Editorial: No free lunches from VCs

By: |
January 21, 2016 1:02 AM

As Q4 funding halves, important lessons for start-ups.

At a time when the government is looking to kick-start entrepreneurship under the aegis of Startup India, venture capital (VC) funding globally has been gradually slowing down. 2015 has been a good year as VC-backed companies raised over $128.5 billion worldwide across 7,872 deals, a 44% increase over the $89.4 billion raised in 2014, according to Venture Pulse, brought out by global consultancy KPMG along with CB Insights. During the year, 71 companies globally achieved Unicorn status (valuation of $1billion) compared to 53 in 2014. That’s where the good news ends. After two strong quarters in 2015, investors are becoming cautious. VC investment globally dropped from $38.7 billion (Q3 2015) to $27.2 billion (Q4 2015). The big fall was in Asia, from $14.2 billion (Q3 2015) to $9.7 billion (Q4 2015). As the global economy hits uncertain terrain, VCs are taking a less bullish view. Add in the freeze in the second-largest economy China and expected interest rate increases following the US Fed, and investors are becoming all the more cautious.

While Q3 2015 saw multiple $1-billion rounds, funding in China fell 29%, to $7.2 billion, in Q4 2015 because of economic uncertainty in the region. In India, as prominent investors expressed concern over overheating in the VC ecosystem, deals fell 18% and funding 46% in Q4 2015 versus the previous quarter as VC-backed start-ups raised $1.5 billion on 114 deals. Yet, there is a stark difference between VC investment in China and India. While VCs invested $7.86 billion in Indian companies during the year, it was almost four times higher, at $ 27.365 billion, in Chinese companies. The biggest deal in India—OlaCabs raised $300 million—is minute compared to the $2.8 billion raised by China Internet Plus Holdings. Among cities, $5.3 billion was raised in Shanghai (23 deals) while Mumbai raised $631 million (24 deals). The dramatic fall in funding in the fourth quarter, of course, has to be interpreted cautiously. It doesn’t mean the start-up story is over, it just means VCs are beginning to evaluate business models more carefully—50% discounts to get customers doesn’t look as great a strategy as it looked even a year ago. According to data collected by Tracxn for The Times of India, the last quarter of 2015 saw a drop of 50% in the number of series-B rounds and an 80% fall in series-C rounds from the previous three months. That also explains the casualties being seen in the start-up space in recent months with

TinyOwl and Spoonjoy discontinuing services and other firms pulling back from smaller cities. A rubber-meets-road situation for startups, in a sense.

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