Startups

Investor Outlook: Why Have India's Seed Stage Fundings Dropped

Seed stage funding has plummeted by 53% in the last year.
Investor Outlook: Why Have India's Seed Stage Fundings Dropped
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Former Staff, Entrepreneur India
3 min read
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As the startup ecosystem continues to foster in India, one would imagine that it has become easier to secure funds for ventures. However, the recent Nasscom report on startups released shows that seed stage funding has plummeted by 53% in the last year, a feat the organization labeled as a ‘Red Flag’ for the ecosystem.

“ Although there has been a rise in the overall funding ecosystem for startups in 2017, the decline in seed stage funding is a red flag for a country like India. If we don’t have those seed funds, the future of the startup ecosystem in India stands jeopardized,” said R Chandrashekhar, President Nasscom.

Taxation a Big Blockade

Additional data from Traxcn, shows that early-stage funding is in fact at a three-year low, with close to only half the ventures receiving funding across the board. More than VC funds, the numbers reflect a worrying trend of angel investors taking a step back when it comes to seed-stage funding.

In what is being termed as Angel Tax, many  startups have been sent notices under Section 56(2)(viib) of the Income Tax Act, 1961, titled income from other sources. It says that any excess consideration received by a company will be treated as its income if it issues shares to a resident at a price which exceeds the fair market value of the shares. The same does not apply if funding is received from VC funds, PE firms or a class of persons notified by the government.

The investors have also received similar notices under Section 68 of the Act that makes unexplained income liable to tax if the IT department is not satisfied with explanations regarding the source of funds. Despite the statement of intent to investment in a positive venture, the tax department  has in most cases concluded that the transactions are bogus or unexplained, and treated the entire investment amount as income.

Talking about how this tax is unfair to angel investors, Raman Roy, Chairman and MD, Nasscom, said, “Angel Tax is the chief cause for the dip in seed fundings. While we understand the government’s perspective to tax these investors in order to prevent money laundering, there has to be a way out in order for these smaller companies to survive.”

The Cautious Tone of Investors

While taxation is the chief cause for angel investors to be weary, the overall stagnation and overpopulation of startups in sectors like e-commerce, food delivery services and hyper-local deliveries have led funds and individual investors to be more cautious. The Nasscom report states that 35%  was the startup mortality rate per year as of 2017 in India. The Snapdeal saga combined with an overall slowdown in the growth of the e-commerce market has made investors take a step back when it comes to pouring in money, especially on capital intensive models.

 “Investors are more cautious now than they were a couple of years back, with the kind of investments they make,” said Vikram Gupta of IvyCap Ventures related to startup funding in India. “It’s not that sectors like e-commerce don’t have potential, but majority of the models in  the market, most of which sunk, were all part of the same block,” he added.  

On the other hand, unicorn funding took center stage this year, with a growth of 167% taking the funding of entire Indian start-up ecosystem (led by unicorns) to $6.4bn in H1-2017.

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