PE investors may go slow on startup funding

After a flurry of investments in the ecommerce sector in the last two years, private equity (PE) fund managers may tighten their purse strings and take cautious steps towards fresh funding in startups that thrive on businesses online.

This comes at a time when a host of startups in 2016 witnessed layoffs and shutdowns as they failed to scale up to the next level.  As per data available with analytics firm Tracxn, as many as 212 startups had to shut shop in 2016 as they failed to scale to the next level. These include names like online grocery startup PepperTap, online beauty startup Amber Wellness and home food delivery startup ZuperMeal. In 2015, the bumper year for startup investments, as many as 140 startups had shut down operations.
 
“Chaos is normal in startups and those who ride through that emerge as winners,” says Arvind Mathur, chairman, Private Equity Pro Partners & Silicon Valley Knowledge Centre. “Since a lot of investor capital has already flown into the startup ecosystem, it’s natural for fund managers to adopt a wait-and-watch policy.”

In 2016, as many as 620 transactions were sealed in the PE/VC space, according to data available with research firm Venture Intelligence. Of this, about 65 percent comprised startup investments. In 2015, the year that created history for the highest amount of PE and VC investments, both by value and volume, of the total of 775 investments sealed in the January-December period that year, 512 were startup deals.

Startup investments started picking up in the country over the last 2-3 years with young entrepreneurs - some of them are first time into business - catching the fancy of fund managers. So, what went wrong? While the number of startups is mushrooming in the country, some early-stage businesses are not being able to transform initial consumer interest into revenue flows, according to experts. Today, most startups are gripped with similar issues: How to get enough margins, how to be price competitive and how to keep customer acquisition costs low.

In the US, 70-80 percent of startups fail. “As long as 1 out of 10 startups succeeds, the purpose is served. That’s the beauty of the startup ecosystem,” said Mathur.