Early-stage start-up funding slumps to a three-year low
Bengaluru: Early-stage funding of India’s internet start-ups by venture capital (VC) firms and angel investors has dropped to a three-year low, data from start-up tracker Tracxn showed.
The slump in early-stage funding along with the drop in new start-up 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 start-ups 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 3 October that the number of new internet and technology start-ups 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. “Additionally, angel investors are not very active. Some who had burnt their hands in 2015 have stopped investing in start-ups... 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, business-to-business e-commerce and financial technology over the past 18 months. The newer areas can accommodate far fewer start-ups than consumer internet.
The slowdown of growth of online retail, the failure of most investments in once-hot areas such as food and grocery start-ups and the implosion of Snapdeal, which had raised nearly $2 billion in capital, have turned VCs against consumer internet companies.
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 very comfortable with online services and still, you’re not seeing many investments or a sufficient number of new start-ups in consumer internet. This indicates that within the next two-three 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, start-ups 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 compared with nearly 1,300 last year, according to Tracxn.
Fewer start-ups are getting more and more capital. For instance, just three companies, Flipkart, Paytm and Ola, account for nearly half of all capital raised by start-ups this year.
The sharp fall in seed and Series A funding indicates VCs and late-stage investors will have few attractive start-ups to back next year.
“Going forward, funding is likely to get more concentrated,” said Kashyap Chanchani, managing partner, The RainMaker Group, an investment bank. “What happened in 2017, where you saw large funding rounds but low deal volume will continue for the next year at least. There’s a fairly clear dynamic now where there are companies that everyone wants to fund and there are companies that few want to touch.”