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Is the worst over for venture capital dealmaking in India?

14 October, 2016

Venture capital (VC) firms who had tightened their purse strings almost a year ago and the number of VC deals has been sliding ever since, seem to be returning to the negotiating table to invest in startups.

The number of venture deals in September rose to 27 from 25 in August, reveals News Corp’s VCCEdge, the data and analytics platform of VCCircle. This makes it the second successive month where the number of startups getting VC funding has risen.

Although the number of monthly VC deals is still much lower than what was clocked early this year, let alone the highs of 2015, and the value of announced investments is also lower, the slowdown in VC dealmaking seems to have bottomed out. VCCircle had last month indicated how the data for August is pointing towards such a trend.

Sanjay Nath, co-founder and managing partner of Blume Ventures, a VC firm that is chasing deals in the seed to Series A stage, said he agrees that VC dealmaking has stabilised.

“Let’s remember venture is a very long term game. Hence, if one is looking for a pattern around trends, a quarterly or yearly reading is far more reliable than month-on-month comparisons. But I’d tend to agree that VC investing has “stabilised” more or less,” said Nath.

For venture investments last month, the bright spot emerged from the late-stage deals that were otherwise muted throughout this year while the pain at the early stage and mid-stage level continued. Late stage VC deals are captured under Series D and beyond.

The surge in late-stage dealmaking was apparent with seven transactions as against a 1-2 deals in the previous months with May drawing a blank (though June recorded five deals).

“Two factors driving more Series D and E or later-stage deals have been consolidation and disproportionately higher funding reserved for category winners,” said Nath.

The dry run at the Series A and Series B & C levels, however, continued into September. 

Series A deal volume was at 10 with a total value of $36 million. However, this was better than seven deals in July and $15.11 million value in May, the lowest this year (see the interactive infographic).

Series A venture capital deal-making is crucial for startups as it marks the first institutional round of funding and brings a larger stash of capital compared to angel or seed funding rounds. It also sets the stage for bankrolling bigger expansion plan for a startup.

For Series B & C deals, representing the mid-stage VC investments, volume at six and deal value at $30.93 million in September is the lowest this year. This is particularly alarming as it means pain for fast growing startups to get cash infusion to scale up after initial funding.

In fact, as pointed out by VCCircle on Thursday, angel and seed stage investors have started deserting startups after patiently investing in early ventures even as VCs pulled back.  

Notwithstanding the gloom as some of these numbers seem to suggest, Nath said he is positive about the coming months.

“2016 continues to be a ‘flat’ year in terms of an increase of investments… India’s consumer opportunity, however, remains as strong as ever, so as we enter 2017, investment activity including in Series A rounds should start to pick up again; the caveat being there will be a focus on backing the top 2-3 companies in any category, ” said Nath.

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Is the worst over for venture capital dealmaking in India?

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