A drop in Series A round of investments for startups in 2016 will likely help bring the focus back on business fundamentals, said panellists at the Delhi edition of TechCircle Startup 2016.
During a panel discussion on what the decline in Series A deals means, the participants said also that 2015 was an “abnormal” year in terms of funding for startups and that both entrepreneurs and investors will now focus on building a business.
“The year 2015 was abnormal. There was a bit too much focus on funding and that has been the focus for a while, but the truth is the focus should be on fundamentals,” said Pankaj Jain, partner at 500 Startups, a fund which struck around two dozen deals last year.
The number of Series A deals fell to 82 in January-July 2016 from 168 a year earlier. Likewise, the total amount of funds deployed slid to $260.38 million from $622.73 million in the stipulated period, according to VCCEdge, the data research platform of VCCircle.
Rentomojo co-founder Geetansh Bamania, however, said that although the ticket size of Series A deals had fallen, the number of deals hadn’t. He added that a company’s valuation was earlier pegged on market opportunity but now it is pegged on revenue and profitability.
Gaurav Sachdeva, managing partner at JSW Ventures, who was acting as the moderator, asked whether the change in Series A deal dynamics hinted at changing expectations from investors. To this, Manish Kheterpal, managing partner, WaterBridge Ventures, replied, “We have a classic problem of looking at the macro [situation] and that gives us a little flawed picture. Last year was not normal for sure. However, we are back to basics and the market now is focussing on the right things. Cashbacks and discounts are out and investors are betting on business.”
Jain of 500 Startups concurred with Kheterpal. “Most investors are looking for business, and they should be,” he said. Business is the basic, and not funding and valuations, he added.
Kraftly’s chief financial officer, Ankit Sood, said that there’s no shortage of funds in the market if a company can justify its business with data.
Bridge rounds, new angels
Lately, several startups have started raising bridge rounds of funding. There may have been a drop in the number of Series A deals and size of deals, but bridge rounds are the saving grace for startups. The participants discussed how this trend reflects on the startup ecosystem.
“Bridge round is common in developed markets and in matured startup ecosystem. The market in India is evolving and a ‘classic bridge’ makes a lot of sense. There’s lot of gap between angel, seed, friends and family, and institutional Series A. A classic bridge plays an important role,” Kheterpal said.
The participants also talked about how angel investors have kept the momentum going. Nearly three-fourths of the angel investors are non-institutional and the country is seeing the emergence of a new breed of angel investors, they said.
Kheterpal warned startups on choosing the right investor. “Money has colours, it’s not about dollar or rupees, but who are you getting it from. It becomes extremely critical whom are you getting your money from. Institutional capital is important as it adds a lot of value,” he said.
Jain said that angels continue to invest because there are good opportunities in the market. “Many angels exit in the second round itself, so they have seen money coming into their pocket,” he said.
Most investors and entrepreneurs showed their concern over Series B rounds, rather than Series A. According to Jain: “Series B is a concern. We have less investors in India in this segment. There is a large gap which needs to be filled.”
Some investors were quite vocal about their thoughts. Jain, for instance, said he is least interested in ideas. “I really don’t care about ideas. Ideas don’t work, execution works. And, if you can turn the idea you will quickly raise the Series A.”
While summing up, the panellists talked about some good things that have started happening in the Indian startup ecosystem. The quality of conversations has improved compared to last year and entrepreneurs are focussing on the right things, they said. And this is good news.
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