InvestorQ : Is it true that start-up funding in India is struggling at present?
Archita Jajjoo made post

Is it true that start-up funding in India is struggling at present?

Niti Shenoi answered.
1 month ago

If you look at the numbers, that is what it looks like. For instance, in the September quarter, the total start-up funding at $2.3 billion was the lowest in 8 quarters. Even the big PE funds have been reneging on their funding commitments i.e. they are committing to fund late stage start-ups, signing the share purchasing agreement and finally dropping out. That is a different debate, but scratch the numbers and there are some distinct trends that are emerging. Let us look at some key trends; which are not all that discouraging.

· If you look at macro numbers you are likely to be misled. Here is why. On the face of it, a 2-year low on start-up funding does look bad. However, PE funds and VC funds have raised billions of dollars and need to deploy these funds. It is just that they have become more selective in funding start-ups in terms of sectors and also the stage of funding.

· The first thing that has changed is that early seed start-up space is getting chunk of the funding. Most of the PE funds are not too keen to get into the second stage funding or later stage funding. Despite these apprehensions, early stage start-ups with good ideas are still getting cheques from the venture investors.

· The other trend is the sectors where these PE funds put money. IT may be the broad sector but the sector used to be ecommerce and then it shifted to Edtech. The latest fad is investing in SAAS (software as a service) companies followed by the Edtech space. That is the sector attracting the most amount of funding at present.

· However, it is late stage and second stage funding that is faltering. That is when most of the start-ups recently had their tryst with reality. That is the reality of sales numbers, profit numbers, growth numbers etc. Second stage or late stage funding is near-market funding. At that point start-ups are hungry for funds and either need PE funding or public issue funding.

· The IPO story in India for start-ups has been disappointing with most of the big IPOs like Paytm, CarTrade, PB Fintech and Star Health trading at a discount to the issue price. That is not a good feeling. Obviously, PE funds do not want to get in at a stage that is too close to the IPO stage for obvious reasons.

· The moral of the story is that the PE funds are getting more selective about the type of sectors they invest in and the stage and that is actually a long term positive. They are less keen to fund start-ups near to market. Now, the pressure shifts to the Unicorns to show tangible performance with real and realistic time lines.