Fall in early-stage start-up funding continues: deal value down 37% in Q1

This comes on the back of 27 per cent drop in angel investment deals and 50 per cent drop in deal volumes in 2018

The slowing in early-stage funding for start-ups deepened in the first quarter of 2019, with deal value falling 37 per cent to $212 million (nearly Rs 1,500 crore), compared to the same quarter in 2018; volumes plummeted 48 per cent to 113 deals.
 
This comes on the back of 27 per cent drop in angel investment (the term for the earliest equity investments in start-up companies) deals and 50 per cent drop in deal volumes in 2018. Early-stage deals comprise angel, seed and Series-A deals. Deal value for mid-stage deals, which is Series-B funding, fell 71 per cent to $89 mn (Rs 620 crore), while deal volumes fell 75 per cent.
 
Late-stage deal activity (Series-C onwards) stays robust, the value more than doubling to $1.3 billion (Rs 9,000 crore) in the quarter.
 
The early-stage slowing could be attributed to the ‘angel tax’ but a bigger drag has been the lack of exits. Business Standard wrote in January on how this was keeping angel investors away.
 
‘‘There have been a lot of issues in the past few years— angel tax, new rules on e-commerce foreign direct investment and other government-created issues — which have knocked the wind out of the sails of the start-up movement. The energy we saw 2008 to 2015 has reduced,” says Rehan Yar Khan, managing partner, Orios Venture Partners.
 
As founders faced issues with the government — vehicles getting impounded, tax seizures, companies being shut down — the news spread and prospective founders rethought plans to start-up, says Khan. Also, because of various issues with the Reserve Bank, the Securities and Exchange Board of India and the tax authorities, start-ups are registering in Singapore and other places.
 
Investors have also become choosy. Earlier, they were willing to fund start-ups on the growth metrics; business fundamentals were not looked at strongly. ‘‘Mishaps on those deals have led investors to start looking at the business fundamentals or prospective business metrics pretty early on in the start-up life cycle,” says Dharmesh Seth, founder, PharmEasy.
 
This has made the funnel smaller in terms of early-stage start-ups getting funded. Which would explain the sharp drop in mid-stage (Series-B) funding but this could also be an aberration. Typically, 22-25 start-ups get Series-B funding in a year.
 
Late-stage deals have been led by strategic investors taking positions in highly scaled platforms which have also proven the business model in some way, says Seth. ‘‘Companies that were in mid-stage for the past couple of years have matured and their sectors have consolidated, leading to increased late-stage activity,'' says Farid Ahsan, founder, ShareChat.
 
Early-stage deal activity is a function of the quality of deal flow. The data tells us the pipeline from angel/pre-Series-A to Series-A is not as strong as investoRs would like, says Ashish Sharma, chief executive at Innoven Capital. Capital is not an issue but investoRs do not want to fund me-too businesses. 
 
Angel investment activity in the past two to three yeaRs was lukewarm, due to tax issues and lack of exits, which hurts the deal pipeline. But this could change. ‘‘The number of start-ups working on leading-edge technology, new private brands and business-to-business requirements is still low. It will pick up in the coming quarters,'' says Ahsan of ShareChat.