Startup

As Early-Stage Deals Dip, Startups are Gearing Up for Winter Funding

The number of seed-stage deals dropped sequentially by 29 percent in Jan-Mar, while the number of early-stage deals dropped by 30 percent. The biggest impact was the early-stage funding levels, dropping by about 40 percent to $534.48 million in January-Mar.

Investors and entrepreneurs in India’s startup ecosystem are planning for a winter funding in 2020-21, as suggested by the seed slump and early-stage funding—considered crucial to startups—in the March portion.

In particular, in the consumer Internet market, the COVID-19 pandemic has threatened start-up valuations. A change in consumer consumption trend due to the nationwide lockout, coupled with limited partners (LPs) making their fund allocations cautious, would hit early-stage funding in the forthcoming quarters, said, investors and industry experts.

In India, the number of seed-stage deals dropped sequentially by 29 percent in the March period, while the number of early-stage deals (Series A and B) declined by about 30 percent, according to data from Tracxn, an investment monitoring website.

Early-stage funding volumes took the biggest hit in the reporting period, falling from $890.62 million in Q3FY20 by around 40 percent to $534.48 million.

The number of seed-stage deals also dropped from $108 million in Q3FY20 to around $84.62 million in Q4FY20, down 22 percent.

Seed-stage funding volumes have declined by around 24.2 percent relative to the fourth quarter of the previous fiscal year (Q4FY19), although early-stage volumes have declined by around 18.5 percent.

Nonetheless, FY20’s overall amount of deals (early, seed, and late-stage) grew by 18 percent to $14.15 billion compared to $11.9 billion in FY19. Tracxn data also showed that in FY20, the number of deals in India’s startup ecosystem dropped by 14 percent to around 1,175 deals.

Though the overall funding volumes increased in FY20, primarily driven by unicorn companies and late-stage firms, early-stage deals are expected to take a significant haircut in the upcoming quarters.

“In the next quarter, seed and early-stage funding will decline by 70-80 percent. Very few small funds and early-stage funds in the country today are capable of honouring already-fixed term sheets. There will be some refreshing papers, delay in cash disbursements and a relook at valuations,” said Anand Lunia, founding partner of India Quotient early-stage fund.

He added that because LPs have no visibility of easing the national lockout, and in particular because of the losses they have suffered in the public markets, they are adjusting the allocation of funds in private equity markets.

“Most LPs have specific allocations of their funds between options available on the public and private markets. And if public-market returns fall drastically, they would immediately their allocation to private-equity funds. Even if their equity portions continue to produce reduced returns, then they will reduce the allocation of funds in debt options,” Lunia added.

Many investors, however, point out that in 2008 and 2009 the tech sector, including the startup ecosystem, had experienced a similar crisis. Most investors in the early and late-stage made respectable returns from their investments, which were financed during that time.

“About nine companies, including major names like Zomato, Dream11, Druva, Paperboat, Practo, PolicyBazaar, Capillary Technologies, and many others who launched their businesses during or just after the 2008 and 2009 economic crisis, have crossed billions of dollars worth of valuations. These companies’ early investors made an excellent return on their investments

He added that because in the last economic downturn, both founders and investors were wary, most of the deals went through further scrutiny. “It was then negotiated a better price and value (2008-09), and I expect that to be replicated in the current scenario.”

One thought on “As Early-Stage Deals Dip, Startups are Gearing Up for Winter Funding

  1. Interesting to read that Zomato, Dream11, Druva, Paperboat, Practo, PolicyBazaar, Capillary Technologies, and many others who launched their businesses during or just after the 2008 and 2009 economic crisis, have crossed billions of dollars worth of valuations. These companies’ early investors made an excellent return on their investments.

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