Why are start-ups getting less money?

Deal values for angel rounds have shrunk less sharply than for Series-A, Series-B, and Series-C round deals.

Angel investors seem more supportive of start-ups in India than venture capital firms. Funding at the seed stage has suffered less than the squeeze in funding at Series-A, B and C stages for start-ups.

An analysis of start-up funding, month-wise and series-wise, shows volume of deals at the seed-stage and angel rounds has not fallen as sharply as it has in Series-A, B and C rounds (see graph).

Deal volumes for seed stage deals in May 2016 were 15 per cent lower than those in May 2015; deal volumes were 56 per cent, 52 per cent and 42 per cent lesser for Series-A, Series-B, and Series-C deals, respectively, in May 2016.

Deal values for angel rounds have shrunk less sharply than for Series-A, Series-B, and Series-C round deals.

In the first six months of this calendar year, deal volumes in angel funding shrank 27 per cent compared to a drop of 60 per cent for Series-A, 39 per cent for Series-B and 65 per cent for Series-C investments.

Deal values for these fell 66 per cent, 43 per cent and 76 per cent, respectively, and fell 56 per cent for angel rounds.

What explains this is the deepening of the start-up ecosystem.

"Number of entrepreneurs of high calibre is increasing.

"Now, the country has a lot of people who have worked in large start-ups (many of whom are turning entrepreneurs),” says Anand Lunia, founder of venture capital firm India Quotient.

But, the valuations and round size have reduced.

A typical angel round is now Rs 1 crore, which was Rs 4-Rs 5 crore (Rs 40-50 million) last year.

Valuation of start-ups at the seed stage has come below Rs 6 crore, from Rs 12-Rs 15 crore last year.

Another reason is that angels have flocked to invest in large numbers, as some angel investors had succeeded last year.

“Last year has been a consistent addition in the number of individuals who have turned angel (investors).

"This has brought in greater liquidity (but smaller investments),” says Ravindra Krishnappa, an angel investor.

“These new angels are in a bit of a 'spray and pray' for now. They will mature up in nine-12 months,” adds Krishnappa.

Also, there are a lot of smaller funds, who have raised $10-25 million, that have come up in the past six months such as Unicorn, Ideaspring, and Axilor.

Investors say they are all going in for seed-stage deals rather than Series-A deals. Some of them become anchor investors, as they need to announce their first deals.

"In general, the Series-A crunch is major and this will hurt the investment sentiment harder than expected in the near term,” says Krishnappa.

“These things take time to percolate down. I am seeing more caution in seed stage funding also.

"As the Series-A funding crunch starts to percolate down, we will see more,” says entrepreneur Alok Mittal, formerly with venture capital firm Canaan Partners.

The image is used for representational purpose only. Photograph: Satish Bodas/Rediff.com