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Business News/ Opinion / Online-views/  Venture capital in 2016: Much more to cheer than despair
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Venture capital in 2016: Much more to cheer than despair

The measured pace of investments in start-ups we have seen so far in 2016 may not be such as bad thing for the long term

It will be a while before the funding market for India’s start-ups returns to what many consider the irrational exuberance of 2014 and early 2015. Photo: BloombergPremium
It will be a while before the funding market for India’s start-ups returns to what many consider the irrational exuberance of 2014 and early 2015. Photo: Bloomberg

Last October, when India’s venture capital market stepped into the final quarter of 2015, a great many things had changed for both investors and entrepreneurs. The food technology sector was on the brink of collapse.

The online property search segment was also looking shaky, with one of the largest players on the block. The hot money that had fuelled a valuation bubble, especially in e-commerce, was in retreat. And, start-ups across the board woke up one fine day to unfamiliar questions from their investors on matters such as cash burn and profitability.

With the market in the final quarter of the year again, there is much more to cheer than despair—we know that from the numbers on venture capital activity for the nine months ended September. Let’s break them down.

(1) There’s no couching the fact that investment levels have declined sharply all around from last year. Between January and September this year, venture capitalists concluded 290 deals worth $1.03 billion, down 26.7% and 36.2%, respectively from the same period last year. With each quarter, venture capitalists put less and less money to work and across fewer deals. Only the third quarter, July to September, has been a tad different—$392 million was deployed compared to $292 million in the second quarter (April to June).

This doesn’t necessarily indicate a change in sentiment. Rather, it’s probably more a function of a number of big-ticket deals that closed during the quarter, among them Lendingkart’s $20 million Series B round, Treebo Hotels’ $16.7 million Series B round and Livspace’s $15 million Series C round. However, the key takeaway from the past nine months is that investment levels in each quarter have settled in the $300-400 million range, which is closer to the normal for the early-stage investment market than was the case last year (see graphic).

(2) Unfortunately, the biggest losers in the ongoing correction in the start-up funding market have been very young companies. Series A capital, typically the first institutional capital into a start-up that needs to take its product or service to market, has been particularly hard to come by for entrepreneurs. In the nine months ended September, Series A investments plunged 47.8% in terms of the number of deals struck and 55% in terms of the amount of capital deployed, compared to last year.

Incidentally, the number of seed-stage deals, typically funded by angel investors, has grown marginally by 0.8%. This presents a problem. The 121 start-ups that raised seed-stage funding in the last nine months will have to wait longer than expected for their Series A funding rounds to materialize. For venture capitalists, this presents an opportunity to pick and choose from the best assets at more reasonable entry valuations than was available last year. For entrepreneurs, the Series A funding crunch spells a higher start-up mortality rate (see graphic).

(3) If venture capitalists are putting less money to work, what’s consuming their time and energy? This is the part where we cheer. Investors across the board have been focused for a while now on returning money to their investors, or limited partners.

Between January and September this year, venture capital firms closed 54 exit deals worth $1.4 billion. That represents a 25.5% increase in the number of deals and a marginal 1.1% rise in the value of deals. Just last month, Sequoia Capital-backed payments start-up Citrus Payments Solutions was acquired by South African internet conglomerate Naspers Ltd in a $130 million all-cash deal. Earlier, the public market debuts of microfinance institutions Equitas Holdings Ltd and Ujjivan Financial Services Ltd delivered exits to both traditional venture capital investors such as Helion Venture Partners and Sequoia Capital and impact funds such as Lok Capital and Aavishkaar (see graphic).

Exits are likely to continue to occupy venture capitalists for the next few quarters. For the past few years, venture capital investments in India have gone well past the billion dollar mark and the concern among limited partners is that not enough has been returned in profits. Most venture capital firms in India have raised and invested more than two successive funds and exits have now become imperative.

It will be a while before the funding market for India’s start-ups returns to what many consider the irrational exuberance of 2014 and early 2015. But, the measured pace of investments we have seen so far in 2016 may not be such as bad thing for the long term.

Snigdha Sengupta is a consulting writer with Mint. She contributes stories on venture capital and private equity.

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Published: 07 Oct 2016, 01:34 AM IST
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