Startup funding jumps 25% amid ‘bubble’ fear

Wednesday 09th October 2019 05:53 EDT

The latest data shows that the total money infused into Indian startups increased by 25 per cent to $10.9 billion in the first nine months of 2019 as compared to the same period in the previous year, even as the total number of deals fell by 26 per cent to 937 transactions. The data indicates that the boom in financing is being led by mid and late-stage rounds over $50 million, and is now trickling down to even early-stage transactions.

Capital flows to startups continued at an increased pace in the latest quarter as global investors carried funding for entrepreneurs building out the next big companies in areas from financial technology to software services, bucking the slowing growth in the economy. However, the rush of capital, which has led to valuation of some startups multiplying overnight without any significant change in business metrics, is also causing concern among investors of a ‘bubble’.

“Right now, all 3 Vs of a ‘bubble’ are at play in the technology investing world - volume (number of investments), value (valuations vs fundamentals) and velocity (time to an investment decision and/or markups between rounds),” said Avnish Bajaj, MD at Matrix Partners India, an early backer of companies like Ola and Quikr.

“Until recently only volume and value were at play, but velocity is also at play now as investors are being forced to take decisions in a few days. And typically the correlation between high velocity and bad judgment is high,” Bajaj further said.

Several startups have seen a significant spike in their valuation within months, across sectors and stages. For instance, home services marketplace UrbanClap’s valuation nearly doubled to $930 million in eight months and Meesho’s valuation nearly tripled to $700 million in a similar period. Both startups closed their new rounds in August.

In such an environment, entrepreneurs have been able to raise capital on their own terms, with investors actively chasing them. But this influx of capital has also led to a high cash burn in several sectors, led by online food delivery where Zomato and Swiggy are together said to be losing $60-80 million a month. Other sectors where startups are aggressively spending money include digital media, online pharma delivery and urban mobility.

For now, the capital flow is expected to continue as the long-term India digital story continues to be attractive, but investors are likely to get more discerning and focus on companies with better unit economics with a path to profitability. And even as startups continue to mop up a record amount of capital, investors said that at the same time they are starting conversations to reduce expenditure now and ensure that they can make the same amount of money last longer. This, many feel, could be good in the long run.

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