Slowing Venture capital investment

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Basant Gupta, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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The first quarter of 2016 has been tough but not all grim for India’s start-up market. Start-ups across sectors continued to attract early and growth capital, even staging a small recovery from the slump reported in the previous quarter in terms of overall capital raised. Data compiled by London-based Preqin puts the total value of venture capital deals concluded during the January-March quarter at $1.6 billion, up 47% from the fourth quarter of 2015.

The surge comes largely on the back of a handful of big-ticket deals that closed despite the withdrawal of a host of later-stage investors, such as hedge funds, from the market. In January, online travel company MakeMyTrip raised a $180 million round from Shanghai-based travel services company Ctrip. The same month, private equity investors Temasek Holdings and Warburg Pincus participated in a $145 million round in auto classifieds platform CarTrade. February saw e-commerce marketplace Snapdeal announce a $200 million investment led by Canadian pension fund Ontario Teachers’ Pension Plan (though a sizeable portion was paid out to venture capital firms Saama Capital and Sequoia Capital, who sold stakes in the company).

And in March, grocery e-tailer BigBasket raised $150 million from an investor consortium that included The Abraaj Group and Sands Capital Management. However, these deals don’t necessarily indicate that the funding slowdown that became official in the last quarter of 2015 is now a thing of the past. Since we’re specifically concerned with how early-stage investors behaved during the quarter, we will take into account deals that were concluded at the angel and seed stages and, separately, at the Series A through C stages. At the angel and seed stages, investors closed 146 deals worth $35 million. That represents a 46% drop in value terms when compared to the fourth quarter of 2015, even though the volume of deals grew 5%. The slower pace of investments at the Series B and C stages means that venture capitalists are still not comfortable with the valuations that are being sought by companies at those stages. By Preqin’s estimates, India-focused venture capital funds are sitting on dry powder or uninvested capital worth $3.4 billion. That capital, going by how investors have behaved in the first quarter, is not going anywhere in a hurry.

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