The economic slowdown in India and global macroeconomic uncertainty seem to have prompted venture capital (VC) investors to take a cautious approach after pumping in record amounts of capital so far this year, investors, entrepreneurs and lawyers said.
While capital is still flowing into startups, the number of such companies getting funded is little changed, if not falling, indicating investors have become more guarded in their approach. For the few deals that are being closed, venture investors are now taking longer to scrutinize investments, a partner at a venture capital fund said, requesting anonymity.
“Many of the growth rounds are taking longer to close. Diligence periods are getting extended as well as time taken for documentation due to complex cap table rights from previous rounds," said Vinod Murali, partner at Alteria Capital, a venture debt fund. A cap table is the list of investors and their rights in a company.
Startups have raised a record $6.8 billion in the first nine months of the year compared with $5.8 billion in the year earlier, according to data from Venture Intelligence. This is significant given that 2018 itself was a record-breaking year for such deals.
However, the momentum has been largely driven by select investors, including Tiger Global Management, which has deployed more than $500 million so far this year.
“Tiger has made it very clear that follow-ons for its investments are not guaranteed, and the firms it has backed now, will get follow-on investments from Tiger only if they perform exceptionally," said an investor directly aware of its plans. “So, if you take out Tiger’s investments, sentiment is not as great as it seems," the person added.
The cautious approach has also been triggered by the lacklustre performance of several high-profile startups in the US, including Uber and Lyft. WeWork’s IPO misadventures and the backlash it faced from investors, too, have dented optimism among startup investors.
“Investors are getting more vigilant and careful about the assets in which they are investing. Recent high profile examples of troubled deals across asset classes, are likely to have a ripple effect that may result in more scrutiny," said Sharad Moudgal, partner at law firm Khaitan & Co.
Deal activity and conversations are still very active; however, a lot of the deals may be delayed or may not close, because of the market conditions and macro environment, he added.
The slowing pace of venture investments in the US is also expected to hurt sentiments in India, given that VC investments in India is dominated by prominent US-based investors such as Sequoia, Accel and Lightspeed.
“The US is also beginning to see a venture funding slowdown, which would make money tight globally, especially in India where exits are still few and far between," said a partner at the Indian arm of a US-based fund, requesting anonymity.
Mint reported on 17 October that US venture-backed companies raised $26 billion in the September quarter, a 15% decline from the preceding three months. Deal volume too, fell 16% to 1,304 transactions, according to data from CBinsights. Deal value was the lowest in five quarters while volume was the lowest in eight quarters.
“Funds which are raising money now, or which are planning to hit the market, may face some difficulty given the macro conditions, and may take longer to raise funds, or raise smaller funds," said Roma Priya, founder of Burgeon Law, a startup-focused law firm.
“But funds which have already sourced capital will continue to deploy," she added.
Global funding fell 7% in Q3 of 2019, from $52 billion to $50 billion as slower venture capital investments in the US dragged the global funding number down. Deal volume too, fell 16% to 1,304 transactions, according to a recent report from market intelligence platform CB Insights, along with consultancy firm PwC.
The slowdown in the US came at a time when tech IPOs struggled to make a mark. Only 22 US VC- backed tech companies went public in the third quarter of 2019 compared with 33 in the preceding three months, according to the report.
Funding in Asia, however, stayed constant at $15 billion in each of the last two quarters, with deal volumes rising marginally to 1,271 transactions.