2018 may be a tough year for start-ups vying for funds: study

Mumbai: Most Indian startups, especially early-stage ones, expect the fundraising environment to be difficult in 2018, according to venture debt provider InnoVen Capital’s India Startup Outlook Report 2018.

According to the report, 56% of the startups surveyed said that they expect fundraising to be more challenging this year. Around 81% said that they expect fundraising to take from anywhere between four and six months to over nine months.

The negative outlook comes even as almost 54% of startups said that they had a positive fundraising experience in the last 12 months, up from 37% of startups in the previous 12 months.

“Some of the early stage and series A companies, believe that funding would be slightly tougher in 2018 than the previous year,” said Ashish Sharma, chief executive officer at Innoven Capital India.

Late stage companies are getting a lot more funding as most of the VCs have a lot of dry powder and therefore they can allocate funds in later or growth stages, he added.

Startups cited better exits as the biggest factor that can help create a better fundraising environment. More foreign investors setting up shop in India and more domestic VCs were also pointed out as factors that could lead to better fundraising environment.

“Eventually, the more exits an investor gets, their ability to recycle the money and make more investments are much higher,” said Sharma.

Only 2% of the over 100 startups surveyed said that unicorns -- startups valued at more than $1 billion -- raising more funds at higher valuations will lead to better investment sentiment.

Apart from fundraising, a large number of startups said that talent management is a major challenge.

“E-commerce and Fintech start-ups rated fundraising as top challenge faced. Enterprise start-ups rated customer acquisition and churn as a significant challenge, as well as talent management. Healthcare and Logistics start-ups rated market creation and talent management as the top two challenges,” the report said.

Respondents said that the government needs to do more on tax policy, facilitate cheaper financing options and incentives to boost domestic startups.

Taxation and availability of cheaper financing options continue to be perceived as major hurdles this year as well, the report said, adding that 32% of the respondents felt better incentives were needed for domestic players to compete against global majors as compared to 19% in 2016.

“Everybody would appreciate that the government can play an enabling act to address challenges. One area where something more can be done is giving some recognition to angel tax. There has been some progress on that front. What government can do is provide some more favourable policies for the startups, such as tax holidays etc.,” said Sharma.

The second thing, which was identified was provision of cheaper financing to companies, he added.

“Government is already planning to put in a fund together but the feedback is that the initiative is not very easy for startups to tap into them,” he said.

The goods and services tax (GST) introduced last year has had varied impact on startups, according to the report.

Startups from sectors such as logistics and enterprise tech said that they have witnessed positive results, whilst other sectors such as media/content, fintech and food tech said that the impact has been negative.