IIT-M report paints a healthy picture of start-up ecosystem

An IIT-Madras report on the entrepreneurial ecosystem in the country reaffirms that the start-up world is active and buzzing — there are more individuals turning angel investors, the amount the angels invest is going up, more start-ups are being founded and many more of these are getting funded. However, the percentage of ventures that attract subsequent rounds of funding has dropped significantly.

Titled ‘India Venture Capital and Private Equity report: Inspiration and momentum for the gladiators; a study and analysis of the start-up industry’, the report by the Department of Management Studies highlights two concerns. One, the development of the ecosystem has been restricted to a few States and within these States, only to the capitals. “The velocity of trickling down to other cities has been very slow,” it points out. Two, “the growth in the number of investors and the amount of investment has been significantly high, which cannot be sustainable in the long run.”

Such exuberance, the report says, can have undesirable side effects. For instance, many naïve investors can get attracted by the euphoria of investing in start-ups, without fully being aware of the risks involved. From a situation a few years ago, when founders and members of the industry complained of the lack of seed and early-stage funding, the pendulum has swung the other way now, says the report.

Because of the “spray and pray” practice of some investors — that of making small investments but not showing the required commitment — these investors tend to move away from making such investments if they are disappointed by the outcome, resulting in dwindling investments in start-ups.

Analysing angel deals, the report reveals a continuous increase in the number of deals between 2008 and 2015 — from 103 deals in the 2008-10 period to 2,790 in 2013-15. “The fact that so many angels are making investments in start-ups has been one of the biggest changes in the entrepreneurial ecosystem in recent years,” it adds.

During this period, the amount invested by angels grew from ₹36.8 crore in 2008-10 to ₹4,321.7 crore in 2013-15, while the number of angel investors increased from six in 2008 to 978 in 2015. Another development as far as angel investors go is the forming of networks, such as the Indian Angel Network, Mumbai Angels, Chennai Angels and the Keiretsu Forum, which is a global network of angel investors headquartered in the US and with chapters in different countries.

According to the report, the average investment in an angel round has increased nearly four times between 2009 and 2015, from ₹1.06 crore to ₹4.67 crore. The study also finds that the average age of the start-up at the time of receiving the angel funding has decreased markedly — from 4.77 years in 2008 to around half a year in 2015. As is to be expected, given the trend in the nature of start-ups, ventures in the software and internet services account for the largest number of angel deals, followed by internet marketplace and e-commerce, whose share has shown an increasing trend of late.

Analysing the trends in start-up funding from all sources — angels, angel networks and venture funds — the report says investment picks up slowly in each sector (possibly a period of learning and understanding for both the entrepreneur and the investor) and reaches a peak and tapers. “It is clearly evident that entrepreneurs have a better chance of getting funded during the growth period of the sector,” the report says, and adds: “The sector that has bucked the trend has been the software and internet services sector.”

Clearly, Bengaluru, Mumbai and the National Capital Region lead in terms of start-ups getting funded, and over the years, the gap between these three cities and the others — Chennai, Hyderabad and Jaipur — has considerably increased. To ensure that the gap does not widen further, the report suggests that policy makers should identify components of the entrepreneurial ecosystem in cities such as Bengaluru that make more start-ups get funded.

Dealing with follow-on rounds of funding, the report says only one in every 875 start-ups that get founded, or a mere 0.11 per cent, is able to raise four or more rounds of funding. Out of the total start-ups that get founded, about 6 per cent have been part of an accelerator or incubation programme.

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