Funding Slowdown Puts Indian Startups At High Risk

The latest fund raising activity by online payments and commerce platform online payments and ecommerce firm Paytm from ICICI bank has raised several questions on an impending slowdown in the venture capital investments in the startup space.

Paytm raised close to Rs 300 crore from the largest private sector lender in two tranches. This was immediately after ecommerce giant Flipkart went in for credit of Rs 450 crore from HDFC Bank by pledging fixed deposits. For Flipkart, however, this is not the first time. In 2015, it availed credit worth Rs 1,400 crore from Kotak Mahindra Bank and Deutshe Bank in lieu of assets.

If the current situation is any precursor to the emerging trends, the list of early stage ventures opting for bank loans over venture funding perhaps points out to the cautious approach that risk capital investors are increasingly adopting while doling out fresh funding to startups as a plethora of deals in the sector on the basis of speculation rather than calculating the actual fundamentals in account in the last one year.

Volumes in private equity and venture capitalists investments in 2015 touched an all-time high with close to 1,049 deals largely due to increase in investments in India’s startups, according to the fourth edition of Grant Thornton’s The Fourth Wheel 2016 report. The report slated that over 600 investments of the total PE/ VC investment volume were been made in startups.

Too many innovative ideas came up over the last 2 years and not all of them have the bandwidth to expand and go to the next level. “It is obvious that not all of them will survive. The nature of the startup business is such that even if one of ten becomes a blockbuster, the purpose is served,” said Arvind Mathur, President at Private Equity and Venture Capital Association.

So, while year 2015 saw hordes of capital flowing into the burgeoning startup ecosystem, going forward it is obvious that private equity and venture capital funds would want to adopt a wait and watch policy, before investing further in the sector.

“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 and fail,” said K Ganesh, founder of GrowthStory, an entrepreneurship platform that promotes greenfield ventures, in an earlier interview . 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.

Already certain ventures have taken steps to curtail their growth plans – these include even some drastic steps like slashing workforce or even shutting shop. These include startups such as Dazo, SpoonJoy, Foodpanda and TinyOwl, among others. It is these early signs of shakeout and the mismatch in expectation versus with actual delivery that is prompting investors to adopt a cautious approach in the second round of funding.