Two Graphs for the Indian Start-up Ecosystem to Celebrate and Fear

There are two graphs that will define how 2018 was for the start-up ecosystem in India.

This telling graph that I took from a CNBCTV18 article shows that the amount of money raised by Indian start-ups in 2018 exceeded the amount of money raised by companies on the stock exchange. It is a rare occasion to see investors pour more money into unlisted investments over listed ones. This can be attributed to the recent market volatility that has hit pause on the number of IPOs in the last 3-4 months. The IL&FS fiasco led to credit crunch and the uncertainty over the results of the Lok Sabha polls next year also acted as catalysts for dampening investor sentiments.

However, this is an important moment for our young start-up ecosystem and I will be the first person to state that the recent spate of $1 billion+ rounds is a harbinger of the good times that lie ahead.

However, these summed-up funding numbers are hiding a very important fact that the number of start-ups raising early stage rounds has dropped 39% from its 2016 peak and the amounts raised is down by 52% from its 2015 zenith. Apart from the large SoftBank led funding rounds, we have had a seriously down year.

A major reason for this slowdown in early-stage funding is the exit of many small cheque angel investors that were blindly pouring in capital into early-stage companies. These avoidable angels (as I would call them) barely spend a few hours with start-up founders during the period of their investment and expect disproportionate returns on the sweat and blood of founders alone, a rare occurrence. Now as many of these start-ups have finished their funding runway, haven’t reached their promised goals and therefore unable to raise new money; they are starting to shut down.

An early stage start-up shutting down is a normal occurrence but these types of angel investors have usually dabbled in mid-cap and small-cap stocks too and their portfolios had swelled up spectacularly until the volatility that eroded the gains, and the principals in many cases. Faced with this double whammy many small angels have stopped writing angel cheques or (thankfully!) sworn off angel investing altogether. The recently advertised angel tax fiasco only helped hasten this decision.

I categorically blame angel networks for mis-advertising this investment class to these investors. Using examples of how small cheques led to massive returns they signed up tons of wannabe (read: avoidable) angels without having explained to them the effort that went into helping those founding teams and – how many failures it took to get one success. The result of these lax policies is the vacuum of early stage capital we face today.

101/2018

6 thoughts on “Two Graphs for the Indian Start-up Ecosystem to Celebrate and Fear

  1. Very aptly blamed. The networks have been enrolling angel investors by the dozens without doing a proper curation/ due diligence of the startups and explaining them the risks and in the process, probably glorifying angel investing. It’s a serious business decision and can lead to serious wealth generation if handled properly. This is a great asset class earning a bad name due to these ‘mandi’ sales.. We are trying to change this in our small way.

    1. It is the lack of standards that will be the downfall of the networks because there is t any network keeping the angels together.

      There is a need for small bands of angels grouping together and doing meaningful stuff without the need of becoming the largest in India/Asia/World.

  2. Well it seems you have not factored in hoax companies used as a vehicle for financial fraud. There is no evidence that all 2015 startups being invested were genuine. But atleast 90% of 2018 startups are genuine for sure, specially after cracking down on khoka companies last year and washout of black money due to demonetization. If read the numbers correctly, 2018 picture is market correction, which was very much required.

    1. I have previous written about the havoc these shell companies have caused and why they are the reason we are afflicted with angel tax. However your deduction that most of 100+ Startups funded in 2015 were shell companies is wrong as these are actual industry numbers.

      The shell companies would have raised funding but not from established angel/VC ecosystem.

  3. Recently I have seen some of the startups which was funded and the angel investors are supporting them with vast networks of business people and media coverage. The passion inside the founders are getting faded by all these sudden popularity and success illusions.
    Later after some time, they don’t know how make their startup a financial successful one but they are popular in public speaking.
    My perception is in down south, many startups are enjoying the honey moon time and become popular speaker but not a successful entrepreneur.
    And what are your thoughts on this kind if ecosystem Anirudh?

    1. It is necessary that a startup founder gain some publicity for his/her startup by building his/her own brand name through public engagements.

      He/she does have to ensure that those publicly made promises are followed through on by his/her startup.

      When the startup cannot deliver on the lofty dreams and gyaan sold to the public- the entrepreneur falls flat on his/her face like, in an embarrassing public manner.

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