Driven by late-stage deals, funding activity picks up for start-ups

Photo: Shutterstock
Things are warming up on the start-up street. Funding activity is picking up — last six months have seen a spurt in late-stage deals, early stage (pre-Series A and Series-A) funding is getting better, but raising money at the angel and seed stage remains a challenge. Founders are again getting multiple term sheets, says an investor.  

Madhukar Sinha, co-founder and partner at venture capital firm India Quotient, says the market is getting better at the Series-A, B, C levels, but the early-stage seed and angel is still lagging as the 2015 shock resulted in less company formation and lower deal flow. “The angel investors and seed investors are still cautious of the washout of 2015 and maybe, in the next two quarters, that would change as well.''

This is reflected in the venture capital flows. In the first-half of 2018, venture capital firms invested $2.28 billion in 164 deals against $1.6 billion across 217 deals in the first-half of 2017, according to data from NewsCorpVCCEdge.

Angel investors invested just $116 million across 227 start-ups in first half of 2018 as against $168 million across 315 start-ups in same period in 2017. Higher VC flows comes amidst a 31 per cent drop in private equity flows in the first-half of 2018.  Angel investors invested just $116 million across 227 start-ups in first half of 2018 as against $168 million across 315 start-ups in same period in 2017. Higher VC flows comes amidst a 31 per cent drop in private equity flows in H1 2018.  ''Funding activity is picking up. There is a strong movement towards using mobile, smart phone, internet, technology for solving core problems like agriculture and financial inclusion, thanks to low bandwidth costs, low phone prices, internet penetration,'' says K Ganesh, a serial entrepreneur and start-up investor.  

''Deal activity this year has been stronger than last year, particularly for late stage (Series-D and above) and we are also seeing vibrant activity in early stage,'' says Ashish Sharma, CEO India at venture debt firm Innoven Capital. Deals in Series-E and above doubled to $680 million in H1 2018. ''Late-stage activity is picking up as many VCs are preferring to back potential winners. Strategic, including SoftBank, Chinese investors  and few PE firms are also more focused on investing in late stage companies which have the potential to go public or give a big exit in the next few years,'' says Sharma. 

There are two other factors driving deals. Many new VC firms, which raised money in 2017, have started deploying while exits at Flipkart will encourage investors in VC firms to deploy more money in India.  Many new VC funds such as Nandan Nilekani's Fundamentum, Fireside Ventures have started deploying money - Sharma estimates local VCs have $3-4 billion of dry powder (fire power), not counting the likes of Softbank and Chinese investors who have a lot of capital.  Deal value in Series-C deals doubled in H1 2018 to $531 million (25 vs 14 deals in H1 2017) with many categories becoming a two-horse race or strong players emerging in verticals like Lenskart, Policy Bazaar. ''Investors are backing companies that have the right kind of scale and have a credible path to profitability and provide exits,'' says Sharma. Innoven grew its venture debt book 30 per cent in H1.

Rehan Yar Khan, founder, Orios Venture Partner, feels there are three factors driving increased deal activity in start-ups. ''The domestic market has expanded thanks to Aadhaar, Jan Dhan, Bharat Net, etc. Thus an additional 300 million consumers are now addressable,'' says Khan. Two, start-ups have discovered foreign markets, like Ola in Australia or Oyo in China, that also expands the addressable market. Three, exits have picked up, thanks to more IPOs and foreign acquirers (like Wal-Mart), says Khan.

''While 8-10 investors would exit Flipkart, it makes LPs (investors in VC and PE firms) believe that India can provide exits and they can put more money to work in India,'' says the head of venture capital firm.

So, at what level is the market? ''I would say activity is at same level as pre-2015 days. Deals are getting closed at similar pace like they were before 2015. We are nowhere like 2015 days except for some sectors like vernacular content and fintech which have a little bit of FOMO (fear of missing out) built in but definitely not at the alarming levels of 2015,'' says Shukla of India Quotient. 

''Even if we have new funds, the cast of characters are the same. Investors have seen the cycle and it is too recent in their memories. People have become practical in terms of how big the market is, the purchasing power and realise that it is not going easy,'' says Sharma.

''Expectations are more realistic, people have burnt their fingers in euphoria times. Entrepreneurs are doing more homework, investors are asking more serious questions, and there's lot more focus on unit economics and actual metrics than vanity metrics,'' says Ganesh.

The FOMO effect will come back if there are 2-3 exits like Flipkart.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel