India’s mushrooming startup culture is strengthening the entrepreneur identity of the country. Every other day, more and more people are coming up with innovative ideas and starting their own ventures. But, when it comes to investment, investors have become cautious than ever before due to approach by Indian internet companies over valuation.
In the backdrop of frothy valuations made by internet companies, investors are becoming choosy in investments and are asking tough questions.
The venture capital (VC) investors aren’t really that excited about the internet companies as they were earlier. Now, they are asking questions on key business metrics, slowing bigticket deal-making in the sector.
"There is some slowdown in valuation but (that's) not questioning the fundamentals of these businesses," Vani Kola, partner at Kalaari Capital and an early investor in Snapdeal and Urban Ladder, told The Economic Times.
However, this depressed sentiment can affect the mindset of entrepreneurs, a situation VC investors can leverage to drive down valuations while closing early-stage deals quickly.
"A lot of entrepreneurs who were thinking that let me burn the series-A money on discounting and quickly raise series-B are now going to act smarter,"said Anand Lunia, founder of seed-stage VC firm India Quotient told.
"They will become more cautious, not negotiate much, take what deals that they can, and sit tighter on their funding, which is good," he added. Several Indian entrepreneurs have already raised capital this year to create a longer runway for themselves in an increasingly competitive market. Several investors said their portfolio companies have capital to operate for 18-24 months.
All this is unlikely to stifle availability of capital for early-stage deals, however, as venture capital firms including Accel Partners, SAIF Partners, Lightspeed Venture Partners, Nexus Venture Partners and Kalaari have raised or are raising new funds totaling more than $1.5 billion.
In last five to six months, several instances have been seen where internet companies and investors have disagreed over valuations, forcing companies to raise capital from their existing investors.
Even so, investments above $50 million have increased from two in 2013 and 12 in 2014 to 25 till July this year, according to startup analytics firm Tracxn. Total funding for venture capital-backed tech companies increased to $5.4 billion this year from $4.7 billion in all of 2014.
The abundance of capital has helped build businesses but without enough moats as it allowed companies-from e-tailing firms to food delivery and online classifieds startups-to lure customers with big discounts, masking the difference between real and artificial demand for a service and leading to questionable unit economics. Unit economics in India are worse than in many other global startup hubs, according to experts.
According to a recent report by Kotak Institutional Equities, gross merchandise value (GMV) per buyer is expected to increase from $140 now to $146 by 2020, as compared to average GMV of $1,092 for Chinese peers such as Alibaba in 2014.