Since 2017, there are as many private equity deals in the start-up space, as much as seed funding deals, according to data by trak.in. While the line between late-stage funding by venture capitals (VCs) and early private equity (PE) investments is blurred, the size of investments have steadily increased. This is an indication that start-ups with clearer revenue streams with better administration capabilities are being funded.

PE investments tend to back less-riskier companies. “I agree that the funding environment for start-up has matured but it is not completely there yet. There are founders with domain expertise who are doing a fairly mature job but there are as many young entrepreneurs who have nothing to lose, and running up losses,” says Ajeet Khurana, angel investor and start-up mentor who was the former CEO of IIT Bombay’s start-up incubator.

Funds flush in

According to Khurana, inferior quality start-ups with less or no vision are being funded, due to large volumes of funds available for investment. Globally, limited partners (LP) interest in the Indian start-up market is at an all-time high. Indian start-ups are exhibiting a growth of 40% annually, attracting global investors who are looking at control-based funding or buyouts along with funding acquisitions by Indian start-ups.

In 2016, start-up funding saw a slight dip from the record-breaking funding the year before, the activity is expected to pick up this year, due to LP funds flowing in. According to a report by Nasscom, key VCs and corporates raised $2 billion for disbursement. Sequoia is sitting on a corpus of $920 million, Reliance Jio has funds of around $750 million while Accel Partners have $400-500 million. New VCs and PEs focused on start-ups are also entering the market, expanding the basket for start-up fund deployment.

Favourites of funds

The maturity of start-up funding is also not uniform across the various sectors of start-up ecosystem. A major chunk of funds is going exclusively into e-commerce and digital products and services, informs Prasad Dahapute, MD of Varhad Capital, which runs an SME fund. “Almost 90% of funds are flowing into online businesses and digital services. Sectors like mechanical engineering and healthcare are not seeing as much traction. Investors have made more money in these areas and hence prefer to invest there. However, fintech has seen fair amount of interest though sub-sectors like cyber security are yet to receive fair amount of attention,” he informs.

PE to IPO, longer journey

Private equity investments are also leading the market towards initial public offering (IPOs), yet another elusive form of funding in the startup sector. Giants like Flipkart have stayed away from going public, yet start-ups like Infibeam and Quickheal Technologies braved the heat. According to experts, the number of start-ups filing for IPO are going up and will grow. Firms with multiple investors and expensive valuations have left no space for new investors to enter.

“The valuations have been going down, and some large start-ups are reducing the percentage of losses that they making. This will pave way for more start-ups to enter the market. The stock markets too have crossed the stage of fancy valuations, but we have seen IPOs in general getting fully subscribed at right valuations,” informs Khurana.

IPO exit is a long road for pe COS

1. PE investments are also leading the market towards IPOs, yet another elusive form of funding in the start-up sector
2. Giants like Flipkart have stayed away from going public, unlike start-ups like Infibeam, Quickheal Tech
3. Start-ups with multiple investors and expensive valuations have left no space for new investors to enter

Source: DNA India