“The apparent decline in the investments in Indian startups can be understood as a reflection of decreasing confidence of Venture Catalysts”. Pratiksha Kapoor
Investments in startups have come down dramatically after a few years of excessive capital coming into young tech startups in India. A lot of start-ups in sectors ranging from food-tech to logistics to e-commerce have experienced slips, mergers and shut downs. The apparent decline can be understood as a reflection of decreasing venture catalysts confidence in the Indian startup ecosystem, due to the prevalence of inefficient unit economics and unsustainable business models.
In 2016, startups witnessed a 44.3 per cent decline in investments at $1.452 billion from 928 deals compared with $2.606 billion from 1,026 deals in 2015, the analysis said. Investors continued to back startups till Q1 2016.
However, the value of investment dropped significantly across all quarters last year compared with 2015. Investors seem to be sitting on the sidelines, being selective in making investments and focusing more on realising investments. One of the KPMG-CB Insights report confirms the worst. Investments in Indian startups slumped from $2.89 billion in the third quarter of 2016 to $1.51 billion in the last quarter of 2015. The year 2016, saw a further fall in investments with around $1.15 billion invested in the first quarter, almost a 24% slump. The number of startup deals also fell 4% to 116 in the quarter.
Given the fact that both the volume and value of deals continued to slip across the earlystage spectrum, the trend clearly suggested that investors had started writing smaller cheques. Hence, clearly raising capital was not at all easy last year.
Bengaluru leads with the most tech startups, followed by Delhi NCR and Mumbai. With Hyderabad and Chennai also emerging as leading hotbeds for tech entrepreneurs, investors are finding more than enough reasons to fund paradigm-changing technology. The data said, startups in Maharashtra collectively scooped up $285 million (1,910 crore) as against $496 million (3,300 crore) in 2015; a drop of about 42% in terms of deal value. As the startups grow, they move to cities like Bengaluru which have cheaper talent in tech space. For instance Ola and Quikr originated in Mumbai but moved to Bengaluru when they needed to expand and hire more people. Cities like Bengaluru, Hyderabad and Pune are technically cheaper cities with easy access to talent.
Investors are putting money where the unit economics is strong and the growth isn’t being hampered. There has been a worrying trend among India startups to believe that going through a long period of heavy losses is satisfactory, even desirable, to achieve growth.
However, angel investment in tech-backed firms is on a rebound, even as VCs are being cautious. The cautiousness of VCs has, in fact, opened up space for smaller investors who may have not shown interest earlier. The government of India initiatives, such as ‘Start up India’, ‘Make in India’ and ‘Digital India’, has also been incredibly proactive in boosting investment for tech startups.
It is not surprising that alarm bells are ringing for entrepreneurship enthusiasts across the country. However, we can certainly look forward to the effect of initiatives being introduced by the central and state governments to not only foster entrepreneurship in the country, but to make investments into newer ventures more convincing for potential investors.