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Venture capital (VC) firms are doing fewer deals but are willing to write bigger cheques for start-ups that are doing well. The average ticket size for VC deals in start-ups rose to $9.38 million in 2017, up from $7.63 million in 2016, even as VCs invested in fewer start-ups. This does not include what start-ups raised from angel or seed-stage deals.
Start-ups raised $3.15 billion in 2017 in venture capital from 336 deals, a notch lower than $3.45 billion raised in 2016 from 452 deals, according to an early estimate by VCCEdge, the data arm of VCCircle. ‘‘Investors have raised the bar. They are willing to invest more in start-ups that are doing well,” says Ajay Hattangadi, former chief executive officer, Innoven Capital.
Investors realise that start-ups won’t be able to raise money quickly, and are willing to cut bigger cheques that give them more firepower and longer runways, says K Ganesh, an entrepreneur, who has backed start-ups like Big Basket, Bluestone and Portea, among others.
The VC funding figures do not include $7-billion fund-raise by large start-ups like Flipkart, Ola, Paytm, Oyo in 2017, which were driven by big investors like SoftBank and Tencent. The funding figures also do not include angel and seed stage deals, which infused $251 million across 452 deals in 2017, down from $374 million from 903 deals in 2016.
‘‘Angels have seen bloodbath in the market, and have all gone to heaven,'' says Ganesh. ‘‘Since angels are less institutional, they are likely to be swayed by market sentiment like retail investors in stock market,'' he adds. Many took to angel investing at the height of the start-up boom in 2014-15, without understanding the risks. As many start-ups shut down in 2016 and 2017, many first-time angel investors burnt their fingers in the bloodbath and might never come back.
Angels were also hit by the angel tax, demonetisation and GST, says Padmaja Ruparel, president, Indian Angel Network. ‘‘In India, angel is part-time investment. When demonetisation and GST hit them, part-time angels had to focus full-time on their businesses,'' she says. They were hit harder by lack of exits, illiquidity and start-up shutdowns.
The good news is after two years of drought and correction, much of the shakeout has happened, Ganesh says. ‘‘The knife has fallen; the quality of investments will only get better from here,'' he added. This, though doesn't mean there won't be failures or shut downs; we may see many more start-ups failing. Two, many VC funds like Sequoia, Accel, IDG or Kalaari Capital raised a lot of money, and will have to start deploying.