Why funding for early-stage start-ups are drying up

From $10 billion deployed in Indian start-ups in 2017, $6 billion went to unicorns

Start-up companies that valued at over $1 billion are gobbling up most of the capital that are flowing into the segment in India as cautious investors are seen chasing mature companies, leaving the leftover for early-stage firms.

Of the total $10 billion invested in 2017, the highest so far, only a meagre $206 million went to seed- and angle-stage deals, according to a new report by CB Insights, a top corporate data firm headquartered in the US.

The trend is no different in the ongoing calendar, going by a recent Nasscom report, when early or seed funding was just a mere of 3 per cent of around $4.3 billion funding the sector received in the nine-month period that ended September 2018.

“The difference between the country’s unicorns and the rest of its tech start-ups is only growing more obvious. Every surge in funding has been driven by these companies valued at $1B+,” said the CB Insights report.

“When funding hit an $8.7 billion peak in 2015, 47 per cent ($4.1 billion), went to tech unicorns.”

The trend is understandable given that large companies - majority of whom do not make money at the moment - need more capital to sustain.

Early-stage funding is usually in the bracket of $500,000 to $5 million, but the deals happen more frequently in this segment.

However, the total number of deals in 2017 were 19.3 per cent lower in 2017, compared with the previous year when the sector saw 974 deals, according to CB Insights.

The value of seed and angel-stage deals also dropped to $206 million from $283 million in 2016.

“What we are a little worried about is we are seeing a continuous decline in seed-stage funding.

"This is not a surprise given where India is as investors will be looking at the proven track records and more mature companies,” said Debjani Ghosh, president at industry body Nasscom.

“But I think this is where we have to think through what are the alternatives for seed stage (funding).

"I think this is where the government plays a role, something on the lines of Japan or China.

"If you start shutting the tap on seed stage, you’re going to kill innovation.

"This (seed stage) is where a lot of new ideas come up and a lot of risk taking happens, so you have to ensure that that segment gets adequate funding too,” Ghosh said.

From $10 billion deployed in Indian start-ups in 2017, $6 billion went to unicorns, including around $3 billion by Flipkart and Ola, India’s start-up poster boys.

Earlier this year, US retail giant Walmart acquired 77 per cent in Flipkart for $17 billion, including around $2 billion as fresh investment into the company.

In the late-stage segment, the industry is getting used to a new normal as deep-pocketed investors double down on India.

SoftBank Vision Fund, a $100 billion investment vehicle already led massive rounds - Ola, Oyo and Flipkart - and is now said to be closing the talks with food delivery major Swiggy.

Large funding announ­cement are also around the corner for tech firm Byju’s.

Photograph: Reuters