VCs tightening purse strings; startups may find difficult to raise funding in 2020

By: |
November 5, 2019 1:23 PM

Startup funding is likely to grow at a meagre 4 per cent YoY in 2020 as VCs would opt for increased scrutiny of startups with high valuations.

The startup funding will turn flat (at best) or slightly negative (at worst) by the end of 2020, said Forrester.

Startup funding is likely to grow at a meagre 4 per cent year-over-year in the calendar year 2020 as venture capital investors (VC) would opt for increased scrutiny of startups with high valuations, source of funds for new investors and fewer new businesses coming up in various markets. The startup funding “will turn flat (at best) or slightly negative (at worst) by the end of 2020. Let’s be clear — the bottom will not fall out of venture capital markets next year,” according to 2020 predictions for startup ecosystem by Forrester. The year that was marked by ‘turbulent ethics’, fewer new entrants, and smaller deal sizes, 2020 will be a year of moderation in most startup markets, it said.

Also read: MSMEs attract 85% industry credit in September; monthly growth turns positive for 1st time in FY20

While there is a spurt in seed-stage deals globally however with respect to dollar volume, which has usually driven by large and late-stage deals is down on an annual basis with a projected $2.8 billion gap in overall funding between Q3 2018 and Q3 2019, according to Crunchbase. Seed and angel investment grew from $4.12 billion in 4,995 deals in Q3 2018 to $3.58 billion in 4,958 deals till Q2 2019 and projected to grow to $4.44 billion in 5,875 deals in Q3 2019 globally. The average deal size for angel and seed deals stood at $1.40 million in Q2 2019 while late-stage deals averaged at $72.50 million during the said period.

With poor high-profile tech IPO of startups such as Uber, and Slack even as others including Airbnb and Postmates delayed their listing while WeWork IPO debacle pushing investors to raise ethical questions about operations of heavily funded startups with lack of proper structure and poor focus on profits, VCs are in no mood to continue with the growth-only strategy. “VCs made money in a way where one investor made money at the expense of the next one who is buying into the company. This had to stop at some point and IPO is that point,” Ashutosh Sharma, Vice President and Research Director, Forrester had told Financial Express Online. Indian startups raised $10.5 billion in 924 deals in 2018, marginally up from $10.4 billion in 1,141 deals, according to Tracxn data.

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