Late-stage funding in India remained strong in Q1 of 2020

Late-stage funding in India remained strong in the first quarter of 2020, even as early-stage and growth-stage investments declined, compared to 2019.

According to data from Venture Intelligence, a firm that tracks private companies’ investments, financials and valuations, the total amount that went into late-stage companies was $1.8 billion in Q1 2020, a nearly 33 per cent increase from $1.36 billion in Q1 2019. Late-stage funding includes seventh or later rounds of institutional investments or investments into companies more than 10 years old.

Late-stage companies are mature and well-placed in the market as compared to early-stage firms and the risk that an investor takes for an established company is very different from a start-up in its early days, said Apoorv Ranjan Sharma, co-founder, Venture Catalysts. He added that negotiations for late-stage deals go on for a long period before they get closed, and most of the deals that got announced in the January-March quarter would have most likely been signed and closed last year.

Decline across stages

The 33 per cent surge in late-stage funding, however, is in stark contrast to investments that went into other stages during the same period. For instance, early-stage funding (which includes the seed, first and second round of institutional investments into firms less than five years old) declined 13 per cent year-on-year to $301 million in Q1 2020. Typically these start-ups are not part of a larger business group and the investment amount is less than $20 million.

Growth-stage and growth-private equity (PE) stage funding did not fare any better in the first quarter of 2020. Data showed that funding for growth-stage companies dropped to $150 million in Q1 2020 from $197 million in Q1 2019. Growth-stage funding data constitutes third and fourth round funding of institutional investments into companies less than 10 years old. It also includes the first and second round of institutional investments into companies greater than five years but less than 10 years old, and spin-outs from large businesses. The investment amount is less than $20 million here, too, as in the early stage.

In growth-PE stage funding, while the first to fourth round investments (greater than $20 million into companies less than 10 years old) was $1,028 million in Q1 2020, a 90 per cent jump from the $540 million in Q1 2019, the amount that went into the fifth and sixth rounds of institutional investments into companies less than 10 years old, cumulatively, tumbled to a mere $407 million in Q1 2020 from $1488 million in Q1 2019.

Funding in Q2 2020 thus far has been low across all stages. After mid-March, investors were not able to physically fly down, complete verifications, and sign on the dotted line, despite agreeing to invest in firms. But investors said they expected deal volumes to rise, going forward, especially for late and growth-PE stages.

“I expect growth-PE deals to pick up towards the end of this year,” said Pankaj Raina, Managing Director, Research and Investments, Zephyr Peacock India. He added that potential buyout deals and late-stage distress deals will be available in highly leveraged industries, and from corporates willing to divest, in an attempt to raise debt to improve liquidity position.

Vikram Gupta, Founder and Managing Partner, IvyCap Ventures , said the deal volume is expected to increase in Q3 because, when the lockdown gradually eases, deals that may not have happened in Q2 2020 due to logistics issues may get concluded in Q3 2020.

While growth-PE stage and late-stage firms have a proven business model in place, experts said that these companies will still have to prove they are relevant in the new economy. And in the case of seed/early-stage start-ups, the situation will be warier now with investors wanting to be extra cautious about what business models and sectors will work post-COVID.

For early-stage start-ups, generally, there are too many risks – people do not know whether the product and the team will work, whether the technology will have the promise or not, explained Sunil K Goyal, Managing Director, YourNest Venture Capital. He added that the early-stage ecosystem needs a continuous flow of risk capital and that, the risk capital availability shrinks when the economic situation is tight.

These start-ups should now look at who is going to be the right partner for their business and who will actually believe in their vision, Goyal said.

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