After demonstrating scale, growth and financial improvement, one founder of a two-year-old agritech startup based in India told me that he’s now confronting a new challenge: Unlike his peers in edtech, fintech or e-commerce, there are very few investors he could approach for raising funds, he told TechCrunch, requesting anonymity. He suggested that a startup of a similar scale solving a similar problem would have little issue raising more than $50 million. But for his startup, seeking a $10 million financing round has proven very elusive in recent quarters, he said.
The story of this startup counters the narrative that fundraising for Indian startups has become easier than ever and that young firms have access to abundant capital from the market. India’s startup ecosystem raised about $14.5 billion in fundraises last year, beating its previous best of $10.6 billion in 2018, according to research firm Tracxn. But a closer look reveals that much of the capital went to a handful of late-stage startups, a trend that continues today.
In the first half of 2020, early-stage startups participated in 577 rounds to secure $1.84 billion, Tracxn told TechCrunch. That figure is the lowest the Indian startup ecosystem has seen in years. In the second half of last year, early-stage startups participated in 752 rounds to raise $3.03 billion, and in the first half of 2019, they raised $2.7 billion from 856 rounds. Series A and Series B startups are not immune to this trend either: In Q1 and Q2 2020, these startups raised $1.55 billion from 186 rounds, down from $2.69 billion from 254 rounds in the second half of last year and $2.37 billion from 279 rounds in the first half of last year, according to Tracxn. Once again, the first half of 2020 was the slowest in years for this segment.
Extra Crunch spoke with several VCs to understand how they were tackling this gap. We granted some of them the freedom to speak anonymously. At TechCrunch Disrupt 2020, Karthik Reddy, co-founder of Blume Ventures, India’s largest VC firm, acknowledged the gap, adding that, “There’s an artificial skew toward unicorns and chasing the unicorns.”
As soon as a startup raises $100 million or more, several VCs tend to focus on it instead of early-stage firms, he said. “The funnel for funding across categories has sharpened over the years.” But Reddy said he is hopeful that the market dynamics will change. Unlike in the past, several VC firms in India and mature startup founders are beginning to back young firms. “Ten years ago, you could have counted such funding sources with one hand.”
Reddy pointed out that several VC firms in India that previously wrote Series A or B checks are increasingly showing interest in coming in early and even putting capital in a startup’s seed round. One example of it is Bangalore-headquartered epiFi. The startup, co-founded by former Google Pay executives, raised $13.2 million in its seed financing round in January this year. The round was led by Sequoia India and Ribbit Capital, two firms traditionally focused on later-stage dealmaking.
On Tuesday, a two-month-old startup called Uni attracted $18.5 million in a Seed round led by Lightspeed Partners and Accel.
Sequoia Capital, Accel and Lightspeed Partners are among several other firms that have launched dedicated programs or funds to back months-old startups in India in recent quarters. Last year, Sequoia Capital launched an accelerator program called Surge for early-stage startups. Since then, about 50 startups have participated, which some analysts and partners told TechCrunch has reduced Y Combinator’s appeal in the region. Accel recently launched SeedToScale, a platform that curates insights from partners and startup founders and facilitates conversations between different industry players. In an interview with TechCrunch, Anand Daniel, a partner at Accel in India, said not being able to identify the right resources is one of the obstacles young startups face in India, and SeedToScale is aimed at addressing it.
If their efforts succeed, they stand to benefit immensely. If some of these firms come in early enough into a startup’s fundraising journey, they are able to get a much larger stake at a fraction of the cost, said Rohan Malhotra, co-founder and partner at Good Capital. As the world moves to cut its reliance on China, India has also become a bigger play for VC firms, so it’s natural that many established firms are getting more aggressive in India, he said. But when these firms back a startup’s seed round and don’t participate in their Series A or Series B, that makes it more difficult for that startup to raise money later on by signaling that something is off with the startup’s growth.
One venture capitalist who spoke on the condition of anonymity, moreover argued that the funding capital calculations from firms such as Tracxn, though accurate based on public information, are not really representative of ground truth. They said only a third of seed investments get announced in India these days as a growing number of startups are preferring to work in stealth mode for longer and they only announce these developments when they have progressed to Series A or Series B deals.
But there is possibly one more explanation why young firms are receiving less capital today. Another VC who wished to speak on background said venture capital firms are more cautious than ever about who they back. “A few years ago, everyone in India was trying to replicate Amazon and Flipkart and building e-commerce services. We have come a long way and are seeing some very original ideas from the founders. But unfortunately, when you see so many new ideas, especially those that have not been deployed elsewhere, the risk factor goes off the roof. You can only pick so many battles from your existing funds,” they said. And at a time of uncertainty that the coronavirus pandemic has created in India, one of the worst-hit nations by the virus, very few are willing to take risks, they added.
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