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New Delhi/Bengaluru: Flipkart Ltd’s negotiations with new investors to raise funds has failed to make progress since talks began in March while Snapdeal was forced to settle for a valuation that was lower than what it initially sought, a sign that the go-go days of easy money and eye-popping valuations for India’s e-commerce start-ups may be nearing an end.

The rush of funding seems to be ebbing after a year-long period that saw investors pouring in billions of dollars into Indian start-ups.

Unlike the second half of last year, when deals were being closed sometimes in a matter of two-three weeks, investors have started to step back, take stock and ask questions about how consumer Internet start-ups plan to make money before writing cheques, according to investors, analysts and entrepreneurs.

About time, some analysts say, pointing to the mushrooming of such Internet start-ups, some of which have questionable business models. For instance, more than 25 start-ups in food and grocery delivery and home services marketplaces—start-ups that deliver food, groceries and services—have received venture capital (VC) money, according to Mint research.

It’s not as if funds are drying up for all; the winners will continue to attract significant cash and several new start-ups will continue to find backers, investors said. However, all start-ups, from the biggest to the newest, will have to work harder to get funds and fetch higher valuations, investors said. In addition, several start-ups in overcrowded sectors such as hyperlocal food, grocery and home services businesses and online real estate will either fail to get higher valuations in their next rounds or not find fresh funds altogether, leading to cost cuts and consolidation over the next one year, investors said.

“There’s a definite slowdown in terms of the pace at which deals are being struck since the last seven-eight weeks," said Avnish Bajaj, managing director at VC firm Matrix Partners. “Investors are starting to ask questions about long-term sustainability. The number of $50 million deals has gone down. Deals are taking longer. This is a soft landing and it’s a good sign. The time correction is likely to be followed by a price correction."

Bajaj’s view was echoed by executives at four other VC firms including Nexus Venture Partners and Kalaari Capital.

“Large investors are getting more realistic. Even though funding is available, it is not available at the crazy valuations we saw last year," said Vineet Toshniwal, managing director at Equirus Capital. “You may now see some fresh capital coming in at down rounds also."

Already, signs of this are emerging.

Online marketplace Snapdeal, run by Jasper Infotech Pvt. Ltd, conducted negotiations with China’s Alibaba Group Holding Ltd and Taiwan-based Foxconn Technology Co. Ltd for more than six months over valuation and shareholders’ rights, before finally clinching a $500 million deal at a lower valuation than it wanted. When it acquired Freecharge in April, Snapdeal issued new shares to Freecharge investors at a valuation of $4.8 billion. Despite a jump in its gross merchandise value (a key valuation metric) since then, Snapdeal fetched the same valuation.

India’s most valuable Internet firm Flipkart has been in talks with new investors since March, but it has been unable to agree terms, and the firm is likely to close a $600-800 million round from existing investors led by Tiger Global Management, people familiar with the matter said.

“We received a lot of inbound interest from financial investors offering materially higher valuations; however, we believed getting strong global blue-chip investors like Alibaba and Foxconn would be in the best interest of the company in the long run. Hence, offering them an attractive valuation at this point wasn’t a concern. We like to look at enterprise value creation in a longer time horizon than focus on near term optimizations," a Snapdeal spokesperson said.

Flipkart didn’t respond to emails seeking comment.

Start-ups in the hyperlocal space are facing delays in their fund-raising efforts because of differences with investors over valuations and as the sector becomes over crowded.

To be sure, there’s plenty of money out there. Several VC firms such as Accel Partners, Kalaari and Nexus have raised fresh investment funds this year and others such as Kae Capital and Blume Venture Advisors are also close to raising theirs. New investors such as Tencent Holdings Ltd and Foxconn are eager to place bets while large investors such as Tiger Global, Sequoia Capital, SoftBank and DST Global remain bullish on Indian start-ups.

Mukul Singhal, principal at SAIF Partners, said that while the investor outlook may not be as rosy as it was last year, the funding environment hasn’t become tough yet.

“The big cheques are taking time to close, but that is also because a lot of hedge funds have already made their bets and that pool has reduced," Singhal said.

Matrix’s Bajaj said a slowdown in funding will hit companies in overcrowded niches.

“The top 10-20% of the start-ups, especially companies like Flipkart, Snapdeal and Ola, will not face problems in getting funds. But in overheated spaces like hyperlocal where there are more than 20-30 companies fighting it out, consolidation over the next year is inevitable. These may not be only distress sales, but it’s clear that you can’t have 20 companies delivering food and groceries," Bajaj said.

A sustained decline in US markets, especially the tech-heavy Nasdaq that slumped over the past week on concerns about an economic slowdown in China, will also hurt investor sentiment. Prominent investors in the US such as Bill Gurley of VC firm Benchmark warned over the weekend that valuations of larger start-ups will be hit by the broader decline in listed tech stocks. Benchmark is an investor in companies such as Uber and GrubHub.

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