A worker sits at a desk and uses a laptop computer inside a startup tech hub (Photographer: Krisztian Bocsi/Bloomberg)

Investments into Startups Fall as Venture Capital Investors Take a Caution-First Approach

Venture capital investors are turning cautious and that might mean tough times for Indian startups that have gotten used to easy and frequent doses of capital.

Investments into venture capital-backed companies in India dropped 75 percent in the April to June quarter, compared to the same period last year, according to KMPG International and CB Insights’ quarterly report ‘Venture Pulse’. Investments fell to $583 million compared to $2.3 billion last year, due to a dearth of mega-rounds and “wary investors”, the report said. This is now the fourth straight quarter of decline. The number of funding deals also dropped to 111 from 146.

Investments into Startups Fall as Venture Capital Investors Take a Caution-First Approach

A Change In Mindset

“The interest is still there but the investor’s mindset has changed. They are a lot more cautious now”, Sreedhar Prasad, the partner in charge of e-commerce and startups at KPMG India, told BloombergQuint in a phone interview.

From 2014 to 2015, it was like a shopping spree for investors ...there were a lot of investments during that period. But a lot of these investors burnt their fingers with investments failing and companies scaling down. 
Sreedhar Prasad, Partner - E-Commerce and Startups, KPMG India

A Slow and Steady Approach

Having burnt their fingers, investors are now conducting deeper scrutiny of business models and their longevity, leading to longer deal cycles, Prasad added.

Earlier decisions would be made far quicker. Now, investors are spending more time and effort, which is reducing the initial impulse driven decisions. If things go the way they are, a very good business cycle will develop with fewer businesses failing and investments will become more rewarding.
Sreedhar Prasad, Partner - E-Commerce and Startups, KPMG India

Startups, however, will bear the brunt of this change. A longer deal cycle will pose problems for startups that survive on frequent funding deals, he explained.

Case for Optimism

But it is not all gloomy for Indian entrepreneurs. The report asserts that the outlook remains optimistic thanks to increasing interest in online ventures in healthcare, financial services, consumer goods, and e-commerce businesses.

We see increasing interest in the online business for financial services products, healthcare, consumer goods and specialised verticals in e-commerce. Uniqueness of the business proposition and multiple revenue streams from the same product/platform are of higher interest today.
Sreedhar Prasad, Partner - E-Commerce and Startups, KPMG India

Fintech startups, which may include everything from an online banking service, an e-wallet, or even a brokerage firm like ‘Sharekhan’, are generating a lot of interest in the market, he observed.

Another positive trend is that a new class of investors are emerging and showing interest in startups. Family houses and investment arms of Indian business giants are actively showing interest in the startup space adjacent to their core businesses, Prasad pointed out.

Investment Magnets

Oyo Rooms, the hotel room aggregator, raised $100 million from venture capital funds, making it the top ranked deal of the April to June period, according to the KPMG-CB Insights report. This was a series D funding for Oyo, which has earlier raised funds from marquee investors including Softbank Group.

Investments into Startups Fall as Venture Capital Investors Take a Caution-First Approach

MobiKwik, a digital wallet provider, came second with a $50 million funding round, followed by Lendingkart, which bagged a $32 million investment from multiple investors.

Investments into Startups Fall as Venture Capital Investors Take a Caution-First Approach

Bangalore, Mumbai and New Delhi ranked as the top three cities and the most active hubs for young ventures, according to the report.