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A slowing economy has not only hit large industries such as automotive but early-stage investments as well with the number of deals in the crucial angel and seed stages falling to their lowest in the past five years in the first half of this year.

In the six months ended 30 June, there were 193 angel and seed deals, declining from 312 deals in the same period a year earlier, 362 in the first half of 2017, 552 in the same period of 2016, and 419 in the first six months of 2015, according to a report by VCCEdge, the financial research platform of NewsCorp VCCircle.

Further, the number of deals under $5 million fell 46% to 198 from 366, while the value of these deals fell 29% to $304 million. Those in the range of $5-25 million remained the same in numbers but the deal value fell by about 7%.

Angel and early-stage deals are critical in the startup ecosystem
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Angel and early-stage deals are critical in the startup ecosystem (Graphic: Paras Jain/Mint)

Angel and early-stage deals are critical in the startup ecosystem as there are often the initial cheques given to founders to take their business from what is essentially a business idea to potential customers and eventually to scale the business further. These deals are also a funnel of investment opportunities for larger investors such as venture capitalists (VC) and growth-stage investors.

“The reality is that markets have been tight for a while now. When the core business suffers, people stop looking at discretionary spending which can make an impact on their alternative assets investment (such as angel investments or early-stage or VC funds) plans. The idea then is to come later," said Sasha Mirchandani, founder and managing partner, Kae Capital, an early-stage investment firm.

Before starting Kae Capital, Mirchandani had invested in his personal capacity in companies such as Myntra, the fashion portal sold to Flipkart in 2014, ad-tech company InMobi, and data analytics firm Fractal Analytics, which is also backed by private equity firm Apax Partners. Mirchandani is among India’s earliest and prominent venture capital investors, who also founded Mumbai Angels, a network of investors in early-stage companies.

The number of M&A deals with transaction value in the range of $50-100 million was at their all-time low in the past five years during January-June 2019, according to the VCCEdge report. The tepid investment sentiments are also visible in the number of new venture capital funds raised. There were only seven new VC funds raised in the first half of this year, compared with 11 a year earlier and 13 in the first half of 2017.

Early-stage VC firm Unicorn India Ventures, which was looking to raise a 600-crore debut debt fund, has now put it on hold as the market is no longer bullish on debt investments, said Anil Joshi, managing partner, Unicorn India Ventures. “We are simultaneously raising a 400-crore tech-focused equity fund and it would be conflicting to raise both equity and debt funds. Equity is a long-term play, so there is enough interest from investors," said Joshi.

Industry insiders, however, are hopeful that the slowdown is temporary. Mirchandani believes most slowdowns last for about 18 months. “We are 12 months into it already. It will be fine after six months, slowdowns are not permanent. There was never a better time for a good company to raise funds than today. There is enough capital available with institutional investors," Mirchandani said.

Furthermore, certain regulatory proposals are also expected to give a boost to more new funds being floated in months to come. In the budget, the government has proposed to allow category I and II alternative investment funds or AIFs to “pass-through" their losses to their limited partners, or investors.

“The streamlining of AIF taxation by allowing pass-through of losses at the end of the fund’s life for Category I and Category II AIFs will allow investors to offset their terminal losses. This step is likely to enhance the attractiveness of AIFs as the primary vehicle for PE and VC investments in India," said the report.

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