By Shrutika Verma
Mint, New Delhi.
The money was in the bank, his first cheque from a few angel investors and an early-stage venture capital firm, and just when the 32-year-old founder of the start-up working in the hyperlocal business thought the ordeal of investor pitches, due diligence and scrutiny was over, one of the investors called.
The competition had raised more money, the investor said, and the start-up (and the entrepreneur) based in the National Capital Region should prepare for the next round of fund-raising.
Yes, was the answer. The logic: the market was swarming with investors looking not to miss out on the Indian e-commerce party; and, there was always the chance that things could go bad and funding dry up. And so, it made sense to raise money when one could and not when one wanted to.
That’s a true story.
Such conversations are taking place across India as e-commerce firms of all hues (mobile tech, food tech, hyperlocal) are topping up funds–just in case.
The last three months have seen 28 follow-on deals in the Indian start-up ecosystem, according to data analytics firm Tracxn. The number was 30-35 during the whole of 2014.
There’s more evidence of this–the gap between rounds of funding is narrowing, not just for growth-stage start-ups (think of them as the teens of the start-up world), but also for the early-stage companies (the toddlers).
According to Tracxn, the average time between Series A and Series B funding has shrunk to three months in 2015 compared with about nine months in 2014. It was almost a year in 2013.
For instance, online grocery vendor PepperTap raised $10 million in April from venture capital firms SAIF Partners and Sequoia Capital; it is already in advanced stages of discussion to close its next round, according to several people close to the development.
PepperTap co-founder Navneet Singh declined comment on the funding, but explained that consumer-facing businesses that want to achieve scale faster need to have sufficient balance in their bank accounts as their customer acquisition costs are very high.
Many founders want to “scale up 10 times faster than competitors”, said Tarun Davda, director of Matrix Partners India, a private equity investment firm.
Mumbai-based food tech company TinyOwl raised close to Rs.100 crore within three months of securing Rs.18 crore in its first funding round. The company is again in the market meeting investors and looking for strategic partners.
Then there is Tiger Global-backed hyperlocal marketplace Grofers. The company closed two funding rounds within 45 days of each other.
“Both companies and investors today are in a rush to close the rounds faster. Companies are worried that the music might stop and reality will sink in. Investors are worried that they may lose the deal to other investors,” said a top executive at an investment bank that works on consumer and consumer Internet deals. The banker spoke on condition of anonymity.
Analysts say the fear of an imminent winter is prompting companies to build this extra layer of cushioning. India’s largest online firm Flipkart and taxi-hailing service Ola were the first to bulk up their war chests by doing three rounds of funding within a 12-month period.
Winter is coming, say analysts, but it is at least 6-10 months away.
“I think the sentiment right now is…build a war chest and be ready for the cold winter,” said Kashyap Deorah, an angel investor and entrepreneur who recently returned to India after having worked in Silicon Valley for nearly a decade.
“People are starting to get worried because a lot of this activity seems unnatural. There are no signs of slowdown but there are signs of uncertainty,” he added.
“When your mother-in-law, who does not even invest in mutual funds, starts asking ‘how can I invest in start-ups?’ you know there is something unnatural in the market.”
Indian start-ups, analysts say, are more expensive than Chinese ones; the cash burn for Indian start-ups remains very high and the companies are yet to justify their valuations.
“When investors stop seeing these companies perform without burning cash; there will be a pullback,” said an investor in a venture capital firm who asked not to be identified.
There’s money to be had.
The shortening of the funding cycle and multiple fund raisings can be attributed to easy availability of capital and investors’ fears that they may miss out on the best companies, explained Matrix’s Davda.
And with valuations rising by the week, if not by the day, many hedge funds and family offices–among the most aggressive funders in the market today — are pushing to close funding rounds faster, added Sanjeev Krishan, partner and leader at PricewaterhouseCoopers India.
That will go on till the season changes. Watch for a macroeconomic event or a large e-commerce firm failing to get an increase in valuation in a subsequent round of funding, say analysts. That will be the sign that winter is here.