Here’s why structured investment platforms are the need of the hour for ailing Indian startups

Indian startups are facing a tough time and entrepreneurs are finding it hard to secure investments. Several startups had to fold up their operations due to lack of funds. Almost 30 startups funded by either angel investors or VC firms have, reportedly, closed down since the turn of the year, while around 11 ventures had to shut shops within just two months.

High cash burn rate and failure to secure more funds have been the most prominent reasons quoted by these startups for discontinuing operations.

The investment numbers seem to corroborate with the slowdown in funding. The total funding into Indian tech startups for the first half of 2016 was around $2.1 billion, a decline of nearly 40 percent from $3.5 billion when compared to 2015.

Moreover, according to a joint study conducted by KPMG and CB Insights, the total amount of funds injected into the country’s start-ups has decreased by a steady 24 percent per quarter since Q3 2015.

Industry experts have attributed this decline to the decreasing investor confidence in the Indian startup ecosystem, which seems to be in hot water owing to faulty unit economics and unsustainable business models followed by many ventures.

While there is a tangible decrease in startup investments in terms of the total value of deals, the number of deals conducted has gone up substantially since the turn of the year.

Indian ventures closed 307 investments in Q1 2016, marking an increase of 108% over the number of deals completed in Q1 2015. So if the number of investment deals is increasing, why is there such a sharp decline in the overall funding amount?

This apparently baffling trend is not as mystifying as it seems, especially when considered that the same timeframe has also seen a sharp rise in angel and seed investments in India. Startups across the country have raised nearly Rs 113.6 crore in angel investments through 69 deals so far in 2016. The value of angel investments has grown by about 62% over the previous year, while the deal volume has also demonstrated a concomitant growth of 47%.

A major part of this growth is due to an increased involvement of the country’s HNI segment as angel investors to start-ups. Indian tech ventures, owing to their potential and disruptive impact, have emerged as a highly viable asset class for investments. Several initiatives, such as ‘Start Up India, Stand Up India’, rolled out by central and state governments to foster entrepreneurship in the country have also made investments into upcoming ventures more attractive for potential investors. This has resulted in nearly 100 percent growth in the number of private investors and investment firms operational in the country over the past one year, thereby giving a massive boost to the Indian early-stage investment landscape.

However, despite the growth witnessed by early-stage investments, several fast-growing start-ups often struggle to secure VC funding needed to unlock the next phase of their growth. This is mostly because start-ups don’t realise that greater amounts of risk capital involved makes VC funding a completely different ballgame from an angel or seed investment. Moreover, with the market renewing its focus on profitability and sustainable unit economics in lieu of hyper growth, traction and aggressive scale, most venture capital firms are now raising the bar of what it takes for start-ups to secure funds. This, in addition to the negligible help available to guide start-ups about VC investments, causes most ventures to find the transition tough.

This is what makes the rise in the number of structured investment platforms, such as Venture Catalysts, in the country good news for the Indian entrepreneurial community. By focussing on innovation and technology, these platforms have been providing highly personalised, end-to-end solutions to various issues faced by emerging start-ups across the country. Be it investments, access to mentorship, or better networking and business opportunities, new-age ventures have been benefitting from the advent of such start-up enablers, growth facilitators and innovation platforms.

The writing on the wall is clear: investors, be it at early-stage or VC, are increasingly averse to make heavy capital investments into overvalued ventures. In such a measured funding environment, start-ups which focus on sustainable growth, robust unit economics and profitability are the ones who will eventually emerge as winners with investors.

(The article is authored by Dr Apoorv Ranjan Sharma, Co-Founder & President, Venture Catalysts)

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