 "Choosy VCs keep start-ups on their toes")
As engineering students in 2008, Bangalore-based Shashank N D co-founded Practo Technologies, which offered clinic management software for doctors. Following a mentoring stint at Chandigarh-based start-up accelerator The Morpheus, the seed-funded start-up morphed into business-to-consumer portal Practo.com, helping patients scout for doctors.
These activities caught the attention of venture capital (VC) fund Sequoia Capital, which pumped in Rs 25 crore in December last year to fund Practo's expansion plans in India and abroad.
However, Practo's case is a rarity today. Unlike two to three years ago, an increasing number of start-ups are knocking on the doors of early-stage VCs for a round of funding, looking to shift from seed stage to venture stage. Anecdotal evidence suggests VCs have tightened purse strings, raised the performance bar and set steeper achievement milestones, before committing money. A recent Canaan Partners dipstick survey of the top 20 start-up accelerators and incubators in India found just one in five start-ups recorded early-stage venture funding. While the weeding process starts early, from seed and angel financing stages, about half the start-ups have to opt for bridge finance by the existing pool of investors.
Sanjay D Nath, managing partner, Blume Ventures (an angel and seed venture fund), says now, most start-ups take longer to raise fresh VC funds. "The bar to get to the next stage of funding has been raised," he says. Start-ups say due-diligence time has taken a hit. Against two to three months 12-18 months ago, due-diligence now takes three to five months. Investment criteria, too, have become more stringent, focusing on customer traction and evidence of paying customers, before VCs move in. Many VC funds want the existing set of seed/angel investors to bridge-finance, before betting on businesses. For those not making the cut, the possibilities include scaling down operations, merging with competitors or shutting operations.
The start-up ecosystem in India is still falling into place. The changes in the early stage funding ecosystem, and the resultant fund crunch, are driven by a slew of demand-and-supply factors. Typically, the VC fund pool fluctuates, depending on macroeconomic factors; last year, it was pegged at $800-900 million. Through the last three to four years, the seed/angel fund pool for bootstrapping start-ups is estimated to have risen to about $100 million annually; the number of angel funds has risen about five times, from seven in 2006 to 32 in 2012. These funds have jumpstarted a slew of start-ups, largely in the technology, e-commerce and mobile services spaces.
Through the last two years, 35-odd incubators/accelerators have set up shop to mentor and aid start-ups. Funded by angel funds, many of these have come up with capacity to mentor 300-400 start-ups a year. And, an increasing number of start-ups emerging from these incubators/accelerators are scouting for fresh funds.
Exit options for VCs in India are limited. The merger and acquisition (M&A) space for early-stage start-ups is yet to evolve. In developed markets such as the US, technology companies such as Microsoft, Google and Yahoo! engage in M&A activities to reduce the time to market a product or service. "M&As help fast value-creation for big players, while offering an exit route for many seed/angel level investors," says Sateesh Andra, managing partner, Ventureast Tenet Fund, an incubation and seed stage venture capital fund. That piece of the exit puzzle is missing in India, he adds.
Shekhar Kirani, partner at VC fund Accel Partner, agrees. "There aren't enough high-quality exits for investors in India," he says. It took Justdial seventeen years to go for an initial public offering in the country, while MakeMyTrip went for a US listing in 2010. Given the softness in global economic indicators, the fund-raising environment among high net worth individuals and institutions doesn't inspire confidence, many VCs feel.
This makes businesses more capital-intensive and creates a need to infuse funds at regular intervals.
Rahul Khanna, managing director, Canaan Partners, feels it is important to reduce the time taken to shift from the seed/angel stage to the VC-stage. Most Indian start-ups take up to three years to reach the VC stage. In developed ecosystems such as Silicon Valley, the phase lasts 12-18 months, he says. Blume Ventures' Nath feels to bridge the gap, start-ups should improve their execution capabilities.
