Most startups in India, especially early-stage ones, expect the fundraising environment to be difficult in 2018, according to venture debt provider InnoVen Capital’s India Startup Outlook Report 2018, according to Live Mint report.
According to the report, 56% of the startups surveyed said that they expect fundraising to be more challenging this year. Around 81% said that they expect fundraising to take from anywhere between four and six months to over nine months.
“Some of the early stage and series A companies, believe that funding would be slightly tougher in 2018 than the previous year,” said Ashish Sharma, chief executive officer at Innoven Capital India.
However in a positive stance, almost 54% of startups said that they had a positive fundraising experience in the last 12 months, up from 37% of startups in the previous 12 months.
Late-stage and growth-stage startups are getting a lot more funding as most of the VCs have a lot of cash reserves and therefore they can allocate funds in later or growth stages, he added.
The biggest factor that can help create a better fundraising environment, according to startups surveyed are — better startup exits, more foreign investors setting up shop in India and more domestic VCs.
“Eventually, the more exits an investor gets, their ability to recycle the money and make more investments are much higher,” said Sharma.
Only 2% of the over 100 startups surveyed said that unicorns — startups valued at more than $1 billion — raising more funds at higher valuations will lead to better investment sentiment.
In one of our article we pointed out that how Flipkart-Walmart deal amounting nearly $7 billion will boost the cash-reserves within Indian startups investors and allow them to recycle the money they got from exit from Flipkart.
Apart from fundraising, a large number of startups said that talent management is a major challenge.
E-commerce and Fintech startups rated fundraising as top challenge faced. Enterprise start-ups rated customer acquisition and churn as a significant challenge, as well as talent management. Healthcare and Logistics start-ups rated market creation and talent management as the top two challenges, according to the report.
Respondent startups said that the government needs to do more on tax policy, facilitate cheaper financing options and incentives to boost domestic startups.
The report further added that, taxation and availability of cheaper financing options continue to be perceived as major hurdles this year, adding that 32% of the respondents felt better incentives were needed for domestic players to compete against global majors as compared to 19% in 2016.
Moreover, the role of government is also crucial for creating better fundraising environment by addressing challenges faced by startups such as giving some recognition to ‘angel tax’, providing some more favourable policies for the startups such as tax holidays etc.
Besides this, the goods and services tax (GST) introduced last year has also had varied impact on startups, according to the report.
Startups from sectors such as logistics and enterprise tech said that they have witnessed positive results, while other sectors such as media/content, fintech and food-tech said that the impact has been negative.
Apart from this report, an another report by Silicon Valley Bank (SVB), the bank of the world’s most innovative companies and their investors, said that startups globally believe that business conditions will be better this year compared to 2017, with 30 percent globally noting that 2018 conditions will be much better. This 9th annual Startup Outlook report by SVB is based on more than 1,000 survey responses from startup leaders in innovation hubs around the world.
In 2016, a report had said that e-commerce sector witnessed a massive 50% cut in fund raising. In 2017, secondary share sales worth thousands of crore of rupees in startups including Flipkart, Paytm, Ola, Lenskart and others have provided funds with desperately-needed returns. These deals helped VC firms prove to limited partners – large investment firms that put money into VCs – that start-up investments in India could be lucrative even though returns take longer to materialize compared with the US and China.
Notably, there are still quite a few factors that could create hurdles for improvement in funding volume. While investor appetite may increase, they may not find enough companies to place bets on. IndianWeb2 had reported in October that the number of new internet and technology start-ups launched in the first nine months of 2017 had slumped to 800 from more than 6,000 in 2016 – a worrying sign for the next two years. Additionally, macro-economic and political factors such as an interest rate hikes in the US, the performance of stock markets (for domestic LPs) and the national elections next year could affect start-up funding.