What Vc Offers Say About Indian Startup History, In Charts

Last month, research firm Tracxn published data on 1,139 investments of $5 million or more made by venture capital (VC) funds in Indian startups since 2010. In the Indian startup landscape, this is, in terms general, the upper end of investments and Business activity. In the wake of a heady 2021, a year that coined unicorns of Indian startups, as well as raising skepticism about their profitability and valuations, this $5 million dataset tells many stories. Here are five stories framed in the context of current narratives from the Indian startup ecosystem.

1. Venture wide

Over the last 12 years, the Indian venture capital industry has gone through multiple phases. The first was the growth phase between 2011 and 2015. Venture capital investments increased 13 times, driven by new venture capital backing themes that were successful in the US and China. Two years of moderation followed. In 2016, the capital dried up. In 2017, the number of operations fell by 75%. But funding skyrocketed, with big rounds going to fewer companies, notably Flipkart, Ola and Paytm.

The next two years saw a recovery, only to be hit hard by the pandemic in 2020. At the start of the pandemic, most startups were concerned with making the funds raised last longer. However, an excess of liquidity in the financial markets made 2021 a record year, both in the number of transactions and in the amount raised through deals of more than $5 million. India produced more unicorns than all previous years combined. In 2011, start-ups in 27 segments received financing. By 2021 this had expanded to 172 segments.

2. Bangalore leads

Bangalore-based start-ups have been the big draw, accounting for 37% of the 1,139 investment deals of $5 million or more and a 48% share of funds raised. Bengaluru is followed by Gurugram, Mumbai and Delhi. The National Capital Region, which encompasses Gurugram, Delhi and Noida, accounted for 27% of such deals. The last few years have seen two documented changes. One, more companies are being started at NCR than at Bangalore, as a recent Mint analysis showed. Two, new start-ups beyond Bangalore, NCR and Mumbai.

However, in this $5 million main set, Bengaluru retains its primacy. It has widened its lead over NCR, especially after 2020 when twice as many Bangalore startups closed a funding round above $5 million from Delhi. Mumbai continues behind Bengaluru and NCR. Startups in the remaining cities have won, closing as many funding rounds in the last two-and-a-half years as they did in the previous two five-year periods.

3. Age matters

There is an impression that this glut of venture capital money and opportunities to scale quickly has meant that the wait time for startups to receive funding has been significantly reduced. Not true for large funding rounds at the aggregate level. The gap between the average founding year and the first funding of more than $5 million has been stable at six years for the last three years. It had been oscillating between 4 and 5 years between 2010 and 2019. The exception was 2017, when the number of transactions decreased significantly and the gap increased to 7 years.

However, according to another metric, the pre-financing assumption is valid. The number of three-year startups to close a funding round of more than $5 million increased from three in 2018 to 10 in 2019 and 19 in 2020. This year, of the 66 transactions above $5 million, nine were in startups founded in the last three years.

4. Signs of maturity

One of the reasons the gap between middle age and the first year of big funding remains stable has to do with the process that venture capitalists follow. They typically start with a small investment in the early stages of the business (after seed and angel funding) and progressively invest larger amounts. In the alphabetical nomenclature of CVs, series A and B are considered early stage, and everything after series C is considered intermediate or late stage.

Data from India since 2010 shows that average funding typically doubles with each series up to Series E. After that, the relationship breaks down as the number of companies declines and funding needs vary. Furthermore, as the system matures, the number of mid- to late-stage deals also increases. In India, the proportion of such deals in the pool of more than $5 million has increased progressively and reached its highest point in 2021 (86%).

5. Summer vacation

The lifespan of a typical venture capital fund is 10 to 12 years, from the time they raise money from their own investors to the time they abandon all of their initial investments. They also expect to start seeing returns on their investments in about five years. Basically, this means that they are unlikely to show a preference for a specific quarter or a specific month when closing investments in new companies.

However, data on such large deals over the last 12 years shows that May and June, which coincides with summer vacations at schools and universities, and at selected institutions such as courts, are the slowest months for completion/ deal announcements. There is also a story of two halves. Trading by venture capitalists in Indian startups tends to pick up in the second half of the year. Thus, venture capitalists closed more deals in July, followed by December, while mostly maintaining momentum in the interim. Will 2022 be different?

www.howindialives.com is a public data database and search engine.

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