At one of India’s premier engineering institutes, students were asked how many of them would want to start their own business. Over 90 per cent of the class raised their hands. That was the exuberance in the start-up space of the 2014-15 period.

Cut to 2017, the situation has turned on its head, as rationalisation takes its toll on many a wannabe entrepreneurs.

According to data provided by start-ups tracker Tracxn, the number of start-ups being founded in India peaked in 2015 with a reported 10,906 ventures set up that year. During 2014 and 2016, the number hovered over 5,500. In 2017, however, only 497 start-ups have been set up so far, which, even by the most conservative estimates, is set to be the lowest in the last three years by a huge margin.

The data also coincides with the decline in the number of investment deals being done in the year, as investors tighten their purse strings and take longer to close transactions.

“Over the last twenty years of investing in the US, China, Israel and India, Lightspeed has observed records in the broader start-up ecosystem set in terms of new company formations and fundings in 1999 (US and India), 2007 (US, India, China) and 2015 (US, India, China),” said Dev Khare, Partner, Lightspeed India.

“Approaching a record year, we see a lot more people starting companies than in other years. What we have observed is that this excitement in the market about start-ups introduces a broader set of people to entrepreneurship. Post these record years, a large portion of these founders tend to leave the start-up ecosystem and go back to traditional jobs in traditional industries, which is fine. But the exciting part is that a good minority of these entrepreneurs stay behind and continue slogging it out to achieve their start-up dreams,” he added.

Private equity (PE) and venture capital (VC) investments in India dropped sharply in 2016 after hitting a peak in 2015, both in terms of volume and value. PE/VC investments worth about $16.2 billion were recorded in 2016 across 591 deals, against $19.6 billion across 767 deals in 2015. This was a decline of 18 per cent in terms of deal value and 23 per cent in terms of deal volume year-on-year, as per data provided by EY.

The year 2017 has seen the numbers dwindling further. According to Venture Intelligence, VC investments in India plunged to a three-year low in the second quarter of 2017 to 78 deals worth $275 million during the three months ended June 2017, 25 per cent lower compared to the same period in 2016. It was also 7 per cent lower than the previous quarter, which recorded 84 deals worth $349 million.

Investors, however, say they are not phased by fewer start-ups coming up. Instead, they feel only quality entrepreneurs are stepping into the growing sector.

“Founders are trying to ensure that they have a well-defined problem statement, clear strategy and differentiated product before starting up. There is a broad realisation that there is no easy capital available and it’s important to demonstrate PMF (performance management framework) fairly early in the journey,” says Ashish Taneja, Managing Director at growX ventures.

He goes on to give the example that growX, an early stage investment firm, had evaluated 2200 companies in 2016 and invested in seven – a strike rate of 0.3 per cent, while this year it has invested in 6 companies out of 650 it evaluated.

“So yes, lesser number of companies but a better strike rate,” Taneja said.

With poster boys like Flipkart and Snapdeal hitting the highs with attracting millions of dollars in investments in 2015, it is not surprising that the highest number of start-ups were founded in online retail. It was followed by edutech, health-tech, local services, and fintech, which continue to attractive to investors.

Khare also echoes Taneja’s sentiments that even though there are lesser number of start-ups being founded, the number of market segments where start-ups are being formed has expanded beyond e-Commerce, giving VCs are wider choice.

“T​here may be fewer numbers but I feel quality has gone up. We do not see a lack of choices. Instead we are happy that we are seeing better quality ventures,” adds Manish Singhal, Founding Partner, pi Ventures.

Shutdowns

“The real companies and entrepreneurs are now left, and the tourists have gone back to banking and consulting and whatever else they were  doing,” Khare had said in a recent interview.

With the rise in the number of start-ups in the country, the number that have shutdown has also been following a parallel graph. According to the Traxcn data, 437 start-ups shut down in 2015, which increased to 450 in 2016 and in 2017, it is about 130 till date.

PepperTap, which raised over $50 million in funding, was the most prominent shutdown in 2016, followed by other well funded companies including GETIT and Zovi.com. In 2017, Stayzilla, with over $23 million in funding, was a shutdown that made headlines, also due to the fact that its founder Yogendra Vasupal was mired in controversy. Other prominent shutdowns in the year include Taskbob and RoomsTonite.

It has to be noted that the numbers represent only the ones that are reported, and the number of dormant start-ups is likely to be much larger. According to Khare, a much larger proportion of the shutdowns would be unfunded start-ups. These, however, are not as widely reported.

“Please review the shutdowns as a percentage of cumulative number of start-ups (and the not as a base of founded every year). You would notice that shutdown as a percentage of total is less than 5 per cent in current year. So, it’s nothing significant in terms of failure rate,” notes Taneja.

Given that the highest number of start-ups were founded in the online retail space, the highest number of shutdowns also took place in that sector, followed by consumer health-tech, food-tech and local services, shows the Tracxn data.

“M​ost of the ventures that shut down were where cost of customer acquisition has been high. With not much different to offer than their competitors, once these ventures ran low on cash, they had no choice but to shut down,” explains Singhal.

Source: DealStreetAsia