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Of the Indian startups that tried to raise funds last year, 63 percent of respondents had an “unfavourable” experience, according to a recently released report by venture debt firm InnoVen Capital. Almost half of these startups tried to raise funds but could not, while the rest either raised a “sub-optimal” round or a bridge round.
Those startups that did raise funds – favourably or unfavourably – had to pitch to six to seven investors before closing a deal, said the Startup Outlook Report 2017, which captured the responses of 170 founders and executives of bootstrapped, angel-funded and VC-backed companies.
Those surveyed felt that investor sentiment would improve in the year ahead if more companies with robust business models emerge and more exits are seen. However, if Indian unicorns – unlisted companies valued at $1 billion or more – raised additional funds at higher valuations, the investment climate was unlikely to improve, said the respondents.
Going forward, in 2017, 94 percent of the respondents are looking to raise a total of $800 million. VC-backed startups are targeting a median fund raise of $12.5 million, while angel-funded and bootstrapped ventures are looking at a median of $2 million. On average, respondents expected to close a fund raising round in 4-5 months.
When choosing a lead investor “strategic fit” and strength of the network were seen as most important by early stage startups, while VC-backed companies stressed on the investor’s “institutional strength” and terms of the deal.
Given the investment climate in 2016, equity fund-raising was seen as the biggest challenge going forward with 26 per cent of the respondents indicating this. Difficulty in recruiting employees and managing talent (16 per cent) and market creation (16 per cent) were the other big hurdles, according to the report. However, whether fund raising would be more or less challenging in 2017, than it was in 2016, was unclear, as the respondents were equally divided on that.
Furthermore, majority of the early stage startups stated growth as their primary focus area in 2017, while for growth stage and VC-backed companies achieving profitability is the key objective. About 80 percent of the startups expect to turn profitable in the next two years. And by 2020 almost 35 per cent startups expect an exit. Initial public offerings (IPOs) were rated as the most preferred mode of exit, followed by consolidation through mergers or acquisitions.
Finally, while digital payments and artificial intelligence are expected to be “hot sectors” in 2017, respondents indicated that an improvement in tax policies, the availability of cheaper financing and further investments in digital infrastructure would improve the startup ecosystem.