SphitiCap: The VC fund inking deals without transferring funds

Invisible dollars: In October 2022, SphitiCap, an early-stage VC firm, announced that it had launched a $500-million fund. Its commitments total to $50 million across eight deals but not a single penny has been invested in 13 months

A lot has changed after the Covid-19 pandemic—how people eat, shop, work and more. The startup ecosystem is no different and has gone through its own metamorphosis. Investors are taking longer to close deals now than they did in 2021. At the height of the pandemic, when money was cheap, venture capital firms wired the money to founders in two or three weeks after final conversations.

In 2023, a similar deal takes at least four to five months to close, but for some founders from SphitiCap’s portfolio, it has been 13 months and they’re yet to see any money.

SphitiCap: The backstory

SphitiCap is an early-stage venture capital (VC) firm which said it had launched a $500-million fund in October 2022 and also committed $50 million (around Rs 400 crore) across eight deals. While announcing some deals shortly after announcing a fund is not uncommon, SphitiCap is yet to mark the first close of its fund and even worse, is yet to get an approval from the Securities and Exchange Board of India (SEBI) to be a registered fund, people aware of the developments told Moneycontrol.

The Noida-based VC firm made four public announcements where it said it has committed to drone company Garuda Aerospace, PayVeda, a fintech startup, EV manufacturer Corrit Electric and eyewear maker ClearDekho. SaaS company 6Degree was also promised money, sources said, but none of the five startups have received even a paisa from SphitiCap. "6Degree is not currently within our portfolio of startups. We've merely evaluated the startup and have not furthered," SphitiCap said in a statement.

The other three deals were not made public, the company refused to reveal their names.

SphitiCap going back on its promises has left its startups high and dry. “It’s almost like we were held hostage. SphitiCap has signed shareholding agreements in some cases, given out term sheets, but not a single company from their portfolio has received any money even a year after the money was promised,” a founder, who was promised money from SphitiCap, told Moneycontrol on condition of anonymity as he feared repercussions.

“See, raising money itself is very difficult and let me tell you, the hardest thing that I've done in my life is to convince new investors to put money into my startup after SphitiCap has left me hanging,” he added.

Pallav Kumar Singh, managing partner, SphitiCap, admitted to Moneycontrol that none of the monies has been transferred. “There has been a delay from our end but that's very well communicated to the startups and we’ll ensure those are fulfilled. Some by the end of this month, some by the end of FY24,” Singh said.

Asked the reason for the delay, Singh added that, “We were focusing on some internal alignment and matters.”

The situation for founders wouldn't be this difficult if they had not made public announcements, they said. While some alleged that SphitiCap forced companies to publicly announce the deals, Singh said it was done after a mutual agreement.

"Any and all announcements were made through mutual discussions with startups and in fact, most were initiated by them. We refrain from making any announcement that our startups are not comfortable with. Hence, certain ongoing deals have been kept under the wraps," Singh added.

PayVeda, ClearDekho, Garuda Aerospace, Corrit Electric and 6Degree did not reply to a request for comments.

Founded in 2022, SphitiCap said it would invest in cleantech, fintech, deeptech, agritech, proptech, SaaS, digital media, direct to consumer, spacetech, defence, and logistics and supply chain startups through its maiden fund.

Singh and Mayank Mehra, who run SphitiCap, were earlier consultants at various places, including MyGov and others, as per their LinkedIn.

SphitiCap earlier wanted to be a category one (CAT I) VC fund, but changed its application and applied to be a CAT II VC fund instead. The change was because it wanted to do deals that were a mix of debt and equity (mezzanine deals) and not restrict itself just to equity deals as is the case of CAT I funds, Singh said while explaining the delay.

However, some industry experts do not concur with that explanation.

“The change in the application process is a simple step and the final SEBI approval should not take longer than four to six months. It is blatantly absurd if a VC firm says it takes any longer than that, and certainly not over a year. SEBI will not sit on an approval for this long unless it has asked questions and the applicant has not replied yet—again a red flag,” said the founding partner at a homegrown VC firm, which has backed several startups including at least two unicorns.

Singh from SphitiCap has however said that SEBI has provided "a lot of guidance on several aspects" and that conversations have been "good". The final approval should come by December, he added.

"Our CAT II application was submitted to SEBI on October 10, hence it’s not been four to six months," Singh said.

SphitiCap’s delay in putting up the funds has resulted in startups growing at a slower pace. “Accounting for the money that would have come in from SphitiCap, we would have grown to a certain scale by now, but we are behind by at least 40 percent,” said another founder from SphitiCap’s portfolio, also requesting anonymity.

“We were promised money at the beginning of 2023 but then that the deadline was pushed every one month, there were only delays, delays and delays,” the founder added.

This has pushed some of SphitiCap’s portfolio companies to raise an interim bridge round as well. Garuda Aerospace, for instance, last month announced that it has raised Rs 25 crore in a bridge round.

"The bridge round for Garuda is an internal decision unrelated to investments from SphitiCap. It is solely aimed at honoring commitments from previous rounds and investors," Singh from SphitiCap added.

Bridge rounds are financing rounds that happen between larger fundraises which ensures startups have enough cash runway to make it to the next round of financing.

“The startup ecosystem usually doubts the founders in such cases where VCs go AWOL so we’ve kept quiet so far, because we need to raise money to keep operating. But the SphitiCap episode has taught us that even founders should do due diligence on the VC firm it is raising from,” one of the people cited above said.

SphitiCap’s Singh has however denied having deviated from agreed-to time frames. “We have not missed any specific deadline. Wiring money is not a one-day job and happens in tranches. We have a target timeline and certain deadlines. We have discussed the structure with our startups,” Singh said.

To be fair, all the people that Moneycontrol spoke with said SphitiCap was still reachable and was in constant touch with its startups. That was, however, not helping the startups’ case because if the money is not being moved to the company’s bank account, it’s as good as not being transferred. If there was too much of a push, SphitiCap could stop negotiations and blame founders for the deal falling through, the founders said.

The rethink

Over the past few months, SphitiCap has also completely revamped its website. The earlier version had spelt out its vision very clearly, along with team members and the sectors it would focus on, but the new website has no details, likely an indication that the company will go back to the drawing board.

SphitiCap's website before the revamp.

SphitiCap's website does not provide information on portfolio companies, thesis, team members and other information like it did previously.

"The revamping of our website is a routine update to our brand assets and should not be construed otherwise," SphitiCap's Singh said.

Apart from Singh and Mehra, also a founding partner at SphitiCap, Moneycontrol could not find more employees who work at SphitiCap.

Notably, Mehra also is also the co-founder of two other firms— CORPZO and Ultiwise Ventures Private Limited—according to LinkedIn which likely means his time is divided between multiple ventures.

The sectors SphitiCap was interested in, as per its website pre-revamp

SphitiCap also boasts of having a key team that has 250 years of consolidated experience, including four members on its advisory board. Arvind Jadhav, Viral Chopra, Vimal Kumar and Sandeep Sehgal were advisors to SphitiCap, as per its pre-revamp website. SphitiCap’s website also did not mention the companies where Chopra, Kumar and Sehgal have worked. The website does not carry their names any longer.

SphitiCap, who?

SphitiCap, which said its first fund will have a corpus of $350 million when closed with a greenshoe option of $150 million, said it is an early-stage VC firm that invests around $10 million on average in each round. Some 70-80 percent of the corpus comes primarily from family offices based in the Middle East and some APAC regions and is a dollar-denominated fund.

The remaining portion comes from ultra-high net-worth individuals (UHNIs) in India, per Singh, who did not disclose more details.

He however added SphitiCap has a 2/20 arrangement, where it charges its limited partners (LPs) 2 percent as management fee and 20 percent in carry when there is a profit.

However, at least five managing partners at different VC firms in the country told Moneycontrol that they had not heard of SphitiCap’s existence, which is unusual for an early-stage VC firm that claims to have a fund size of $500 million.

Some even underscored that the SphitiCap episode is similar to Oxshott and Sumeru Ventures, the little-known VCs who promised but never ended up investing in Byju's.

SphitiCap's name also does not figure on SEBI’s website which has a list of registered alternative investment funds (AIFs). Singh said he expects the final approval by December, but it remains to be seen how much of its commitments SphitiCap will honour.

Note to readers: The story was updated only to include additional comments from SphitiCap which were sent hours after publishing. There are no other changes.