As much as the industry would hate to admit it, the year 2016 has not been kind to startups so far. Many younger startups have shut down, big boys got devalued, job offers were pulled back, and competition was never fiercer. Save for online marketplaces and fintech startups, which are obviously interlinked, investment inflow into the country has been dull, compared to the previous year's Q1 and Q2.
According to YourStory Research, venture capital-backed companies in India have raised $2.1 billion for the first half of 2016, through 559 deals, where angels, VCs and private equity (PE) investors deployed risk capital across stages. More than $719 million was raised in Q2 alone across 260 deals. This is a 40-percent decline from the same period in 2015, when startups raised $3.5 billion across 380 deals.
A vicious circle
Last year, hedge funds, mutual funds, venture capital firms, and corporate investors were scrambling to get into every deal. This year, however, that doesn’t seem to be the case. A handful of startups —including Peppertap, Amber Wellness, Tooler—have shut down in the last six months. Many have been rumoured to be opening up their fixed deposits for survival. Understandably, this has investors worried.
Shubhankar Bhattacharya, a venture partner at Kae Capital, says that the market is generally over-cautious right now. “Some of the big bets placed during 2014 and 2015 didn’t go well, so now investors don’t want to put in so much money. Now they over-analyse the market before investing. Earlier, questions were few before jumping in; now they are more pessimistic,” he adds. He believes that this trend will continue for a few more months, not because the market is bad but because investors are cautious. He, however, predicts it will pick up by the beginning of 2017.
The luckier spots
Our research finds Bengaluru, NCR-Delhi and Mumbai to be the A-list cities when it comes to venture fund flow. Bengaluru has been the prime destination for talent and capital; there was $780 million invested in the Garden City, with the primary focus being on marketplace and fintech startups. The NCR-Delhi region has seen more number of deals, 184, to be precise, but it is ranked second in terms of the amount invested. Ranked number three, Mumbai has seen about 100 deals.
The edtech sector has seen 17 deals worth $81 million in the first half of 2016. VCs are bullish on marketplaces too. About 45 marketplaces in different categories, ranging from logistics, and used cars, to jewellery, have managed to attract funding.
In 2016 so far, Sequoia Capital continued its bets with 12 investments, Accel Partners did 11, SAIF Partners seven, Beenext Ventures seven, and IDG Ventures India and Inventus Capital six deals each.
Cycle of survival
In late 2014, there was significant enthusiasm in investing in India, driven by the success in China like Alibaba’s IPO. Global investors like Tiger Global, SoftBank, coming to India made Series-A investors, like Sequoia, Matrix, SAIF etc., start digging into more seed-stage investing. Also, the perception was that since their early-stage investments worked in China, it could be replicated in India.
In 2014, $5 billion was raised from over 300 deals. In 2015, the first two quarters as well as the last saw similar amounts being invested: $1.7 billion each in Q1 and Q4 and $1.8 billion in Q2. However, Q3 was the blockbuster quarter in terms of the amount of investments, with deals worth $3.8 billion.
Larger funds went to Ola, Flipkart, Snapdeal, Paytm etc. Shubhankar says that investors were keen on investing on the next biggies. “Everyone started betting on what is the next big thing – the perception was that even if there is a mistake and some things go wrong, let’s make sure that we invest in the next big thing,” he says.
Rival VC firms always analyse how they missed out on the others' big investments. There is guilt if they miss out on a large opportunity. But such decisions, driven by euphoria, are also limited in more ways than one. When China stocks dipped, the seed investors assumed that somebody else might invest in the next round, which did not happen. “Now they realise that this is not the right path is to invest, but by trusting the founder and the startup,” adds Shubhankar.
Angels to the rescue?
In 2014 and 2015, VCs were excited, but angels lagged. Once VCs had made the right decision, Shubhankar observes, the angels also plunged in. They delayed only because they were observing VCs’ actions. Even if the VCs withdraw,, angels do not follow suit immediately. Market is slow because VCs are not giving away funds as before. It is obviously more easy for startups to raise from angels, as they have to convince only one person, whereas VCs have a board or committee to decide on investments, according to set guidelines.
Indian Angel Network has announced 18 early-stage deals. Blume Ventures has pumped in funds into 16 startups. Tata Group Chairman Emeritus Ratan Tata continues making bets, like he did in the previous year. He has invested in 14 companies already in 2016. Entrepreneurs like Flipkart’s Bansals have also joined the bandwagon. With seven investments, FreeCharge’s Kunal Shah, and with 11, TV Mohandas Pai have also announced their arrival.
Raja Lahiri, partner, Grant Thornton, says that this trend of entrepreneurs making investments will continue, and many more will come on board. He adds that the current dullness is not a unique development. “Last year it was the unicorns’ funding that pushed up the numbers in funding. But this year none of them have raised funding so far, and the slowdown has been visible since February,” he says.
Shubhankar agrees that fundamentally nothing wrong has happened and that this is just a phase. “All markets have ups and downs – there is no need to dig deep into it,” he adds. It is only natural that a lot of startups will die out eventually. But those with great business models and cost efficiency will succeed, says Alok Goel, Managing Director at SAIF Partners. He believes that angels have consistently been active, and many unannounced deals by VCs also show that the scene does not give cause for worry yet.
Developments like Brexit will have an impact too- not too soon on early stage startups though. “It can trigger European countries to contemplate the position that might result in a cascading effect on European economies and, in turn, banks,” says Shubhankar. Foreign investors will want to see efficient business models, and, more importantly, profit. Although government has opened up FDI, e-commerce marketplaces need not rejoice yet – the red tape always takes time before becoming effective.
It would be safe to say that while startups will be affected, entrepreneurship will thrive, because the ecosystem is still strong and robust. Another 180 days await, before we make the final verdict for 2016.