Worst over, funding crunch eases for start-ups

There were fewer Series-B deals this year versus last, but more money was raised

Illustration: Uttam Ghosh/Rediff.com.

Fundraising scenario could be easing for start-ups. If you leave out the year 2015, which was an aberration, fundraising could be returning to levels seen earlier, says Madhukar Sinha, partner, India Quotient, an early-stage venture capital (VC) firm. The data also supports this view.

Between April and May 2017, start-ups raised $538 million from 138 venture capital deals, marginally lower than the $565 million they raised from 200 deals during the same period in 2016.

Money raised between April and May 2017 is almost similar to the money raised during the same period in 2014 ($536 million), and more than the money raised in 2013 ($416 million) and 2012 ($314 million).

Start-ups raised $703 million in 2015 from 193 deals, according to data research firm Venture Intelligence.

There were fewer Series-B deals this year versus last, but more money was raised. The crunch in Series-B and C continues, but larger deals (Series-E) are back.

Suchi Mukherjee, founder and chief executive officer (CEO), Limeroad, says there is a definite movement in Series-A and B territory and in very large deal sizes, but  the market continues to be shallow in mid levels.

‘‘Those who were earlier playing at these stages continue to be wary. India needs some strong exits for real confidence to return,” she says.

Rajat Gandhi, founder and CEO, Faircent, says the drought is surely over,  investments are trickling in, with primarily existing investors are investing back into their companies.

‘‘I will say the latter part of 2016 and early part of 2017 have been the "bridge" years of VC funding. Going forward, I expect the rest of 2017 to be a normal year though valuations will be under pressure,” he says.

The hedge funds have disappeared, but observers say there’s great interest from investors in China and Japan, who are taking more bets in India.

Joseph Cherian, founder and CEO, 48East says the crunch is certainly easing out but it’s not over yet.

‘‘This year has seen several deals of varied ticket sizes across multiple sectors. We have also witnessed a lot of consolidation and clean-up based on the past investments.

Investors have become more cautious in picking start-ups to invest in with a lot more focus on business models instead of just growth.”

It’s not that fundraising has eased for everyone. Kruzr, a safe-driving app, has been in the market to raise its first institutional round and has met over 20 investors in three months.

‘‘The benchmarks for fundraising are very high. Investors are looking for significant traction, revenues before they get the confidence to invest. It is difficult but makes us more resilient,” says Pallav Singh, founder, Kruzr.

Abhishek Agarwal, founder, Credit Vidya says VCs today are asking questions on profitability and scale a lot more than they used to do earlier.

‘‘The days when you raise fund purely on the basis of a presentation and a hypothesis are gone,” he says. But, if an investor believes that the business has a strong monetisation model at scale, it stands a good chance of getting funding, he adds.

“I think last year was a scenario-soaking year for most VCs where there was a lot of noise in the e-commerce space for more worrisome reasons than good.

This had obviously halted the 'entrepreneurial craze' where almost every business idea was funded.

We think that solid business ideas continue to attract VCs for the immense potential this country holds to expand markets in sectors such as fintech, health care, retail,'“ says Deepak Jain, founder and CEO, FlexiLoans.

‘‘2015 was extreme when many start-ups that got fund should not have. 2016 was in some ways cleaning up after the party. Investors got far more selective and only the very best companies were able to raise money.

I would say that the pendulum probably swung a bit too far to the other side and even many worthy companies found it difficult to raise capital,” says Dhruva Agarwala, CEO and co-founder of PropTiger.

The year 2016 marked a return to basics for most companies where they had to tighten their belts and start focusing on making money and aim to get to profitability.

‘‘2017 is seeing a return to normalcy, as companies got more disciplined with their operations. As the focus on unit economics returns to start-ups, investors will get out of their fear mindset, which they had gotten into last year,” adds Agarwal.

‘‘The level of fund-raising is exactly where it needs to be. We’re past the days of the internet bubble, where people were writing very large checks for companies and expecting them to grow at unreasonable rates,'' says a founder who didn't wish to be identified.

‘‘Now the expectations of both investors and entrepreneurs are more in line with what they should be. People are not overcapitalising companies and entrepreneurs are not expecting inflated valuations,” he added.

‘‘Today, there are very innovative companies in India doing enterprise software, fintech, insurance tech, internet-enabling technologies and also areas such as Artificial Intelligence (AI), cybersecurity and Internet of Things (IoT),” said Ben Mathias, MD & India Head, Vertex Ventures.