Most industry players say the fund crunch is unlikely to take the sheen off the start-up boom seen in the last three to four years. "It will only strengthen the ecosystem and start-ups would emerge stronger," says Practo's Shashank. The sooner start-ups realise businesses aren't built on money, but money only accelerates the business, the better would they tackle the crunch, he adds.
These activities caught the attention of venture capital (VC) fund Sequoia Capital, which pumped in Rs 25 crore in December last year to fund Practo's expansion plans in India and abroad.
However, Practo's case is a rarity today. Unlike two to three years ago, an increasing number of start-ups are knocking on the doors of early-stage VCs for a round of funding, looking to shift from seed stage to venture stage. Anecdotal evidence suggests VCs have tightened purse strings, raised the performance bar and set steeper achievement milestones, before committing money. A recent Canaan Partners dipstick survey of the top 20 start-up accelerators and incubators in India found just one in five start-ups recorded early-stage venture funding. While the weeding process starts early, from seed and angel financing stages, about half the start-ups have to opt for bridge finance by the existing pool of investors.
Sanjay D Nath, managing partner, Blume Ventures (an angel and seed venture fund), says now, most start-ups take longer to raise fresh VC funds. "The bar to get to the next stage of funding has been raised," he says. Start-ups say due-diligence time has taken a hit. Against two to three months 12-18 months ago, due-diligence now takes three to five months. Investment criteria, too, have become more stringent, focusing on customer traction and evidence of paying customers, before VCs move in. Many VC funds want the existing set of seed/angel investors to bridge-finance, before betting on businesses. For those not making the cut, the possibilities include scaling down operations, merging with competitors or shutting operations.
The start-up ecosystem in India is still falling into place. The changes in the early stage funding ecosystem, and the resultant fund crunch, are driven by a slew of demand-and-supply factors. Typically, the VC fund pool fluctuates, depending on macroeconomic factors; last year, it was pegged at $800-900 million. Through the last three to four years, the seed/angel fund pool for bootstrapping start-ups is estimated to have risen to about $100 million annually; the number of angel funds has risen about five times, from seven in 2006 to 32 in 2012. These funds have jumpstarted a slew of start-ups, largely in the technology, e-commerce and mobile services spaces.
Through the last two years, 35-odd incubators/accelerators have set up shop to mentor and aid start-ups. Funded by angel funds, many of these have come up with capacity to mentor 300-400 start-ups a year. And, an increasing number of start-ups emerging from these incubators/accelerators are scouting for fresh funds.
Exit options for VCs in India are limited. The merger and acquisition (M&A) space for early-stage start-ups is yet to evolve. In developed markets such as the US, technology companies such as Microsoft, Google and Yahoo! engage in M&A activities to reduce the time to market a product or service. "M&As help fast value-creation for big players, while offering an exit route for many seed/angel level investors," says Sateesh Andra, managing partner, Ventureast Tenet Fund, an incubation and seed stage venture capital fund. That piece of the exit puzzle is missing in India, he adds.
Shekhar Kirani, partner at VC fund Accel Partner, agrees. "There aren't enough high-quality exits for investors in India," he says. It took Justdial seventeen years to go for an initial public offering in the country, while MakeMyTrip went for a US listing in 2010. Given the softness in global economic indicators, the fund-raising environment among high net worth individuals and institutions doesn't inspire confidence, many VCs feel.
This makes businesses more capital-intensive and creates a need to infuse funds at regular intervals.
Rahul Khanna, managing director, Canaan Partners, feels it is important to reduce the time taken to shift from the seed/angel stage to the VC-stage. Most Indian start-ups take up to three years to reach the VC stage. In developed ecosystems such as Silicon Valley, the phase lasts 12-18 months, he says. Blume Ventures' Nath feels to bridge the gap, start-ups should improve their execution capabilities.
Most industry players say the fund crunch is unlikely to take the sheen off the start-up boom seen in the last three to four years. "It will only strengthen the ecosystem and start-ups would emerge stronger," says Practo's Shashank. The sooner start-ups realise businesses aren't built on money, but money only accelerates the business, the better would they tackle the crunch, he adds.