Return of discipline

The venture capital sector in India has been around for a decade-and-a-half, and VC firms offering risk capital have been the dominant sources of funding and impetus to the rapid growth of start-up ecosystem. A staggering $11 billion-plus has been invested in the Indian start-up ecosystem. Over the years, venture capital as an industry (like all capital markets) is subject to funding ebb and flow. In the US, the years 2000 and 2008 saw venture funding retrench. China experienced its own funding crunch. It should be no surprise, then, that India had to go through a correction cycle; 2016 was the year.

Growth at reasonable cost

In 2016, the momentum of venture funding seemed to ebb away, though mostly for latestage companies. Indian start-ups have raised about $3.5 billion in 2016 compared with $7.3 billion in 2015 — a 50 per cent drop in the amount invested. But, loss in momentum was not loss in confidence of Indian start-ups. The loss was the inevitable correction of irrational exuberance or ‘frothiness’ in the funding ecosystem and also the lack of exits in the industry.

Corrections, though painful at times, bring a cleaning that is good, like the forest fire that spurs new growth. It was not uncommon for founders to submit business plans with irreverence to any thoughts of monetisation. Start-ups chasing growth at all costs have been chastised, shifted focus to unit economics with an eye on path to profitable growth has become the new norm. Understanding that top-line growth devoid of any bottom-line impact is irrelevant. Start-ups without sound business models saw fund-raise to be more difficult than previous years. This trend is likely to continue in 2017. But, sound business models with a strong focus on unit economics and disruptive ideas will continue to see strong investor interest.