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The great Indian VC challenge - more angels, more early-stage investments

Apoorv Ranjan Sharma
14th Jul 2016
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2015 was a landmark year for the Indian startup ecosystem. With the country rapidly emerging as a hotbed for startup activity, Indian ventures managed to secure investments worth more than $9 billion – an amount that was on par with the total funding received during the 2010-2014 period.

The-Great-Indian-VC-Challenge

This positive investment trend also continued well into 2016, as a staggering $1.42 billion was injected into startups in India in the first quarter. This amount was raised through more than 300 investor deals, marking an exponential increase of 108 percent in the number of deals over the previous year’s statistics. Impressive as they are, however, what these numbers don’t really say is that despite having so much capital being invested in the startup community, many of the country’s entrepreneurs are still facing a lot of hassles in securing adequate funding.

Going beyond numbers to identify the bigger picture

A quick reading between the lines lays bare the ground reality of the Indian investment landscape. Consider this: nearly one-third of the total investment went into the seven established unicorns in the country, many of which were in a Series C or Series D funding round. While this no doubt highlights the impressive propositions that Indian unicorns make for potential investors, it also subtly hints at the challenge before indigenous startups in the early stages of their growth. But why is the Indian early-stage investment landscape such a tough nut to crack for emerging entrepreneurs and startups?

Challenges before the industry: not enough angels, not enough early-stage funds

Several factors contribute to complicate the early-stage investment landscape in India. The most prominent amongst them is a distinct dearth of angel investors and startup enablers in the country. There are a total of 400-500 angel investors and approximately 110 incubators currently active in the Indian startup ecosystem, a number that is not adequate to fulfil the funding requirements of the 4200+ startups estimated to be operational at the moment. A recent report by the Expert Committee on Innovation and Entrepreneurship also highlighted the challenge in securing early-stage investment in India. According to the report, angel investors in India contributed only 7 per cent of the total early-stage funding for startups; in contrast, 75 per cent of early-stage investments in the US came from angel investors.

Winds of change: the entry of foreign startup enablers and the rise of indigenous players

The scenario, however, is set to improve as the investment industry – both locally and abroad – wakes up to the immense potential locked within the Indian startup ecosystem. Several new funds such as Stellaris Venture Partners, Mukul Singhal’s yet-to-be-named firm, Endiya Partners and Prime Venture Partners are now operational to support Indian ventures, whereas leading global players such as Plug and Play are also making inroads in the country through strategic partnerships with indigenous startup enablers, growth facilitators, seed investors and innovation platforms such as Venture Catalysts. The emergence of such high-quality funds is indicative of a significant increase in investments. Several industry estimates predict that Indian ventures may see a rise of more than 20 per cent in Series A financing. Investment trends in 2016 support this hypothesis, with Indian startups having secured 132 early-stage deals in Q1 2016, out of which 112 deals were pre-Series A.

Rekindling startup growth: AI, big data to lead the way

This is good news for the country’s entrepreneurial community, which will be looking to capitalise on these favourable developments to drive their growth and make their mark within their chosen market segments. What is even more encouraging is the fact that this may potentially unlock several new sectors, such as manufacturing technology, which will be looking to disrupt business functions through state-of-the-art tech. The focus, this time around, is on tech-centric ventures with robust revenue models instead of hyper-growth. As such, startups operating in the fields of artificial intelligence (AI), fintech, cyber security and data-driven intelligent software will continue to enjoy investor attention and may see significant early-stage funds pumped into them through seed and angel investments.

The road ahead: why 2016 holds much promise

Many changes are being heralded as a result of the aforementioned developments. The early-stage investment landscape is witnessing greater involvement from the country’s HNI segment as angel and seed investors, while successful entrepreneurs are also actively taking up the roles of mentors and guides to usher the next wave of Indian startups. The government, too, has initiated several policy reform and regularisation initiatives in order to boost indigenous ventures, especially during the early stages of their growth. With the country’s investment landscape evolving and growing at such a rapid pace, 2016 could well end-up being The Year of Early Stage Funding for Indian startups. All that is needed is a dedicated, integrated effort from key stakeholders to aid the creation of a comprehensive, end-to-end ecosystem that enables easy access to early-stage funding and support.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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