Winter is Here From a Funding Perspective… and Will Continue The last ten years have seen three mini cycles of waxing and waning of investor sentiment.
By Vinod Murali
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It feels like we are awaiting the next season of Games of Thrones in the Indian start-up world as well. It is quite clear that winter is here from a funding perspective and the question in most minds is how long will it last? The last ten years have seen three mini cycles of waxing and waning of investor sentiment. This
has been surrounded by a constant strengthening of the entrepreneurship ecosystem where every time a bearish run is encountered, the system resets to a new normal.
The quality of businesses and the level of competency, awareness and maturity of entrepreneurs has been trending upwards and to the right (like all good projection charts!). It helps to have numerous evangelists but the surfeit of start-up networking events at some level become a distraction. However, the fact that this has become a livelihood opportunity is also evident of the underlying strength of our fledgling start-up ecosystem.
Opportunities Come From All Directions
2016 was a year where large funding rounds vanished from the horizon and valuations are clearly under pressure. This was also the year when folks questioned why start-ups talk more about their funding rounds than anything else. I feel it's important to raise good chunks of capital and ideally a little bit more than what the business demands. Opportunities come from all directions when founders execute on hyper-growth pursuits so the least desirable situation is to be constrained on capital. The challenge is to find the balance between what is necessary and giving away most part of your company to financial investors. As to publicizing funding rounds, it helps in establishing some brand credibility which could have a positive ripple effect on hiring as well as comfort for clients especially for B2B businesses.
More Capital in the Series C/D Threshold
2017 looks like it will be an investor's market, for most part of the year. It is hard to see a scenario where funding rounds are consummated under six months, even when it is not a Vinod Murali, Managing Director, InnoVen Capital India cold start. The expansion of fund sizes as witnessed recently with Sequoia, Nexus, Accel, Matrix and Kalaari are indicative of the reality that many of these early stage investors see the necessity to be able to fund through, all the way to a successful outcome.
The best companies of their portfolio should have constant access to capital to ensure they are firing on all cylinders. Seed investors are stepping up all the way to Series B rounds and the VCs are gearing up for their growth capital avatar. Hopefully, India will see more supply of capital in the Series C/D threshold where companies are not yet profitable but have robust unit economics and growth potential. This is still not ready for PE interest but astute founders have realized that the path to long term growth is to demonstrate a short term track to profitability. As companies grow, they need to ensure there is a tangible profitable neighborhood whilst investment into growth continues in other segments.
AI/AR/VR Might Breakout in 2017
Lots of buzzwords like AI/AR/VR filter through many discussions these days but there have not been too many companies with a strong value proposition but hopefully 2017 is the breakout year for these segments. Education is still a reasonably under penetrated segment while healthcare technology/services continues to be interesting, given the massive opportunity and execution
challenges.
There is a lot more love for SaaS wherein the gestation period required to build good products is now being balanced with the fact that revenues are more predictable and sustainable with controllable burn. SME financing as well as aggregation or buying clubs are also segments seeing more interest as there is a large and fragmented market but the underwriting and working capital challenges need to be managed to build out a long term proposition. It feels like we are at the end of the third day in a typical test match where most of the spadework has been done.
(This article was first published in the February issue of Entrepreneur Magazine. To subscribe, click here)
