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Business News/ Opinion / Online-views/  The elusive quest for Series A funds
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The elusive quest for Series A funds

Since January, according to data compiled by VCCEdge, start-ups have raised $149.13 million across 28 Series A deals

Graphic: Ahmed Raza Khan/MintPremium
Graphic: Ahmed Raza Khan/Mint

Every now and then, a press release turns up in my inbox from a start-up to announce its pre-Series A funding round. It’s been happening more frequently in the past six months. The term is a misnomer. If you read between the lines, what the start-up is actually saying is that it went out into the market to raise a Series A round, but was only able to close a seed or at best, a bridge funding round.

But we are not here to deliberate on what terminology start-ups should or should not use. The more pertinent question is why seed or bridge funding rounds are being packaged as pre-Series A rounds these days.

The investment numbers for the first quarter of the year so far offer some clues. Since January, according to data compiled by VCCEdge, start-ups have raised $149.13 million across 28 Series A deals. In comparison, the fourth quarter of 2015 closed with 60 deals worth $239.43 million. In fact, Series A funding through all four quarters of 2015 has consistently breached $200 million (see chart for quarter-on-quarter data). The comparison may not be entirely fair because we do have a couple of weeks to go before the current quarter ends. Still, these preliminary numbers indicate that the environment for Series A funding may be getting a little tough.

Now, if that is indeed the case, there’s cause for concern. The past couple of years have seen an explosion in seed-funding activity. Last year alone, early stage investors poured $327 million into 650 angel and seed-stage deals (chiefly seed), according to VCCEdge data. That’s a 64% jump in terms of value and a 82.5% jump in terms of volume over the previous year. This means that a record number of first-generation entrepreneurs are out there right now looking for their next tranche of capital.

The explosion in seed-stage funding activity can primarily be attributed to the large seed investment programmes launched by venture capital firms over the past couple of years. Firms such as SAIF Partners, Sequoia Capital, IDG Ventures India and Matrix Partners are among those that broke from conventional strategy to power into seed deals. This was driven by the quest to capture stakes in younger companies at lower entry valuations as valuations in later-stage companies went through the roof.

Seed-stage start-ups benefited from the valuation bubble in later-stage start-ups through most of last year. However, that changed in the fourth quarter. Since October, valuations of later-stage start-ups have been under pressure. Investors now believe that some of the valuations at which they entered those start-ups may have been too high and could affect their net returns in the longer term. Therefore, they are now waiting for valuations to settle at more realistic levels before they deploy fresh capital.

When valuations at later-stage companies do settle at the levels that investors want, folks such as SAIF Partners, Sequoia Capital and others will prefer to divert the bulk of their capital to mature start-ups—Series B, even Series C—and deploy less capital at the earlier stages—seed and Series A. Several are already in the process of downsizing their vast seed investment programmes. Many of the companies that were funded as part of those seed investment programmes will probably not get to the next round.

The strain is already beginning to show. Take a look at some of the recent so-called pre-Series A deals announced. The investors involved in these deals are largely either angels or strategics. This week, Delhi-based Pramati Healthcare, a start-up that offers in-home healthcare services, raised $200,000 from strategic investors whose identities have not been disclosed. Last week, Jolly Food Fellow, an analytics platform for food retail vendors, raised an undisclosed sum from Malibu Group managing director Janak Parikh. Earlier, mobile payments platform FTCash raised $150,000 from investors led by micro venture capital firm IvyCap Ventures. Gympik, an online marketplace for fitness centres, raised an undisclosed sum from Seattle-based venture capital firm RoundGlass Partners.

Last month, staffing solutions company JoulestoWatts raised an undisclosed amount from Manipal Global Education Services and Saha Fund, a fund focused on female entrepreneurs.

On the bright side, whether or not they call it a pre-Series A round, these companies are among the luckier ones because they have at least been able to find fresh capital. Most others may not be that fortunate.

Snigdha Sengupta is the founder of StartupCentral, a digital news and analytics platform focused on venture capital. She also periodically contributes stories on venture capital and private equity to Mint.

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Published: 18 Mar 2016, 01:02 AM IST
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