Start-up funding gathers momentum

At a time when a sense of caution prevails in the stock markets, venture capital funds, seed funds and angels seem to be upbeat about start-ups.

VCCEdge data shows a sharp jump in the number of funding deals in the start-up space — the number of start-ups funded so far this year has risen to 554 from 342 during the same period last year.

Growing valuation The value of deals has grown at an even faster pace. Seed and venture capital funds have pumped in $3.4 billion so far this year. This is over three times the investment of a little over $1 billion made last year. The average ticket size of VC deals has more than doubled to $13 million.

The total investment by angel investors has also more than doubled from $72 million last year, to $157 million. The average ticket size of funding by angels has risen about 20 per cent to over $0.5 million.

Besides fund raising by new businesses, a steep increase in valuations of start-ups, which raised subsequent rounds of funding, also bumped up the total investment. Sample this. Sequoia Capital India Advisors made a seed investment in Locodel Solutions, which owns and operates the on-demand delivery service portal grofers.com, in September 2014. Sequoia then picked up 24.15 per cent stake in the company for $0.5 million, valuing the enterprise at about $2 million.

Subsequently, in early February, the fund picked up an additional 30 per cent in Locodel for $10 million. This implies an over fifteen-fold jump in valuation in less than six months.

Key factor But what drove up valuations within such short time frames? “Companies operating in the consumer internet space have seen a big leap in valuations. This is because there’s too much capital chasing a few good quality businesses,” says Radha Kizhanattam, Investment Principal, Unitus Seed Fund.

“Companies pursuing aggressive expansion plans want to acquire more customers and end up raising a lot of money. And if the scale-up happens, investors are also happy to back them,” she adds.

Samir Kumar, Managing Director of Inventus Capital, agrees. “Oversupply of capital has led to a sharp run up in valuations,” he says. The steep rise in valuations is not comforting, says Peesh Chopra, Managing Partner of Peesh Venture Capital.

“I feel that many start-ups are overvalued and will not provide investors the expected returns,” he adds. “That said, I feel high valuations are justified in some cases because venture capitalists are betting on companies operating in sectors such as education and healthcare with an experienced founding team and a great product.”

Investment areas So, where are VCs and angels putting their money? About 55 per cent of the funding by VCs this year has been in the IT/ITeS space, followed by consumer discretionary, which accounts for 29 per cent.

Angels too have put half their money into companies in the IT space. Next, they have placed big bets on the consumer discretionary segment, which accounted for almost 44 per cent of the total.

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