Early-stage funding for start-ups falls 15% to $148 million in 2018

While private equity and venture capital (PE/VC) investment into start-ups rose in 2018, early stage funding went down.

Seed funding fell 15 per cent to $148 million (Rs 10,000 crore) in 2018, as against $174 million the previous year. Venture Intelligence data shows Series-A funding fell 11 per cent to $137 million and Series-B funding by 17.8 per cent to $83 million.

“The year has seen investors looking at more technology-driven companies and unique models, rather than the previous trends of investing in conventional firms like e-commerce companies and others,” said Sanjay Enishetty, managing director at 50K Ventures. Investors have become choosy, based on the learning on investments from 2014 onwards, he added. His venture used to select 10 companies from a set of 40-50 applicants for funding. Now, if it gets 80-100 applications, it invests in only two or three.

VCs, it appear, would tend to stay away from sectors which have not been growing or not raising follow-on funds. The scrutiny has become tougher.

Overall, the year has been positive for the PE/VC sector. Several unicorns (billion-dollar valuation entities) emerged in e-commerce and in financial technology, as also the Flipkart mega deal with Walmart, says VC entity Ventureast. 

"High valuations in the start-up universe have been a concern area for VCs but given the over-funded situation in some of these sectors, it is inevitable," said Siddhartha Das, general partner at Ventureast. 

The government has had much more of a positive role in driving the entrepreneur eco-system than at any time in the past, he said. Adding: "However, clarity on several policy initiatives need to be spelt out within a shorter time frame, so as to maintain the current momentum and not take the wind out of the sails of VCs and entrepreneurs, who are bound by fund life constraints and exit horizons. The bootstrapped entrepreneur needs to be encouraged with a more clear and tax-friendly regime and not be distracted by angel tax fears. After all, the phenomenal success of the IT (information technology) services industry was facilitated through an enabling tax regime." 

Over-capitalisation of some start-ups make it harder for others to get capital, said another investor. The year ended with a decline in angel investment in the final quarter, primarily on the fear of income tax notices to such investors and the associated network, along with the investee companies. This would also be a concern for the stage investments during 2019, say experts. While angel investment grew to $228 million, from $197 million in 2017, these declined from $73 million in the quarter ended September to $33 million in the quarter ended December. 

Angel investors and those who invested through some of the angel networks were served with such tax notices in the recent past. The notices demanded confirmation of investments, annual income tax returns of the investor for the financial year and the bank statement for the year.