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Business News/ Opinion / Online-views/  Inside round: The difference between survival, extinction
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Inside round: The difference between survival, extinction

Not every venture capital-backed start-up will be able to raise follow-on capital, a great many will and thus survive the slowdown, unlike their dot-com predecessors

Neither a deadpool list nor the slump in investments implies that a dot-com redux is in the offing in the start-ups domain. Photo: iSotckphotoPremium
Neither a deadpool list nor the slump in investments implies that a dot-com redux is in the offing in the start-ups domain. Photo: iSotckphoto

Over the past few weeks, “The Deadpool List", a compilation of technology start-ups that are dead or have one foot in the grave, has been the subject of much interest across mainstream and social media. Bloomberg reported last week that the list, compiled by Bengaluru-based analytics firm Tracxn and which is not public, runs into 800 start-ups, all founded after 2011. Most of them, not surprisingly, hail from the consumer Internet sector.

It is hard not to recall the painful dot-com bust from the spring of 2000 when presented with hard evidence of this nature. Talk of a slowdown in India’s start-up funding market has been around since late last year. A July report published by KPMG and New York-based analytics firm CB Insights confirmed the slowdown. Investments in the second quarter of the year, April to June, plummeted nearly 59% to $583 million from $1.4 billion in the first quarter.

But, neither a deadpool, which will swell as the slowdown gets more severe before it gets better, nor the slump in investments implies that a dot-com redux is in the offing.

Why? Because unlike what followed the dot-com bust, start-ups, especially the current generation of Internet start-ups, continue to be funded by their existing venture capital investors. Internet start-ups from the earlier generation were wiped out because they weren’t able to raise additional capital from even their existing investors. That was because their investors ran out of money themselves and were unable to compensate for the absence of new investors with what’s commonly known as inside rounds.

Inside rounds tend to be less common when the funding environment is on an upswing. While existing investors will usually participate in a portfolio company’s follow-on financing round, both promoters and investors like to get a new investor on board, preferably as the lead. This chiefly helps validate a higher valuation for the company. We have seen this play out in the Indian market in 2014 through the former half of 2015. That has changed over the past eight-odd months. With a downturn under way, inside rounds have started showing up more frequently.

Two inside rounds were reported this week alone. Livspace, a Bengaluru-based online home design and furnishing start-up, raised a $15 million Series B round from existing investors Bessemer Venture Partners, Jungle Ventures and Helion Venture Partners. It had last raised $8 million as part of an extended Series A round about a year ago from the same set of investors. Runnr, the Bengaluru-based entity created through the merger of food ordering service TinyOwl and hyperlocal delivery service Roadrunnr, secured a $7 million bridge round from Nexus Venture Partners and Blume Ventures, two of its four existing investors.

In July, Holachef, the Mumbai-based food ordering and delivery start-up backed by Tata Sons chairman emeritus Ratan Tata, raised a reported $1.95 million from Kalaari Capital and India Quotient in what appears to be a bridge round of funding. In May, Chennai-based budget stays aggregator Stayzilla raised $13 million in a Series C funding round from Matrix Partners India and Nexus. Mint reported, citing documents filed with the Registrar of Companies, that the round concluded over three tranches of $8.8 million, $1.8 million and $2.4 million, and took nearly five months to close.

In February, Mumbai-based baby and kids products e-tailer Hopscotch raised a $13 million Series C round from Facebook co-founder Eduardo Saverin, who had also led the $11 million Series B round in early 2015.

An inside round doesn’t necessarily imply that a company is not doing well and has been compelled to raise capital from existing investors at a valuation lower than its last round or at a flat valuation at best. However, this is more likely than not in a market that’s in the midst of a downturn. Most investors are currently knee-deep in cleaning up their existing investment portfolios, weeding out the laggards and reserving follow-on capital for those they reckon are winners. By most accounts, nearly every front line venture capital firm active here has enough capital in reserve to see them through at least the next two years.

While this means that not every venture capital-backed start-up out there will be able to raise follow-on capital, a great many will and thus survive the slowdown, unlike their unfortunate dot-com predecessors. Many of the follow-on funding deals we see over the next few quarters will be inside rounds. It’s not something that start-up founders prefer, chiefly because of the valuation knock. Several of India’s celebrated unicorns, start-ups valued on paper at $1 billion or more, are currently facing exactly that. But, as Silicon Valley venture capitalist Bill Gurley said in his blog Above the Crowd earlier this year, “A down round is nothing. Get over it and move on." An inside round even at a lower valuation could be the difference between survival and extinction.

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

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Published: 02 Sep 2016, 03:35 AM IST
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