Venture capital investors in no hurry to deploy funds

The funding slowdown that became official in the last quarter of 2015 is not necessarily a thing of the past now


The surge in the first quarter of 2016 comes largely on the back of a handful of big-ticket deals, such as in Snapdeal, MakeMyTrip and BigBasket, that closed despite the withdrawal of a host of later-stage investors from the market. Photo: Reuters
The surge in the first quarter of 2016 comes largely on the back of a handful of big-ticket deals, such as in Snapdeal, MakeMyTrip and BigBasket, that closed despite the withdrawal of a host of later-stage investors from the market. Photo: Reuters

The first quarter of 2016 has been tough but not all grim for India’s start-up market. Start-ups across sectors continued to attract early and growth capital, even staging a small recovery from the slump reported in the previous quarter in terms of overall capital raised. Data compiled by London-based Preqin puts the total value of venture capital deals concluded during the January-March quarter at $1.6 billion, up 47% from the fourth quarter of 2015.

The surge comes largely on the back of a handful of big-ticket deals that closed despite the withdrawal of a host of later-stage investors, such as hedge funds, from the market.

In January, online travel company MakeMyTrip raised a $180 million round from Shanghai-based travel services company Ctrip. The same month, private equity investors Temasek Holdings and Warburg Pincus participated in a $145 million round in auto classifieds platform CarTrade.

February saw e-commerce marketplace Snapdeal announce a $200 million investment led by Canadian pension fund Ontario Teachers’ Pension Plan (though a sizeable portion was paid out to venture capital firms Saama Capital and Sequoia Capital, who sold stakes in the company).

And in March, grocery e-tailer BigBasket raised $150 million from an investor consortium that included The Abraaj Group and Sands Capital Management.

However, these deals don’t necessarily indicate that the funding slowdown that became official in the last quarter of 2015 is now a thing of the past.

Since we’re specifically concerned with how early-stage investors behaved during the quarter, we will take into account deals that were concluded at the angel and seed stages and, separately, at the Series A through C stages. At the angel and seed stages, investors closed 146 deals worth $35 million. That represents a 46% drop in value terms when compared to the fourth quarter of 2015, even though the volume of deals grew 5%.

This may have happened because of two factors. One, venture capital firms have cut back on the big seed-investment programmes that were all the rage till late last year. Now that entry valuations at later-stage start-ups, particularly at the Series B and C stages, are becoming less expensive, they’d much rather divert more capital that way. Two, the ticket sizes of deals at the seed stage may have started coming back to normal. Remember, not too many quarters ago, it wasn’t unusual to hear of seed rounds closing at $2 million.

Now let’s look at the Series A through C stages, venture capital’s traditional playground. Venture capitalists closed 33 early deals worth $172 million at the Series A through C stages. That’s a 19.5% decline in terms of volume and a bruising 57.5% decline in value terms compared to the October-December 2015 quarter. The big casualties are the Series B and C stages. This is where start-ups, fed on a staple of generous deal ticket sizes and even more generous valuations for most of last year, are hurting the most.

Investors deployed just $34 million across eight Series B deals, against $130 million across 10 deals in the October-December quarter. The Series C stage reported $53 million deployed across four deals, compared to $179 million and three deals in the last quarter.

The slower pace of investments at the Series B and C stages means that venture capitalists are still not comfortable with the valuations that are being sought by companies at those stages. By Preqin’s estimates, India-focused venture capital funds are sitting on dry powder or uninvested capital worth $3.4 billion. That capital, going by how investors have behaved in the first quarter, is not going anywhere in a hurry.

Snigdha Sengupta is a freelance journalist based in Mumbai and founder of StartupCentral. She writes on private equity and venture capital for Mint.

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