After hitting Rs 26,000 crore peak, VC investors may slow pace of deal-making on profit concerns
Venture capital investors poured $3.98 billion across 329 deals in the first nine months of 2015, data from financial research firm VCCEdge has showed.
While the flow of risk capital to entrepreneurs has surged from $2.39 billion in 2014, investors, driven thus far by the fear of not betting on the next Flipkart or Ola, are expected to slow down their frenetic pace of deal-making of the previous four quarters because of a lack of visibility on sustainable economics and profitability.
For hyper-local startups such as food and grocery delivery services that dominated seed and series-A fundraising in the first half of 2015, securing cheques of $15-20 million will likely become tougher, according to several investors and entrepreneurs ET spoke with.
“Founders are now focused on unit economics more than any time in the last 12 months, as that is the first thing they mention,” said the managing director of a US-based private equity firm, who declined to be identified as he was not authorised to speak with the media.
Venture capital investors poured $3.98 billion across 329 deals in the first nine months of 2015, show data from financial research firm VCCEdge. This excludes private equity fund-raising by large internet companies — Paytm, Flipkart, Quikr and Snapdeal — who have mobilised more than $2 billion this year.
Seed and angel investments also increased robustly, to 415 deals, between January and September this year from 320 deals in 2014. But this has narrowed the scope for angel-funded startups looking to raise money from a limited number of venture capital investors.
“Getting a lead investor to write a cheque in a round of over $15 million is becoming a proper slog for entrepreneurs,” because of the recent absence of hedge funds who previously filled this gap by quickly closing deals, said a venture capital investor, also requesting anonymity. “In the hyper-local space, expansion plans of companies are completely dependent on how much capital they can raise,” he said.
Slowdown in investments was evident in the quarter ended September 30 — venture capital investments dropped from 43 deals worth $604 million in July to 30 deals worth $255 million in September.
“The time frame for raising capital is no longer a few weeks as negotiations and deal closures are taking 4-6 months typically,” said Vinod Murali, managing director at venture debt provider Innoven Capital, which is seeing an increase in deal-flow from startups looking at longer fundraising cycles. “It is time for entrepreneurs to raise as much money as they can and not necessarily try to optimise round valuation.”
But large funding rounds continue to be raised, even if these are taking longer than before. Snapdeal, Paytm and Flipkart announced capital raises in the September quarter, and online taxi-hailing service Ola is expected to close a $500-million fund-raising round shortly.
“When we went to the market we were looking to raise $60-80 million, but ended up raising $100 million because of the valuation we got, and it seemed right to raise more,” said Ambareesh Murty, cofounder and chief executive of online furniture retailer Pepperfry.
Many entrepreneurs expect the funding slowdown to pinch hard in 4-6 months when large companies seek to raise more capital. “There is a general trend towards belt-tightening and an advocacy of caution but we haven’t changed our plans in terms of expansion and burn rates,” said Varun Dua, cofounder and chief executive of online insurance broker Coverfox, which raised Rs 75 crore in April.