Early and mid-stage companies will find it challenging because they seek new investors outside India coming on the cap table in cases where local investors invest up to $15-20 million.
Majority of startup founders in 2020 see the fundraising environment to be challenging given the global investors have sort of reset their due diligence process in backing startups following how large tech IPOs like Uber performed at the stock exchanges coupled with the WeWork IPO debacle and of course the recent outbreak of the deadly Coronavirus that is slowing down decision making. According to an annual report by the venture debt firm InnoVen Capital, 58 per cent of around 100 startup founders and senior leaders believed it would be tough to raise capital this year.
Importantly, in comparison to 55 per cent respondents eyeing Chinese and Japanese funds in 2019, this year the share has declined to 42 per cent seeking capital from investors in the two countries while another 44 per cent are targeting private equity investors outside China and Japan, according to the report titled India Startup Outlook Report 2020. “There will be a short to medium impact on funding due to Coronavirus that will start reflecting in a few months. Early and mid-stage companies will find it challenging because they seek new investors outside India coming on the cap table while local investors invest up to $15-20 million,” Arun Natarajan, Founder, Venture Intelligence told Financial Express Online.
While overall funding will be impacted to an extent irrespective where the fund is based but facing challenges in fundraising has to be seen from the context of whether these funds have a local presence in India to ensure the least disruption in the decision-making process. “Entrepreneurs take money from wherever available especially in this situation where funding in general and decision making is going to slow down. Chinese and Japanese investors like SoftBank, Rebright Partners have people in India empowered to make decisions and hence it doesn’t make much difference,” said Natarajan.
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The broader shift in the mindset of entrepreneurs from growth-led strategy to focusing on business efficiency and profitability is visible, again thanks to investors’ renewed investment strategies. 79 per cent of the founders surveyed agreed to make profits a priority instead of growth while 89 per cent founders believed their business could be profitable in two-four years. But instead of IPO, a majority 57 per cent founders expected M&A and secondary deals to be the most likely exit route this year. 65 per cent respondents said it would take another three-five years to give exit to their investors.