Start-down: Angels won’t tread on fools’ ventures
Only two or three ago, things were super-hot for the business, with online grocery startups catching the fancy of several investors. Even corporate bigwigs, including Tata Group chairman emeritus Ratan Tata, Wipro chairman Azim Premji, Infosys co-founderbusiness Updated: May 30, 2016 11:03 IST
Last month, when PepperTap announced it was closing down operations, the spotlight fell on the plight of hyper-local delivery companies. After all, the Snapdeal-backed company was among the top three internet grocers in the country, and was growing at 30% to 40% every month.
But cash was no longer the king.
PepperTap was losing money on every order, big or small, which meant sooner or later it would run out of cash. “We couldn’t shake off the feeling that we were walking towards the edge of a cliff hoping that things will get better before we reach the abyss… The path-to-profitability was looking very long,” wrote Navneet Singh, co-founder and CEO of PepperTap in his blog “the PepperTap Journey: Our Story”.
Last week, TinyOwl, the fastest growing food-tech startup, pulled out of 10 cities, except Mumbai. Even the backing of marquee investors, Sequoia Capital, Blume Venture Partners, Matrix Partners and Nexus Venture Partners among them, couldn’t keep it afloat.
Food delivery platform Dazo, courier startup Deliver.me, Muziboo that connected musicians, and payment platform PayZippy are a few others that never managed to raise the next round of capital.
What’s worse, unlike PepperTap, which raised $51.5 million and still has most of that in the bank, others did not even cross the third or fourth round of funding. Seed and angel investors, who participated in the first two rounds, lost their money.
A BUBBLE WAITING TO BURST
Only two or three ago years, things were super-hot for the business, with online grocery startups catching the fancy of several investors. Even corporate bigwigs, including Tata Group chairman emeritus Ratan Tata, Wipro chairman Azim Premji, Infosys co-founder Narayana Murthy and Hero MotoCorp CEO and CMD Pawan Munjal, turned angel investors. In 2015 alone, $321.38 million was put into 719 startups. In 2011, the number was $96 million for 316 startups.
“People were investing without the knowledge of angel investment,” said Ajay Hattangadi, chief operating officer of angel fund InnoVen Capital. “There was a bubble forming.”
In a recent television interview, Naren Gupta, co-founder of Nexus Venture Partners, which had invested in TinyOwl, said companies shutting down cleanse the system. It’s happening in the US — 20 out of 150 unicorns (startups with a valuation of over $1 billion) have either lost their valuations or closed down. In India, too, Flipkart lost a third of its valuation, as Morgan Stanley marked down the value of its shares in the e-tailer twice in two months.
A part of the fallout is also because 90% of the money deployed comes from the US and China.“The venture market correction happened in the US and China in mid-2015, and is now happening in India,” said Deepak Gupta, co-founder at Equity Crest, a platform to raise seed capital.
“The determining factor of angels to invest is that they will get an exit,” said Sunil K Goyal, founder, YourNest Angel Fund.
Investments were made on the basis on ideas and not on unit economics, said Avnish Bajaj, MD of multi-stage fund Matrix Partners. “Money will now be lost and companies will go out of the market.”
In 2016, investors are treading with caution. There’s enough money out there, but they are not in a hurry to invest.
So, when Sid Talwar, co-founder of Lightbox Ventures, was putting money in used-car marketplace Droom, he took five months to evaluate Droom’s founder Sandeep Agarwal’s pitch note to raise $1.5 million. There were half a dozen firms in that space, but every other company was a discovery platform, while Droom would enable commerce as well. Also, Agarwal had plans to take Droom overseas. So in the end, Talwar did invest.
Investors rarely conducted this drill in the past two years. “Me-too companies got funded. Valuations were unworldly, based on hype. That will come down,” said Talwar.
The change is already visible. According to data from VCCEdge, the average valuation of companies raising angel investments has fallen by 30% to $2.14 million, and the average deal size is down by a third to $500,000. “Of the big e-commerce guys, no one has scaled up. I don’t think there will be any major announcement in the next couple of quarters,” said Nita Kapoor, CEO of VCCircle Network. So, what will be the road ahead? Every investor will want to see a pathto-profitability. Startup founders will have to be more judicious about spending, and will have to avoid hyper-competitive industries. Consolidation will be key. The process has already started. Ola Cabs bought TaxiForSure, OYO is buying ZO Rooms.
“Only a small proportion of companies will raise series-A funding,” said Deepak Gaur, MD at Saif Partners. And only 15-20% of all angel-funded companies will make it to the next stage.