Indian startups have created over 40,000 jobs during the same period and many are also expanding into foreign markets. Total money invested into startups increased by 25% to $10.9 billion in the first nine months of 2019 as compared to the same period in the previous year, even as the total number of deals fell by 26% to 937 transactions, as per the report from Tracxn.
Capital flows to startups continued at an increased pace in the latest quarter as global investors carried on signing huge cheques for entrepreneurs building the next biggie in areas from financial technology to software services, bucking the slowing growth in the economy.
But the rush of capital, which has led to valuation of some startups multiplying overnight without any significant change in business metrics, is also causing concern among investors of a ‘bubble’.
Several startups have seen a significant jump in their valuation in a matter of months, across sectors and stages. Entrepreneurs have been able to raise capital on their own terms, with investors actively chasing them. But this influx of capital has also led to a high cash burn in several sectors, led by online food delivery where Zomato and Swiggy are together said to be losing $60-80 million a month. Other sectors where startups are aggressively spending money include digital media, online pharma delivery and urban mobility.
For now, the capital flow is expected to continue as the longterm India digital story continues to be attractive, but investors are likely to get more discerning and focus on companies with better unit economics with a path to profitability and even as startups continue to mop up a record amount of capital, investors said that at the same time they are starting conversations to reduce expenditure now and ensure that they can make the same amount of money last longer. This, many feel, could be good in the long run.
“Startups are bracing for a longer fund-raising cycle and ensuring they are capitalised well for the next calendar year. In series B and onwards, it is already becoming tougher and rounds are dragging, sometimes taking more than six months,” said Vinod Murali, managing partner at venture debt firm Alteria Capital.