Indian startups celebrate as funding boom returns

INVESTMENT FRENZY 2018 turning out to be bestever in attracting capital

BENGALURU Start-ups have been raising multiple rounds of capital in quick succession at increasingly higher valuations. Investors are chasing start-ups that don’t generate any revenue—at least not yet—and market share is the preferred investment metric, not unit economics. Is another hyper-funding wave around the corner for Indian start-ups?

Increasingly, this year is resembling 2014, when a handful of relatively mature start-ups raised huge sums. That year was followed by a broader hyperfunding wave in 2015 when it seemed that all you needed to raise cash was a degree from a top engineering college and the word “hyperlocal”, which was the flavour of the day then, in your investor pitch.

Investors have already struck 18 deals of $100 million or more this year compared with 22 last year, according to data compiled by Tracxn. At least a dozen more such deals including mega-funding rounds at Oyo, Byju’s, Swiggy, Zomato, ShareChat, BigBasket and others are in the works, according to previous reports in Mint. Factor in the $16 billion sale of Flipkart to Walmart and it’s clear that this will be the best-ever year for startups in terms of attracting capital, a stark contrast to the weak investment activity in the last two years.

The jury is out on whether this bumper year will be followed by an investment frenzy similar to that of 2015.

But there are some early signs. Start-ups such as Swiggy, Zomato and CureFit are attracting large rounds of cash in quick succession and at soaring valuations. Investors are chasing content start-ups that have no business model in sight. And, in some sectors such as food ordering, start-ups are spending wantonly on discounts, advertising and free product deliveries, though still not at the levels seen in 2015.

“While the ecosystem of companies has grown, the number of quality start-ups in the later stages has not grown at the same pace,” said Sharad Sharma, an angel investor and co-founder of iSpirt, an industry group for software products start-ups. “As a result, investors have fewer midto late-stage companies to back and double down on. Other than the category leaders, the ones that have just managed to survive but haven’t really taken off in a big way are also getting funded in the current wave. So, in mid- to late-stage deals, we’re definitely starting to see the beginning of a bubble.”

Mint had reported on 20 March that start-up funding may bounce back this year.

To be sure, it’s not clear if investor enthusiasm for mature internet companies will trickle down to early-stage start-ups. Funding for early-stage startups is at its lowest in four years, Tracxn data shows. And many investors have raised concerns about the low rate of new start-up formation.

Some investors said that VCs and start-ups both have learned from their mistakes in 2014-15 and it is unlikely that a bubbletype scenario will be repeated this time.

“The environment is very different from (that in) 2014-15,” said Ritesh Banglani, partner, Stellaris Venture Partners. “First, there is clear evidence of exitability of Indian internet companies. Second, companies that are raising large rounds are mostly market leaders who have proven the benefits of scale. Third, companies like Swiggy and Zomato that are raising big rounds have demonstrated good unit economics. So, most growth-stage funding is going towards building scale rather than proving business models, which was the case in 2014-15.”

Dev Khare, partner at venture capital (VC) firm Lightspeed India, agreed, saying that unlike 2014-15, VCs haven’t poured excessive amounts of cash in early-stage companies and neither have late-stage funds made bets on early-stage companies.

“Many investors had come in earlier during 2014-15 than they otherwise would, and a lot of sectors got overfunded,” Khare said. “Now, the market has matured and you’re seeing one or two winners emerge in several sectors. In India, capital accumulates around the winners pretty quickly, so I would expect more sectors to get funded in the growth rounds than in 2014-15.”

In the 2014-15 hyper-funding boom, Tiger Global made a series of early-stage bets, a move that gave rise to the term, Fear of Missing Out (FOMO), among other investors, who followed Tiger Global’s lead.

Khare and Banglani both said that so far, the FOMO factor isn’t at play. (While Tiger Global has stepped up its investment pace over the past nine months, it is avoiding early-stage companies)