Start-Up Founders Expect Weaker VC Funding Environment This Year

According to a report by venture debt firm InnoVen Capital, a majority of founders still put growth over profitability as an area of focus for 2020.
Start-Up Founders Expect Weaker VC Funding Environment This Year
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3 min read

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For the last few years, the Indian start-up ecosystem has well and truly been on a roll. From once being considered a risky affair, starting up and becoming an entrepreneur is now slowly being considered a viable and vibrant career choice in the country.

A large part of this change has come from runaway successes like Flipkart, with money managers quickly taking note of the bountiful opportunities that lie within this massively diverse and gap-filled market. The last few years especially has seen venture capital coming in thick and fast into the system, as both domestic and foreign investors looking to cash in with the hopes of eventually cashing out big. According to a recent report by venture debt firm InnoVen Capital, however, founders expect the environment to be tougher in 2020.

In its 5th start-up outlook report, which saw the participation of close to 100 leaders, the firm found that 58 per cent of founders expect fund-raising to be more challenging this year. For 75 per cent of them, the experience was favorable in 2019, an improvement from the 74 per cent recorded in 2018.

66 per cent of founders said the valuation offered in their last funding round met expectations while it was below expectations for 29 per cent.

When it comes to choosing investors for their respective start-ups, founders chose strength of institution brand (22 per cent) and strategic fit (23 per cent) as the most important factors. Apart from local venture capital, private equity firms have emerged as the preferred choice for funding with 44 per cent choosing PE over Chinese and Japanese funds (42 per cent). Last year, 55 per cent had opted for the latter.

Growth Versus Profitability

One of the major areas of concern across the ecosystem have been startups who have raised massive amounts of money with possibly no clear path to ever turning a profit. The much-publicized fiasco around WeWork’s cancelled initial public offering last year also put a dark cloud over Indian start-ups with possibly inflated valuations.

The report found that the trend to focus on growth over profitability. 79 per cent chose the former as a larger focus area for the year, and while it was down from the 85 per cent from 2019, it is still a large increase from 2018 when it was just 56 per cent. Looking closer, one finds that the trend is largely the same irrespective of which stage the start-up is at. 

81 per cent of early stage start-ups chose growth over profitability while it was 73 per cent for growth-stage start-ups. For late stage companies, where one would typically expect a change, the numbers rose to 83 per cent.

According to 89 per cent, it would take them 2-4 years to achieve net profitability.

When it comes to exits, the choices are far more balanced. 30 per cent said merger or acquisition was the most likely option followed closely by an initial public offering in India (26 per cent) or a secondary sale (27 per cent). 16 per cent also went with an off-shore IPO.

For 65 per cent of the founders, the expected timeline of exit is 3-5 years.

Hiring Talent

75 per cent of start-ups expect to hire more in 2020 over last year with those in enterprise technology and fintech space being the most bullish. Content/media and e-commerce follow close behind.

Compared to Mumbai and the National Capital Region, more start-ups in Bengaluru expect hiring to be significantly higher versus 2019.

Hiring good talent was also seen as the biggest challenge for start-ups this year, with 25 per cent option for it. Enhancing the leadership and management teams was seen as the second biggest business priority for the next 12 months after fundraising.

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