BENGALURU: Capital flow to startups continued at an increased pace in the latest quarter as global investors continued to sign big cheques for entrepreneurs building out next big companies in areas from financial technology to software services, bucking the slowing growth in the economy. But the rush of capital, which has led valuation of some startups to multiply overnight without any significant change in business metrics, is also causing concerns among investors of a “bubble” even as the global sentiment turns against highly valued private technology companies with the failure of WeWork’s public offering in the US.
Total money poured into startups increased by 25%% to $10.9 billion in the first nine months of 2019 as compared to the same period in the previous year, even as the total number of deals fell by 26% to 937 transactions. According to the latest data from Tracxn. The data increasingly indicates that the boom in the financing is being led by mid and late-stage rounds over $50 million. And is not trickling down to even early-stage transactions.
“Right now all 3 Vs of a “bubble” at play in the technology investing world – volume (number of investments), value (valuations vs fundamentals) & velocity (time to an investment decision and/or mark-ups between rounds),” said Avnish Bajaj, MD at Matrix Partners India, early backer of companies like Ola and Quikr.
“Until recently only volume and value were at play, but velocity is also at play now as investors are being forced to take decisions in a few days. And typically the correlation between high velocity and bad judgment is high.”
Several startups have seen a significant jump in their valuation in a matter of months, across sectors and stages. Take for instance neo-bank startup open is in talks with investors to raise a financing round of up to $100 million at a valuation of around $400 million, according to two sources briefed on the matter. This after the startup has already raised two rounds of funding in 2019, with a valuation between them increasing nearly 8 times to $150-160 million. Open co-founder Aneesh Achuthan wasn’t immediately available for comment. Similar instances include home services marketplace UrbanClap valuation nearly doubling to $930 million in 8 months and Meesho’s valuation nearly tripling to $700 million in a similar period.
The fast pace of deal-making is being led by Sequoia Capital India at the seed stage, with several other VC firms like Matrix Partners, Light speed and Chiratae Ventures also increasing the number of investments at an early stage over last few months. Size of seed rounds being done by some of these firms has increased from standard $500,000 to $1 million to $2-3 million, with valuations going over $10-15 million even before startups have built out their products. The increase in the number of serial entrepreneurs and founders with 5-10 years of operating experience at successful startups like Flipkart is making investors bullish.
At the same time the return of New York-based Tiger Global Management, which has closed over 20 new mid to late-stage investments in India already this year, a pace even more aggressive than its record spree 2014-15. Perhaps the most influential investor in India internet, Tiger Global had stopped backing new companies in after leading 18 new investments during a month period during 2014-15 as it waited for larger bets on Flipkart and Ola to pay off.
Several other firms actively investing in larger rounds include hedge funds like Stead view Capital, investment bank Goldman Sachs and US-based fintech focused investor Ribbit Capital, among others.
In such an environment, entrepreneurs have been able to raise capital on their own terms, with investors actively chasing them.
“Our investors were on-board with the fund-raise we had in mind even though we were getting double the money needed for the business plan for the next 12-18 months,” said Abhimanyu Saxena, co-founder, Interviewbit Academy. Saxena’s Pune-based startup offers income-sharing agreement (ISA) – based re-skilling courses to fresher’s and engineering graduates, who only pay the fee after landing a job. His company is in the final stages of closing a $20 million financing from Sequoia Capital and Tiger Global. Interview bit is part of the first batch of startups selected in Surge, Sequoia’s new accelerator program.
But this influx of capital has also led to high cash burn in several sectors, led by online food delivery where Zomato and Swiggy are together said to be losing $60-80 million a month. Several other sectors where startups are aggressively spending money include digital media, online pharma delivery, and urban mobility, among others.
The increasing worry is that investors who don’t have permanent capital dedicated to venture capital in India, and like in 2014-15 they may take a pause if sentiment turns negative. In the US, the share price of several high cash burn consumer-facing businesses like ride-hailing major Uber and cycling startup Peleton have slipped below their issue price while those of software services companies like Zoom and Datadog with profitability in sight have done well.
This sentiment, where after the failed IPO of WeWork the valuation of private technology companies is increasingly under scrutiny, could have an impact in the coming months.
“Broadly in the market, there is more ‘risk-on’ attitude and bullishness compared to 8-10 months ago. The reason is the rapid adaption of the digital way of life is reflecting in the explosive growth in key metrics for many business models. However, given recent performances of tech IPO’s in the US could have some cautionary effect in a shorter-term when it comes to funding questionable business models,” said Pankaj Naik, co-head of technology at investment bank Avendus Capital, adding that he has not seen any immediate impact on investor sentiment right now.
Even as they urge caution, both Bajaj of Matrix and Naik of Avendus say the market is much deeper now in terms of breadth of startups able to attract a significant amount of capital, the maturity of the startup in terms of their financial metrics and even size of the opportunity as compared to 2014-15. For instance, new startups like Bounce, Vogo, Quickride, and Rapido have come up in urban mobility which was expected to be dominated by Ola and Uber. The same is true for other major sectors like online retail digital payments as well.
For now, the capital flow is expected to continue as long term India digital story continues to be attractive, but investors are likely to get more discerning and focus companies with better unit economics with a path to profitability. And even as startups continue to mop up a record amount of capital, investors said that at the same time they are starting conversations to reduce expenditure now and ensure that they can make the same amount of money last longer. This many feel could be good in the long run.
“Startups are bracing for a longer fundraising cycle and ensuring they are capitalized well for the next calendar year. In series B and onwards it is already becoming tougher and rounds are dragging, sometimes taking more than six months,” said Vinod Murali, managing partner at venture debt firm Alteria Capital.
Read More: Times of India