The importance of getting venture funding

Customer may be the king, but the investor is an emperor. No doubt then, when a start-up gets venture funding, the achievement is celebrated. Limelight is instantaneous. And for good reasons. In practical terms, having an investor significantly raises the perception of the company among customers, employees and suppliers.

For the founders, venture capital provides the fuel to sustain the start-up during the initial years of negative cash flows, before becoming profitable.

Venture funding for start-ups

Founders who clamour for venture funding should be informed of two factors. First, the odds of success are low in the initial stages of the start-up lifecycle. Venture and angel investors take pride in their selection process and given the number of deals that come to them, they can afford the luxury to be choosy.

For the entrepreneur, it is important to quickly identify the appropriate investor rather than spending time on frustrating pitches. Thankfully, data-driven tools such as the one from YNOS are available today for systematically identifying the investors and thereby dramatically reducing the search time.

Start-up sectors

Second, the queen that venture capital is, smiles only at selective suitors. Venture capital flows more only to few sectors.

Software and internet services category has received the maximum rounds of funding followed by consumer products and services and fintech and payments categories. Deals in sectors such as edutech, hyperlocal and logistics, and technology are considerably lower. Sectors such as manufacturing, tourism and textiles account for very less rounds and have been aggregated under the others category. The import is clear – if you are a founder having a start-up in those sectors that do not have much venture funding activity such as the ones indicated above, then have a Plan B to fund the venture rather than bemoan the lack of venture funding in your sector. One cannot change the nature of the beast!

The number of rounds of funding during the first three years of the start-up lifecycle is much higher than that of the next three years. While the average quantum of funding received between 3-6 years could be higher, waiting for a longer time for fund raising does not increase the chances of getting funded. Lack of capital in the initial years increases start-up mortality and it is difficult to fund an early-stage venture that is on the throes of a financial crunch. So, if the idea is to get external funding, it would be better to go for it sooner than later.

Cities and venture funding

Could the city improve the chances of getting venture funded? Our findings seem to indicate so. In India, venture funding is concentrated only in Bengaluru, Chennai, Delhi, Hyderabad, Delhi, Mumbai and Pune.

However, there are significant variations in the level of venture funding between these cities. Bengaluru, Mumbai and Delhi are the top cities for venture funding.

The chances of getting venture funding, therefore, becomes higher for start-ups in these cities.

The average round investment is the highest in Bengaluru followed by Mumbai and Delhi. Not only do more deals get funded in Bengaluru, they also get higher amounts of funding. The business and industrial ecosystem of the city has also influenced the type of ventures that get funded.

For example, Bengaluru has a higher number of ventures funded in software and internet services sector, as compared to that of other cities.

In Mumbai, fintech and payments account for a significant percentage of venture investments. I am not arguing that a software services start-up should necessarily set up shop in Bengaluru nor a fintech start-up in Mumbai. But as they say, it is worthwhile to know the lay of the land.

Summary

Venture funding as a source of capital is compatible only for select sectors and is dominant only in a few cities. Not just in India, but even globally. Not all are successful in getting venture funding. Inability to get venture funding does not mean that the start-up does not have enough potential. However, if it is imperative to get venture funding, having clarity on the funding landscape is critical.

The writer is a Professor at IIT- Madras, an Associate at Harvard Kennedy School, Harvard University and co-founder of YNOS.in

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