Behind India’s Startup Funding Frenzy
Blank coins. (Photographer: Waldo Swiegers/Bloomberg)

Behind India’s Startup Funding Frenzy

When Niraj Singh was looking to raise funds for his startup this year, he received funding offers for up to thrice the amount he required.

General Catalyst, which has backed used car platforms in the U.S. and Europe like Vroom and Carzoo, invested nearly $43 million in Spinny, a secondhand car platform founded by Singh. “This is definitely a one-of-its-kind funding boom that’s playing out in the ecosystem right now,” he told BloombergQuint over the phone, a day after the fundraising.

“We had offers to take the round to $120-150 million. While it’s tempting, we realised there was no need to raise more than we had planned,” he said. “We also wanted to onboard the right partners that not only bring in the capital but domain expertise as well.”

Singh isn’t alone. The Indian startup ecosystem is witnessing a funding frenzy, minting as many as six unicorns—or startups with a valuation of over $1 billion—over the course of a week earlier this month. And the money netted by Indian startups in the first three months of 2021 is a quarter of the total fundraise overall of 2020.

Seed, Growth Funding Boom

Seed-stage funding rose to $323 million by the end of 2020 —the most in the last six years, data shared by Venture Intelligence showed. The trend continued in the first half of the ongoing fiscal as $62 million was raised in 42 deals, with the average ticket size also at a six-year high of $1.47 million per transaction.

That frenzy seems to have trickled down to early-stage funding, too. The category is a barometer for newly founded startups getting funded. It faced a slowdown before the Covid-19 pandemic.

Early-stage funding, which includes seed to series A funding, rose to $296 million in the first half of the ongoing fiscal, the highest in the last five years, Venture Intelligence data showed.

“There is definitely a rise in deal flow,” Sanjay Nath, managing partner of early-stage VC-firm, Blume Ventures, said In India it’s never been a question of quantity, always quality. “The difference since 2020 is an increasing cohort of second-time founders and the availability of mentors and seasoned entrepreneurs that younger first-time founders can learn from.”

When Anirudh Damani, managing partner of Artha Venture fund, an early-stage micro-VC fund, was participating in a $2 million bridge round a month ago, the round became a Series-A round of $11 million amid a sudden influx of early-stage backers and angel investors. “We even had to scale back our commitment to accommodate others,” he said, adding it happened with three of his portfolios in 2021.

That comes as the Covid-19 pandemic accelerated the adoption of online technologies. Nearly 1,600 new startups were founded last year alone, taking the total count to over 12,500, according to a January report by Nasscom, the country’s technology industry trade body.

Akshay Chaturvedi, the founder of ed-tech startup LeverageEdu, which raised $6.5 million last month and is witnessing interest from investors for a follow-on round, said there’s a lot of pressure to deploy money in the ecosystem.

“Everybody wants to be a startup investor, but not a startup founder,” he said over the phone from his office in New Delhi, after a call with a U.S.-based venture capitalist.

The ecosystem is flush with funds, according to Credit Suisse, which said in a report “dry powder” by the end of 2020 globally stood at approximately $2.1 trillion as a result of record second-half fundraising and lower deal volumes.

Google has already committed $10 billion under its digitisation fund. Sequoia Capital last year announced $1.35 billion fund for India. Tiger Global, one of the most active series-A investors in the country, raised $6.65 billion for its global fund earlier this month.

Three events may have led to the present situation, the first of which was the pandemic.

“When Covid hit, the ecosystem was about to see a packed deal-making spree, which went into a toss when it led to a complete shutdown,” Vijay Sambamurthi, founder and managing partner of Lexygen, which specialises in advising VC/PE funds and startups, told BloombergQuint over the phone, adding the Covid-led bridge round started as the restrictions were eased.

And when restrictions were eased, there was a lot of pent-up funding demand, he said. “So, a lot of them started pickup up deal making in a kind of a rapid pace.”

The second factor was disruptions caused by the pandemic itself, which forced people to stay inside their homes and led to rapid rise in digital adoption in the world’s second-largest internet economy—be it in health, education or financial segments.

“Digital adoption has been a clear winner in the pandemic, that has made the use cases of so many models relevant. The huge stride startups made since Covid-19 have been a big attraction,” Damani of Artha Venture fund, said, adding a rush of initial public offerings by tech companies around the world and a line-up of IPOs in the home market has added to the sentiment that real exits are finally happening.

To be sure, companies like Zomato, Flipkart, Policy Bazaar, Nykaa, Freshworks and Delhivery are among those expected to go for initial share sales in the next 12-months.

Shift Away From China

An exodus from China also played a role. A global backlash against Asia’s largest economy, coupled with India’s tightening of investment guidelines from China and the country’s own clampdown on its internet behemoths like Alibaba spooked investors.

“What has happened to China is a big positive to India,” Nath of Blume Ventures said. “Growth investors and LPs are now viewing the scale of India in and of itself, with India no longer having the overhang of China comparisons per se, like earlier.”

The frenzy comes with red flags.

Chaturvedi of LeverageEdu said in the present environment, angel rounds are getting closed ten times faster than in normal conditions. “It took me 15-17 days to raise an angel round, today it can be done in 1.5-2 days,” he said, adding valuations have remained stable, unlike the 2015 boom.

The rush is such deals are being finalised at a faster pace. Damani said 10% of the time they’re forced to say no because due diligence—which usually takes 45 days—is getting expedited.

“$100 million is the new experimental cheque. $20 million is the new seed cheque. Funds are in rush to deploy. This boom is way-way bigger,” Anand Lunia, founding partner at India Quotient, said in a WhatsApp text response, adding some companies will raise a little more than they deserve, but many of them will survive.

While there is deal-making frenzy, I don’t think it’s a bubble yet, said Sambamurthi. “A bubble is when entrepreneurs starts to get greedy, and investors have FOMO (fear of missing out). Thankfully, that’s not seen yet.”

Utsav Somani, a partner at Silicon Valley-based Angellist, which allows individuals to raise angel rounds, said the entire drive has been driven by a liquidity boom. “The difference between last time is that there was crazy valuation where non-profitable, only burn-based models were getting backed and that led to artificial inflation.”

One of the key differences between the present boom and the last one, according to investors and founders BloombergQuint spoke with, is exits are happening this time.

Siddharth Ladsariya, an angel investor who has a portfolio of 130 startups, said he has received exit options from 20 startups this year alone. “This is indicative of a sign that there is more venture capital money available but less good opportunities. In 2015 we haven’t seen so many exits.”

Damani said the exit market is heated up. “Every third day there are secondary exits happening in the ecosystem.”

Spinny also completed a secondary transaction in its recent round in which some of its early-stage funds and angel investors exited. Dream 11’s parent raised $400 million in secondary funding in March.

Damani sums up the situation: “Today if you have proven your model then there is an unimaginable amount of money available, and mindless investment isn’t seen, yet.”

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