Majority founders, CXOs believe Indian start-ups are in a bubble
63% of the respondents who attempted to raise funds confirmed that they had an unfavorable funding experience in 2016 with almost half of these not being able to raise any funding and the rest raised either a sub-optimal external round or a bridge round.
Around 65% of founders and CXOs of Indian start-ups believed that start-ups in India is in a technology bubble, of which 18% felt that it was close to bursting soon, according to InnoVen Capital's India Startup Outlook Report 2017.
The survey further showed that on the fundraising environment in 2016, 63% of the respondents who attempted to raise funds confirmed that they had an unfavorable funding experience in 2016 with almost half of these not being able to raise any funding and the rest raised either a sub-optimal external round or a bridge round.
Further, the report said that 94% are looking to raise funding in 2017, with venture capitalist (VC) backed companies aiming to raise a median of $12.5 million. The average expectation on how long it could take to close the round is 4-5 months.
“Although difficulty in raising equity funding was voted as the top business challenge, followed by difficulty in managing talent and market creation, it seems however uncertain whether fundraising will be more challenging in 2017 or less as the group was equally divided on this when specifically asked. Overall, almost 3/4th of the set supposed that the startup ecosystem in 2017 will be driven by entrepreneurs, whilst 26% voted that investors will play the pivotal role,” said the report.
The survey also concluded that the most critical factor in choosing a lead investor is strategic fit with the startup followed by the investor network and commercial terms of the deal, while specifically for VC backed companies, strength of the institution brand was most important.
Focus in 2017 for majority respondents will be growth, however VC backed companies opted for profitability as the primary factor to solve for. Only 38% of the cash burning companies had a higher burn rate in 2016 as compared to 2015 and overall, the median timeline for achieving profitability is expected to be 1-2 years.
Separately, the preferred mode of exit for majority startups is to publicly list either in India or offshore with 30% selecting merger and acquisition as the top choice and another 30% opting to continue to remain private. In all, about 64% of the respondents expect an exit event in the next 6 years.
GST was selected as the most helpful recent government initiative, especially by founders in Retail consumer brands and logistics sector. Media and content sector found the push towards Digital India a shot in the arm and Fintech companies were appreciative of digital payment tools such as UPI.
Interestingly, demonetisation policy was seen as favorable in the short term by only 22% respondents, increasing to 52% in the long term. The entrepreneurs converged on the following three major measures that can make India more appealing for startups: better tax policy, facilitation of cheaper financing and investment in digital infrastructure.
Ajay Hattangdi, Group COO & CEO India, said, “The startup outlook report is part of our continued effort to understand and communicate the nature of the Indian entrepreneurship ecosystem. In this report, we explore the mood and outlook of Indian startups given the recent budget, cautious investor climate and an uncertain global economy. We hope this report helps all stakeholders including entrepreneurs, investors and lobbying groups create more effective outcomes in engaging with the innovation economy.”
The survey captures responses from over 170 startup leaders across bootstrapped as well as funded ventures.