Indians Founded Fewer Startups In 2019 As Funding Slows

The number of startups registered in 2019 fell by over a third compared with the previous year, in step with a decline in angel and seed funding, according to data analytics firm Tracxn. In 2019, about 4,543 startups were founded, down from 7,711 in the year before that. In 2017, about 8,000 startups were registered.

“The last three years have shown that entrepreneurship is exciting, but it is hard,” Vinod Murali, managing partner and co-founder of Alteria Capital, a venture debt fund, told BloombergQuint over the phone. “It isn’t easy to raise funds the way it was in 2015-16, where entrepreneurs would raise money on power point presentations.”

According to Anirudh Damani, managing partner at Artha India Ventures, an early-stage investment firm, a gradual decline in angel investing in India has led to entrepreneurs being cautious about taking the leap as small inexperienced angels are out after the funding frenzy in the 2015-16 period. “When the companies are not getting initial firepower, people will be hesitant to leave their 9-5 job.”

This is evident by the fall in deal volumes last year, which tumbled from 1,264 in 2018 to about 985 in 2019. Early-stage funding—especially angel and seed—saw the worst crunch as the number of deals fell sharply.

To be sure, the of deals has increased in the last five years, indicating some startups have been able to get bigger cheques in early-stage funding.

The average of deal for angel funding is up by 32 percent since 2015, while for seed funding it’s up 27 percent, according to Tracxn data.

Investors BloombergQuint spoke to suggested that the shift hints at the maturing of the startup ecosystem where the quality of companies has improved. “Investors today have become a lot more careful and diligent about startups they want to back, as the ecosystem has also widened,” said Ankur Bisen, senior vice-president–retail and consumer products at Technopak.

Bisen, however, cautioned the fall in the number of new startups isn’t a good thing. “We definitely need more startups as there are enough problems to be solved.”

But this may be a blessing in disguise for new startups. “Investors and entrepreneurs have started to talk about profitability and scale together as against separately, and are moving towards more businesses where scale can be achieved,” Ankur Pahwa, who leads EY India’s e-commerce and consumer internet space, said.

According to Ben Mathias, managing partner at Vertex Venture Holdings Ltd., an early-stage venture capital firm backed by Singapore’s Temasek Holdings, this also means that the capital is getting allocated to only the best companies. “Less startups are getting funded and the high-quality founders are able to raise larger rounds which give them more runway,” he said. “It’s a sign of maturity.”

Slowdown Blues

The ongoing economic slowdown is only adding to the pain when it comes to angel investing, according to investors.

Funding from discretionary angels, who make smaller bets in their individual capacity, has dried up due to the slowdown and a drought in smallcap and mid caps, Damani said. “So this additional capital which could have aided upcoming ventures at a time when institutional ones have become more cautious, is also gone.”

Padmaja Ruparel, co-founder of Indian Angel Network, said if the economy does well, we will see more number of companies signing cheques. “If the cash in the system goes down, then only the structured ones would invest.”