The odds against entrepreneurial fund raising

Entrepreneurs looking to raise capital would do well to bear in mind the teaching of Sun Tzu: “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

Despite the tremendous growth in the sources and quantum of start-up funding, the percentage of start-ups getting funded is small. To be successful in fund raising, founders need to be extremely well prepared (along with a dose of Chutzpah and luck!).

We looked at data from LetsVenture, India’s largest start-up funding platform, to analyse the success rate of start-ups in terms of getting funded. Out of the 12,073 start-ups that are registered in the platform, only 998 were able to raise some amount of external funding, i.e., only 8.3 per cent of the start-ups were successful in receiving some form of funding.

We also looked at the pattern by type of city. Overall, about 83 per cent of the companies that obtained some form of funding were from Tier-1 (metro) cities. A large majority of the companies that raised capital were from the big cities.

Overall, the proportion of start-ups that got funded from Tier-1, -2, and -3 cities was 10 per cent, 6 per cent, and 5 per cent, respectively. Not only is the start-up formation rates in Tier-2 and -3 cities lower, the probability of getting funded is also considerably lower.

It’s not just with LetsVenture – it’s the characteristic of entrepreneurial landscape in India. For example, while the average batch-to-batch growth in the number of applications received by Axilor has been 57 per cent, only 3 per cent of the start-ups have been selected by the accelerator. Chennai Angels has funded only 3 per cent of the proposals, while the annual growth in the number of proposals has been around 60 per cent. A leading technology venture fund had an annual average deal flow growth rate of 28 per cent during 2010-16 and invested in only 0.67 per cent of the deals that it assessed.

We estimated the proportion of start-ups that get funded in every successive round by interpolating multiple data sets. In sum, for every 875 start-ups that get founded, only 75 are able to get the first round of funding, out of which only 15 are able to get the second round of funding, and only 5 are able to secure the third round of funding.

While the odds considerably improve for a firm that has successfully raised the first round, the odds are considerably stacked up for the first round of funding. Not for nothing it is said that the first step is the hardest in every journey of dreams.

Among the several reasons for the low proportion of funding, a key reason is the shortage of capital. Growth rate of funding sources has not kept pace with the growth seen in the number of start-ups.

The number of investors itself is much lower in India. For example, while India has about 1,800 active angel investors, the US has close to three lakh. This makes a big difference. For example, the percentage of global start-ups that are able to successfully raise capital in the grocery tech, healthcare and consumer healthcare, and smart home and home improvement are 41 per cent, 52 per cent, and 36 per cent, respectively.

The corresponding figures for Indian start-ups are 5 per cent, 10 per cent, and 11 per cent. Privately, VCs have told me that out of 100 fundable deals, about 30 – 40 are not able to get funding because of capital constraints.

Given the constraints, entrepreneurs trying to raise capital should assume a gladiatorial purpose and intensity in their efforts.

Low success rates are nothing new in the Indian context, if we go by the examples of IIT and UPSC entrance exams. Just being aware of the odds would inspire the start-up founder to be better prepared. Dispiriting though the statistics might be, it might be worthwhile to recall the words of Henry Ford: “If you think you can, you can. And if you think you can’t, you’re right.”

The writer is Professor, Department of Management Studies, IIT Madras and International Research Affiliate, Coller Institute of Venture, Tel Aviv University, Israel

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