Startups feel the pinch as funds dry up 

Startups feel the pinch as funds dry up 
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Story Dated : November 13, 2015

Mumbai: After an unprecedented funding boom over the past 18 months, the Indian startup ecosystem has started seeing early signs of pain as capital becomes tougher to raise.

Companies have started to lay off employees, pull back on expansion plans and focus on unit economics, particularly in the high profile consumer Internet sector. While such an eventuality has been expected, the sudden chill has caught most by surprise.

And how long will it last? Depending on who you are speaking to — a venture capital investor or a startup founder — it could be between six months and two years before the chill lifts.

Total VC money invested and the number of deals have already hit a new low in October — 24 transactions worth $112 million (Rs 730 crore) were closed in the month, compared with a peak of 43 deals worth $831 million in March 2015, according to VCCEdge.

The slowing momentum of deal-making has already resulted in consolidation in hyper-competitive and over-funded segments. More strategic deals are expected in the coming quarters, some of which could be investor-driven mergers.

“Companies need to find moats beyond just giving discounts. This slowdown will lead to a cleansing of the system,” said a prominent VC investor on condition of anonymity.

Focus is increasingly turning to sustainable business models which do not rely on burning investor money to win ever more customers. While overall capital-raising is expected to remain flat, for companies emerging as leaders in their segments, money will still be available but not at irrational valuations.

The changing sentiment coincides with valuation markdowns for some of Silicon Valley’s hottest startups such as Snapchat and Square.