Angel, seed stage deals down 40%

Start-up deals in the angel and seed stages have fallen sharply this year as investors have turned cautious after the euphoria of 2015 and 2016 and are waiting for exits to rotate their money.

Sharda Balaji, founder, NovoJuris Services, which advises start-ups and investors, says there is a significant drop in angel deals. ‘‘We used to do four-five deals in a month. Now we mostly do one or two,’’ she says. 

Angel investors don’t see exits on the horizon as funding in the next stages is not as robust as it used to be. Tiger Global, after backing many start-ups in India, is not investing here, while Series-A investors are preferring later-stage firms with revenues.

‘‘Angels have turned cautious and choosy as they have burnt their fingers. The frenzy that you saw earlier is no longer there. Earlier, a company would start and get funded. Now, investors want to see a lot more traction before they invest,” says Balaji.

Angel deals are down 47 per cent since 2016 and 44 per cent since 2015, according to data compiled by research firm Venture Intelligence. Seed-stage deals are down 44 per cent and 42 per cent, respectively, while deal value fell 42 per cent and 38 per cent over 2016 and 2015.

Vikram Gupta, managing partner, IvyCap Ventures, says angel and seed stage investors thought they can exit in the next round. “Series-A rounds, which range between $3 million and $5 million, is not for exit but for growth capital (for the start-up),’’ he says, adding investors are stuck and not able to rotate their money.

In 2015, angel investing had become a fad, with professionals and scions of business families jumping on the bandwagon. Members of these business families have invested the money allocated to them or have got no fresh allocations, or not yet made any exit.

“People have come to realise that exits are going to be only in 5+ year timeframe, which means while angel investment is sexy, it has lower liquidity than other forms of investment,” says Ravindra Krishnappa, an angel investor from Bengaluru. 

Many see a silver lining in the slowdown in early-stage deals. ‘‘There was a spike in seed and angel deals in the consumer internet space in 2015 and this momentum continued into 2016. There were a lot of me-too companies with unviable business models getting seed-funded. In many cases, these were done by investors with no background in technology who got carried away by the euphoria,’’ says Ben Mathias, MD, Vertex Ventures. 

‘‘The market has corrected itself now. So even though there are less angel rounds taking place, they are by and large for entrepreneurs looking to do something sustainable and with a strong technology differentiation. And as angel investors are doing less deals, they are able to spend more time with the entrepreneurs and provide mentorship and value-add,’’ he said.

Raman Roy, chairman, NASSCOM, and a member of the Indian Angel Network, however, says there’s no drop in angel deals, though many don’t get reported. ‘‘There’s no slowdown. At a recent start-up event, there were 500 investor meetings in one day. Angel investing is not about dumb money but about mentoring and adding value to entrepreneurs,’’ says Roy.