Elevation Capital, meanwhile, are allocating time and resources to build their crypto expertise. Indian funds have sent analysts for blockchain fellowships and are reaching out to industry veterans to scout for early-stage deals.
“We have a small group of investors which builds depth and brings the rest of the partnership up to speed on specific areas as needed,” said Hemant Mohapatra, partner at Lightspeed.
The fund, which was an early backer of unicorns such as Oyo, Udaan and Sharechat, has invested in the space sparingly so far, but sees it “playing a very significant role in the future of global finance and trade”.
Sequoia India has backed crypto exchange Coinswitch Kuber and Singapore- and Thailand-based blockchain startup Band Protocol.
“The most exciting part of blockchain is the way it creates equality of opportunity and reward. Developers, collaborators, users, investors can all take part in the governance and growth of an organisation,” said Shailesh Lakhani, managing director at Sequoia India. “It’s a new model for the way organisations should be structured that is suited to the borderless online reality where we spend most of our time.”
Indian VCs cautious
While the intent to invest is strong, several blockchain and crypto founders who have engaged with VCs said these funds were still not cutting cheques at an aggressive pace, given the regulatory uncertainty.
Funds are also taking time to understand various investment models for crypto and blockchain projects, not just equity investments.
Both Polygon and Instadapp received investments in lieu of their native tokens, which are subject to price fluctuations and investor sentiment.
A large fund, which makes late-stage bets and has several unicorns in its portfolio, is taking its time to familiarise itself with token investments.
A senior executive at the fund said this is because there are a lot of nuances to scaling token projects. “Tokens don’t accrue any cash flow from the company, so investors need to spend time understanding the long-term benefits of such an investment.”
Blockchain and crypto founders engaged in such conversations with Indian funds said that talks are progressing slowly, owing to the time it takes to explain the intricacies of the technology.
“VCs are still averse to investing in token projects that have a public buy-in from Day One, unlike the IPOs that these funds plan for,” said another founder who runs a successful company in this space and informally advises Indian funds on crypto and blockchain investments.
International VC firms such as Andreessen Horowitz, which is dedicating $2 billion to crypto investments, have already adapted to the new ways and are making a combination of token, equity and hybrid investments, the person added.
Founders and VCs agree that Indian investors make up for a lack of domain expertise with years of experience in building and scaling companies, and product adoption.
Bhaskar from Elevation Capital said the rules for scaling a company remain the same across sectors, and that the fund also brings its experience from scaling several large fintech companies.
Jaynti Kanani, co-founder of Polygon, said the Indian crypto ecosystem has come a long way from 2017, when raising funds was a struggle. There is more awareness of and belief in Indian developers globally, he said. “But Indian investors have to up their game pretty quickly, otherwise they will lose this market completely.”