Waning funding takes bite out of start-ups

Union commerce minister Nirmala Sitharaman recently hinted that the upcoming Budget would have tax sops for start-ups, showing the government’s intent to nurture entrepreneurship and create a favourab

Published: 19th January 2017 01:46 AM  |   Last Updated: 19th January 2017 03:14 AM   |  A+A-

Express News Service

BENGALURU: Union commerce minister Nirmala Sitharaman recently hinted that the upcoming Budget would have tax sops for start-ups, showing the government’s intent to nurture entrepreneurship and create a favourable climate for start-ups to thrive.

This could not have come at a better time because these firms, according to experts tracking the sector, might endure a sustained slowdown in the coming months with fund flow from venture capital (VC) firms drying up. VCs have become cautious in investing in start-ups owing to poor financial management on the part of start-ups, among other reasons.

In 2016 VCs funding to start-ups stood at $3.8 billion, a straight 50 per cent drop from $7.6 per cent in 2015. This trend is unlikely to change in the coming months, says Shyam Sekar S, founder and chief mentor, Startup Xperts Business Consulting. Some VC firms put in money in start-ups that lacked solid business fundamentals. Calling such investments “questionable”, he says the trend will continue for some more time. “VCs should take the support of business mentors, have business professionals on their board – rather than just looking at it from a prism of ‘finance’ and ‘excel-based working’ – in order to have successful investments.”  

Harshit Desai, chief operating officer, DesignGild, said that there have been instances where start-ups have shelled out crores of rupees on hoardings without understanding the utility quotient. “VCs have money but they want to put it in the right ideas.”

That apart, everyone is concerned about the global political scenario and still recovering from the demonetisation shock. The slowdown mode will continue for a few more months, said Bharati Jacob, managing partner of Seedfund. “Now everybody is wondering whether there will be more such shocks. Maybe the Budget will clarify it for us.”

From the VCs’ point of view, the current trend will be beneficial for the sector in long term. Vinod Murali, managing director of InnoVen Capital, feels even though number of deals have come down, there is more conviction in the deals today. “There’s reasonably good capital available for the best companies and there is some capital available for the next segment, while there is no capital available for the companies who aren’t able to prove themselves. This is unlike 18 months ago where everyone was getting access to some capital.”

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