At around this time during last year, Indian start-ups seemed to be hitting gold everywhere they turned. With the funding momentum hitting a peak of $4 billion in the third quarter of 2015, the mood of the market was bullish.
Come March this year, however, things changed completely. Funding into the country’s start-up ecosystem saw a steady decline compared to the heights it achieved last year, witnessing a gradual decrease in the amount invested into the sector. Indian ventures only managed to raise $1.9 billion in the first quarter of 2016 as compared to the $2.5 billion they raked in the first quarter of 2015, demonstrating a year-on- year decline of 25%. Moreover, with the average deal size dropping by more than half to $4.3 million in 2016, rumours of low investor confidence and drying up of funds started circulating.
The Indian start-up landscape was predicted to face a tough time securing capital in 2016. What most of these predictions, however, failed to take into account was the shift in investors’ focus to more early-stage investments. This has been underlined by the funding patterns so far this year where average deal size may have gone down, the number of deals has seen a massive jump of almost 25% in 2016. The first quarter of 2016 funding roundup report also underlined the increased focus on greater investor involvement in the early stages of start-up growth. The number of deals in the early stage startups saw a sharp rise of 108% as compared to 2015, while 132 deals out of the 307 completed investments were early-stage.
This boom in early-stage investments has been driven chiefly because of a rapid growth from the supply side. Investors have realised the immense potential locked in new-age Indian ventures which are targeting major disruption through the integration of technology, scale and sustainability. With traditional investment avenues such as public equity markets, debt and real-estate witnessing a slowdown, these ventures represent an extremely promising and viable investment alternative for the country’s high net worth individuals (HNIs). As a result, a new breed of HNIs is now actively taking up the mantle of angel investors to emerging start-ups.
Early-stage investments have also received a major boost from the entry of a new class of investors -- the business scions. Hailing from long-established business families traditionally operating in sectors such as retail, textile and real-estate, these young, passionate professionals are funding upcoming ventures operating in their business domains. Such deals are often mutually beneficial to both parties involved – while start-ups gain funds and industry insights from leaders in the sector they are operating in, investors also benefit from the development of newer technologies that can help optimize and streamline the operations of their family business.
The entry of several new, indigenous funds such as Stellaris Venture Partners, Mukul Singhal’s yet-to- be-named firm, Hyderabad-based Endiya Partners and Bengaluru-based Prime Venture Partners coming into the picture has also changed the game immensely for growth-stage start-ups. Series A investments are expected to rise by more than 20%, while the overall investment landscape is expected to receive a major boost.
All in all, 2016 promises to be a great year for start-ups in early stages of their growth even as the overall start-up industry enters a phase of consolidation. The indications that the central market regulatory body SEBI may also relax the norms for start-ups listing on the bourses, there is a palpable excitement within the Indian investment community. Such a move will enable easier exit opportunities to existing start-up investors and will facilitate the raising of funds for the 4200-odd start-ups currently operational across the country through increased involvement from domestic and international VCs and private equity investors. With such promising developments in the offing, the country’s early-stage investment landscape is definitely expected to grow by leaps and bounds in the near future.
The author is co-founder & president of Venture Catalysts.
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