Most investors foresee fall valuations, hunger for e-commerce

Time for start-ups to focus on profitability now, say respondents in a VCCEdge survey

After strong growth in PE (private equity) and VC (venture capital) funding in 2015, the valuations for various stages of funding are expected to be weak in 2016 and the interest of investors in e-commerce is fading, according to data from VCCEdge. It said that angel, seed and Series-A stage VC transactions that peaked with 100 deals in November 2015 halved to 51 in January 2016, the lowest level in 15 months.

The survey was released by VCCEdge as a pre-cursor to the VCCircle India Limited Partners Summit 2016. The survey indicates a general consensus among PE and VC investors that valuations of companies will drop and investments by limited partners will moderate.

Around 46 per cent of survey participants have indicated their interest in investing in start-ups in the consumer service and product space, with only 23 per cent showing interest in investing in the e-commerce space.

While 62 per cent of investors are raising fresh capital, the survey has found that there would be increased focus on profitability rather than valuations of companies in 2016.

The lower valuations would make exits difficult and almost 92 per cent of venture capital investors believe valuations for Series-B, -C, and -D rounds will drop. Almost 62 per cent of VC and PE investors believe exit valuations will come down or remain flat this year.

About 92 per cent believe more strategic investors will do deals this year and nearly 62 per cent of the VC firms that participated in the survey expect that the most relevant exit channel this year would be sale to strategic investors while the rest 38 per cent believe it would be secondary sale to other VC and PE investors.

Almost 57 per cent said they will do more deals this year than in the last year.

Around 38 per cent feel that allocations from limited partners will stay flat and 19 per cent predicted a drop. The remaining 43 per cent believed that allocations from limited partners would increase.

Around 46 per cent of VCs expect start-ups to increase focus on profitability. This, according to 31 per cent of the participants, would mean mergers and acquisitions and consolidation, while 23 per cent expect this to be shutdowns, job cuts, and scaling down of operations.

Sahad P V, Founder, VCCircle Network said, “The survey has predicted more challenges for start-ups in 2016. While mid­stage venture funding deals had hit a speed bump a few months ago, early­stage funding had remained robust keeping hopes alive for start-ups looking for initial financing support. However, if the first month of 2016 is anything to go by, even angel and seed­stage investors seem to have tightened their purse strings."

The survey was conducted among 21 investment firms over a span of eight weeks during January and February, 2016.