It hasn’t been a great year so far for startups in 2018. While growth is being seen across industries, the amount of funding isn’t matching up. Some might even speculate that deal sizes are shrinking across the board. However, this might be a normalizing effect for existing startups that have massive valuations. With more money being funnelled into unicorns and established players, seed funding might be taking a hit in the months to come.
With investment coming in from international borders, Indian startups aren’t seeing a dearth of cash per say. While the top 5 sectors in the startup space have raised about $3.6 billion, the decline is significant. Last year the estimate was around $5.6 billion. There’s been a 40-50% drop in the deal quantity and in the number of deals. Even when it comes to M&A activities, the number has decreased by 28%. This may seem doom and gloom at first, but investors might just be playing their cards close to their chest.
Year of the Unicorns
The country just added four new startups to the Unicorn club with Policybazaar, Swiggy, BYJU’S, and Paytm Mall. Many of the leading startups raised huge amounts in funding, with Swiggy bagging close to $310 milion this year. Combing this data point with the fact that Q2 2018 has been better, means that investors are becoming confident again about the startup space this year. We may have started slow, but we’re picking up the pace in the months to come.
“I don’t think there is lack of funding in India at any stage for the right startup. The bigger question is how to create the right conditions to ensure that startups can grow into healthy, profitable, and sustainable businesses, ready for late-stage funding and eventually for public markets. That should be the goal, regardless of the outcome," Hemant Mohapatra, Incoming Parter, LightSpeed India Partners said in an interview with Inc42.
Seed funding
Seed funding is going down but as per to forecasts to about $183.75 million across 179 deals. We’re also expected to see about $5 billion coming in the second half of 2018 in terms of investment. If nothing else changes, startups are still going to reap the benefits of investments in India. In a growing economy like ours, there are huge expectations from global investors that are funding local startups.
Although it still can’t be compared to the massive growth this time last year, we’re not in a slump when it comes to the startup space. There are a significant number of segments within the Indian startup sphere that are still growing and are seeing increased attention. One such sector is the big tech startups that are raising upwards of $100 million.
They’re growing in valuation every quarter and are showing no signs of stopping. A similar goal should be on the minds of startups that want to achieve rapid growth themselves. Is there a sign of a bubble? While looking at KPIs, it isn’t clear that there is one.
“Yes, there is an over-valuation for companies. But 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,” Economic Times quotes Anand Lunia, General partner at early-stage venture capital fund India Quotient as saying.
Hyperlocal services – the investor hot bed
There are other pockets within the startup space that are receiving attention as well. The hyperlocal space has seen a jump in the amount of funding from $15 million (H1 2017) to $80 million (H1 2018). Grofers has taken the lion’s share there with $60 Million in funding in H1. Apart from the fact that investors and companies are betting big on the hyperlocal space, the attention is being given to mature startups that have a proven business model and significant investments.
“The services delivered through hyperlocal business models have always had a large market, be it concierge, grocery or food. Hence, we saw an upsurge of funding in this segment in 2015. But soon, founders and investors figured that they couldn't scale up the businesses without cracking unit economics. This was hard because most Indian businesses were not optimising for logistics cost and experience,” YourStory quotes Arpit Agarwal, Principal, Blume Ventures as saying in an article on investor interest coming back to the Hyperlocal space.
Disrupt or go home
If you’re an early stage startup and you don’t have a proven model yet, then you might be out of luck. Funding for early stage startups has been one of the worst in recent memory. Investors are eyeing large-scale and bigger deals in hopes that growth will raise valuations over time.
For startups that are disruptive, there are international investors vying to invest. Homegrown startups that haven’t showcased a solid business model may see disappointment in the months to come.
However, as soon as you enter Series A, B, C you’re going to see a lot of capital and attention from investors. There has been an almost 60% jump in the capital pool of $1 billion across 140 deals in the space. Capital is growing steadily, with investors preferring results over valuation.
Views expressed are author's own