A majority of Indian startups expected the funding environment to be more challenging in 2018 compared to the previous year. That was a key takeaway from the Startup Outlook Report released by venture debt firm InnoVen Capital in April. Recent data from Tracxn prove their fears true.
According to The Economic Times, the first half of this year has so far seen investments worth $3.6 billion made across 411 deals in startups. But the corresponding period of 2017 had seen 571 deals in the space totalling investment of $5.6 billion. That's nearly a 36 per cent drop in investment year-on-year.
Furthermore, early stage deals in seed and angel investments reportedly continue to struggle with only $137.8 million invested in startups this year, against over $200 million in the first half (H1) of 2017. Things appear far worse in terms of the number of deals struck - just 227 deals in H1 this year, a four-year low. Investments in the seed stage and angel money are, in fact, down 45 per cent from H1 2017 and stand 57 per cent lower than the 528 deals struck in H1 2016. Citing investors, the report added that a large part of the lag in investments in the ecosystem so far has been due to the lack of quality companies.
The other major change has been the ticket-size of the overall investments made. H1 2017 investments were driven by large ticket deals. For instance, Flipkart and Paytm had both raised $1.4 billion last April and May, respectively. In contrast, this year's largest deals, be it Policybazaar, Swiggy, Zomato or Paytm Mall, have all reportedly ranged between $150-400 million, at best.
But it's not all gloom-and-doom. The data shows that investments across series-A, -B and -C stages have fared far better, with 165 deals soaking up investments to the tune of $1.6 billion. This is a 60 per cent jump from the capital pool of $1 billion across 140 deals that flowed into these stages during H1 2017. Startups across financial services, content and digital media are witnessing a spike investor interest driven by the rush of Chinese venture capital bets in these spaces, especially in the past six months.
So, the tide just might be turning for the startup ecosystem. "Formation of new startups is picking up ever so slightly after having been dormant for a long time. We are hence, in a bubble where the amount of capital available to India stays strong but where will it go?" an angel investor told the daily. As a result, we are seeing larger cheques being offered to select winners across early- to mid-stage venture capital funding rounds, spurring on their valuations.
Indeed, several of the big-ticket investments this year have led to a concentration of capital within a few startups that have raised multiple rounds of financing within a span of a year to 18 months, including Unacademy and Pine Labs.
Regional language social platform Share-Chat is another prime example. Back in May, it was reportedly courted by a flurry of investors to raise capital at more than 5 times its valuation in a Series B round just four months ago, where it had raised $18.2 million at a $75 million valuation.
Investors, however, claim that over-valuations apart, the current situation is not reflective of a bubble-like situation akin to 2014-2015, where pricey valuations seldom followed merit. "The growth rate in performance for some of these highly valued companies is significantly better than that during 2014-2015. Hence, on a forward looking basis, the market is not over-valued," Anand Lunia, general partner at early-stage venture capital fund India Quotient, told the daily.
The important fact to keep in mind is that the funding pipeline is not drying up. This will spur asset creation and over a period of time, price and valuation will catch up with each other. The report added that the underlying growth achieved in a short span of time makes the valuations reasonable and, in turn, helps spur the enthusiasm back in startup formation. This offers hope for a recovery in seed stage investments over the next 12-18 months.
In addition, the profitable share sales in startups by existing investors have given exit-starved VCs some respite and a reason to come back to the market.
Some early-stage players like Matrix Partners and India Quotient have reportedly been making investments in startups at the pre-product stage itself, across sectors, in order to spur startup formation and boost confidence among entrepreneurs. India has already minted four unicorns in H1 2018, and investors foresee big action in fintech, content and media, in terms of valuation as well as investments.