Early-stage funding of startups at 3-year low

BENGALURU: Early-stage funding of India’s internet startups by venture capital (VC) firms and angel investors has dropped to a threeyear low, data from startup tracker Tracxn showed.

The slump in early-stage funding along with the drop in new startup formation has led to concerns that there will be an acute shortage of deal supply over the next two years for VCS and other large investors who have billions of dollars in capital waiting to be deployed.

In the first 10 months of this year, 482 startups have been funded at the seed and angel stage, which is the first round of funding for a new company, Tracxn data showed. That number is far lower than the 894 deals at the same level in 2016 and 816 in 2015, and is unlikely to catch up in the last two months of the year, which tend to be a lean period for start-up funding.

Mint had reported on October 3 that the number of new internet and technology startups launched in the first nine months of this year has slumped to 800 from more than 6,000 in all of last year, as start-up closures, the struggles of large internet companies such as Snapdeal and a slowdown in the growth of the e-commerce market took their toll on entrepreneurial activity.

“Many VCS who were doing seed deals in 2014-15 and last year are not investing in early-stage or have generally become very cautious,” said Anand Lunia, co-founder of India Quotient, an early-stage VC firm. “Angel investors are also not very active. Some who had burnt their hands in 2015 have stopped investing in Early-stage funding of India’s internet startups by venture capital firms and angel investors has seen a significant drop, data from startup tracker Tracxn shows. In the first 10 months of the year, 482 startups have been funded at the seed and angel stage, far lower than the numbers in 2016 and 2015. 2014

startups...you have to remember that public markets have been very attractive this year.”

The fall in seed and angel deals is partly because consumer internet and e-commerce companies have lost favour with investors. Both investors and budding entrepreneurs who had flocked to start consumer internet companies in 2014 and 2015 have shifted to areas such as software as a service (Saas), business-to-business e-commerce and financial technology over the past 18 months.

The slowdown of growth of online retail, the failure of most investments in once-hot areas such as food and grocery startups and the implosion of Snapdeal, which had raised $2 billion in capital, have turned VCS against consumer internet firms.

Yet, the consumer internet market has never been healthier partly because of the expansion of digital payments and the availability of fast and low-cost mobile internet services.

“The consumer market has never been better, because of Jio and the growth of digital payments. Indian consumers are 2015 2016 2017* very comfortable with online services and still, you’re not seeing many investments or a sufficient number of new startups in consumer internet. This indicates that within 2-3 years there could be another bubble because you’ll see a lot of investors chasing very few start-ups,” Lunia said.

It’s not just seed investments that have fallen. Even Series A investments this year have dropped sharply to 124 from 174 and 191 in the two preceding years, respectively, Tracxn data shows. Overall, startups have raised roughly $10 billion in the first 10 months of the year, compared with $4.6 billion in all of 2016. But the volume of deals, has dropped to 841 from nearly 1,300 last year, according to Tracxn.

Fewer startups are getting more and more capital. For instance, just three companies, Flipkart, Paytm and Ola, account for nearly half of all capital raised by startups this year.

“Going forward, funding is likely to get more concentrated,” said Kashyap Chanchani, managing partner, The Rainmaker Group, an investment bank.