Venture Capitalists, Private Equity Players Are In Wait And Watch Mode

Year 2016 may not be as lucky as 2015 for the country’s bourgeoning startup sector as there are finally signs that the flood of easy money is starting to recede. Risk capital investors such as private equity and venture capital firms are preferring to adopt a wait and watch policy before pumping into more capital into startups as it is now time for the budding entrepreneurs to deliver, say experts.

As per data available with VCCEdge, venture capital funding, which
hit a peak during the year-ago quarter, witnessed a drastic decline
with 88 deals being recorded in the first quarter of the current
calendar year against 138 deals recorded during the same period in
2015. Deal value declined to $334 million in Q1 CY15, compared to $1.8 billion seen in the corresponding quarter last year. The share of
venture capital funding, by value, dipped by about half to 14.6% in Q1 CY16. Private equity inflow of $2.3 billion during the same period this year is 48.8 per cent lower than the inflow of $4.5 billion in Q1 of 2015.

Venture funding refers to investments in startups, while private
equity is growth capital raised by mid-sized ventures. Last year the
dramatic increase in the number of transactions in the private equity
space was due to the increased number of investments in the startup
space. However, this year, due to a slowdown in venture funding, the
overall sector is undergoing a blip.

What it means for the industry?

“Small is beautiful.” This seemed to be the mantra of investors last
year. Thanks to the changing digital landscape – both mobile and
internet – several budding entrepreneurs had come up to ride the
domestic consumption wave. Undoubtedly they came up with innovative ideas that attracted capital in hordes.

So what went wrong? Of all the early stage ventures who raised capital last year, a handful did not have a dream run – after all not everyone has the bandwidth to scale the business to the next level. “Over the past one year in particular, there has been an explosion of online companies,” says Arvind Mathur, President at Private Equity and Venture Capital Association (IVCA). “Sectors such as mobile and online services offer tremendous opportunity. The nature of the business here is such that on an average even if one out of 10 becomes a blockbuster, the purpose is served,” he adds.

Despite availability of capital, a bevy of early stage ventures in the
last couple of months have had to take drastic measures to keep their
bottonlines intact, while some have also had also to shut shop. These
includes names like Dazo, SpoonJoy, Foodpanda and TinyOwl, among others. It is still the early signs of shakeout and it is the mismatch in expectation versus with actual delivery that has prompted investors to develop cold feet while going in for the second round of funding. Today, the problems that most startups are facing are somewhat similar: how to get enough margins, how to be price competitive and how to keep customer acquisition costs low .

If the current satiation is any precursor to come, then slowdown in
the startup space is here to stay for a while. However, that is not to
say all early stage ventures will fail. As much as 20-30 per cent of
ideas are fantastic and going forward, they are the ones that will
stand out. “E-commerce companies that will be successful can be
classified into two categories,” MK Sinha, managing partner and CEO of IDFC Alternatives, had told BW Businessworld in an earlier interview. One, that allows penetration in the under penetrated areas, and two, that allows to improve capacity utilisation of idle assets and thereby extract economic value, he adds. In the next 2-3 years, it will be interesting to see which ones actually survive the competition.