Mumbai: Less than a year ago, when an investment banker focussed on start-ups was asked who his biggest competitor was, he said the competition was with not with another investment bank but with direct deals. These are deals where investors and companies connect directly, leaving no opportunity for the bankers to come in.

Until a year ago, there were a lot of these direct deals. In 2014 and most of 2015, venture capital funds were scurrying to find the next big thing in the start-up world and pumped money into these firms. Indian start-ups raised $2.3 billion and $5.4 billion in 2014 and 2015 respectively.

However, in recent months, this has changed. As funding has dried up, a larger number of start-ups are seeking the services of investment bankers to raise funds.

“This year, everyone wants bankers, while in the last two years, appointing bankers was optional for many start-ups. We are seeing too many inbound requests these days, as start-ups are realizing that in this environment, they cannot afford to do fund raising on their own," said Vishal Pereira, managing director at Bengaluru-based advisory firm CreedCap Asia Advisors.

On 10 May, VCCEdge reported that in the month of April, only four Series A deals (worth $13 million) were closed. This is the lowest number of Series A deal activity in the last six years, VCCEdge said. In fact, the number of Series A deals have been on the decline month after month since November, when 28 such deals were reported, data shows.

The over $5 billion that was pumped into Indian consumer internet start-ups last year was an exception; the market is now settling into normality, said bankers. “Last year was an aberration. This year is more like the normal for the market and so, people need to prepare better before they talk to investors. What we are seeing is that entrepreneurs are certainly more welcoming of guidance from investment bankers," said Amit Gupta, founder of Delhi-based investment banking firm Coralbay Advisors.

The dynamics of fund-raising have also changed.

Closing a new round of funding no longer takes just a few weeks but many months. Most of the aggressive investors have either gone slow or have completely exited the market. This has meant that start-ups may need to reach a wider network of investors through bankers.

“When the investment environment within the start-up ecosystem is bullish, deals are done faster, mindsets are more open, cynicism is lower and cheques get signed quicker. As a result, a lot of founders could find reaching out to prospective investors far easier than what it was earlier or what it is now," said Vinayak Burman, founding partner at Mumbai-based law firm Vertices Partners.

The biggest issue nowadays is to be able to not just get the attention of the investor but also to garner trust that the founders have their eye on the basics such as unit economics and profitability and that they are not deviating towards a burn trend for the sake of value or scale, Burman added.

In this difficult environment, bankers are back in demand.

“People are looking to hire bankers for the distribution, reach and the ability to tap a diverse investor base outside of India," said Nitin Bhatia, managing director at tech-focused investment bank Signal Hill.

The downside is that the attention of start-up promoters is getting diverted towards fund-raising and dealing with bankers rather than growing the business, which they can ill-afford in this market.

“Nowadays, a deal has to go through at least 4-5 hoops before it gets closed. Also, one needs to talk to at least 30-40 odd funds. Practically, that means you need to spend a lot of your bandwidth on the fund raise process if you are going to do it on your own," said Sumir Verma, managing director of Mumbai-based start-up advisory firm Merisis. Verma adds that founders would rather focus on the business.

The nature of deals coming to investment banks has also changed with merger and acquisition transactions becoming more common. “We have not seen any downturn in the number of deals that we are running compared to any other year. While around 12 months ago, the usual deal mix used to be 70% fund-raising and 30% mergers and acquisition, today the mix is the other way round," said Bhatia of Signal Hill.

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