Why Investors Are Getting Cold Feet About Start-ups

After an initial frenzy towards new investments in the country’s bourgeoning startup ecosystem in the last few months, investors have suddenly developed a cold feet. They are now adopting a wait and watch policy towards fresh investments in emerging businesses and this is true when it particularly true comes to the second round of funding.

Startups need at least 2-3 rounds of funding to scale up. However, in the currently entrepreneurial landscape when certain businesses have failed to translate the initial consumer interest into revenue flows, fund managers have decided to adopt a ‘wait and watch’ policy towards fresh funding in them.

In the past few weeks, a host of early stage ventures have been forced to shut down operations. These include names like Bangalore-based food tech startup Dazo, online recruitment platform Talentpad and healthcare portal DocTree, online restaurant SpoonJoy. The list is only getting bigger by the day. All these ventures were earlier in news for raising capital, some from the most marquee investors. For instance, Dazo in April this year raised funding from Google India chief Rajan Anandan, Amazon’s country manager Amit Agarwal, Commonfloor founder Sumit Jain, TaxiForSure founder Aprameya Radhakrishna and former FreeCharge chief executive Alok Goel. Despite this, it decided to wind up its operations as it failed to keep pace with its competitors and was short of capital even after raising its first round of funding.

“Six months ago everyone was euphoric and now everyone is predicting a blip. It is not a slowdown in funding, but a correction in ideas that will succeed or fail,” says K Ganesh, founder of GrowthStory, an entrepreneurship platform that promotes greenfield ventures. He adds that it is disheartening to see how much money went into businesses whose ideas were not tested and with which entrepreneurs were expected to scale up in a tearing hurry.

As per a Grant Thornton data, of the total 863 private equity/venture capital deals in Jan-Oct period this year, as many as 414 comprised start up investments. But in the first half of 2015, 363 venture capital deals were sealed, which were three times more than the number of 99 private equity deals. This definitely shows how the number of deals in the startup deals have come down in the last few months.

Fund managers say the slowdown started only after the stock market collapse in China in August that left tremors elsewhere in Asia and even across the globe. This made fund managers instantly curl up into a wait-and-watch position waiting for more clarity to prevail in the sector.

Today, most startups are gripped by similar issues: adequate margins, competitive pricing, and controlling customer acquisition costs. So far, these issues are not tackled, it may be difficult for emerging businesses to go in for the second round of funding!