When
Aditya Rao, 27, set out to raise his first institutional round of
funding for LocalOye, a home and local services marketplace, he was
confident getting investors wouldn't be tough. Rao raised $5 million in a
Series A round of funding from New York-based investment firm Tiger
Global and Lightspeed Venture Partners earlier this year. LocalOye is a
part of a new tribe of earlystage startups, in hyper-growth categories,
which has mopped up millions of dollars at never-seen-before valuations
in a remarkably short period of time.
In the past year, young Indian startups, some of which are not even incorporated as companies, have raked in $3-5 million in funds as investors lay very early bets in search of the next unicorn - those billion dollar companies which are not so mythical anymore.
Overnight doubling of valuations, competitive bids and the use of funds to lock out rivals are the new normal for the fledgling Indian startup ecosystem which has attracted unprecedented capital of late.
Early-stage round sizes doubled in a year
Says Rao, who started LocalOye back in 2013, "Startups which boast of either of these three things are able to command a higher valuation at Series A- multiple term-sheets and hence VCs to choose from, riding a wave (being part of a hot industry) or having great traction."
According to startup data collector Tracxn!, the average size of Series A and B rounds combined more than doubled from $6.68 million in the first quarter of 2014 to $14.29 million in the same period this year, with a big bump up taking place in Series B rounds. What used to be historically a Series A round at $2-3 million is raised at the seedstages buoyed by an upcoming group of active entrepreneurturned-angel investors and pureplay VCs entering the ecosystem at the idea stage, backing teams and not the business. Says Albinder Dhindsa, co-founder of express delivery venture Grofers, which raised $45 million in little over two months from Sequoia Capital and Tiger Global earlier this year, "We are one of the first in what is going to be a long list of early stage companies that achieve $100 million plus valuation within a couple of years of starting. Investors are a lot more willing to bet aggressively early now as the market is very competitive, both for new companies and for investors to get access to these companies."
Competition fuels soaring valuations
Aggressive fund-raising abilities, shorter time gap between funding rounds and a go-for-broke attitude of the founding teams are some of the cachets that distinguish a potential winner from the rest of the flock. Investors say they are sanguine about the success of a few of these startups, justifying their expensive deal making, which will offset the losses made on the ones who fail."VCs are hungry for such deals because of the large market that exists here. Indian consumers are responding very quickly to any new service that's better than their current options. With the entry of newer Series A investors like Tiger, the competition has increased significantly, again driving up the valuation. Almost all VCs are clearly chasing only the potential number one or two in any space," says Anand Lunia, founder of early-stage fund India Quotient. Over the past two years, as many as 120 startups have raised more than $3 million without having done a seed or angel round. Seventeen startups have raised more than $10 million in their first round of funding without raising any seed capital.This signals that institutional investors are willing to wager on ventures right at inception."As an investor, if you have to play in this market, you need to pay up. The best founders, however, target a valuation that is at least 10 to 12 times the total capital raised in prior rounds. This ensures that the business is growing in a capital-efficient manner and there is sufficient value creation between rounds," says Tarun Davda, director at Matrix Partners, which has invested in Ola, TinyOwl and Practo among others.
Getting to the capital efficiency stage though is still some time away for a majority of these startups. The immediate goal is to take a leadership position, for which founders say they need capital and that, too, in abundance. Harshvardhan Mandad, 25, co-founder & CEO of Mumbai-based fooddelivery app TinyOwl, says if given a chance he'd like his company to grow in a stable way and without having to raise funds every two months, a sentiment echoed by many other young entrepreneurs. But the reality is starkly different for this fast-growing company which is having to fiercely fight competitors like Zomato, Food panda and a swarm of other food delivery startups. TinyOwl will need to build a gargantuan war chest, says Mandad. "We would raise another big round soon if we have to achieve our milestones like that of being in 50 cities by the year-end." The one-year-old Mumbai-based venture has in all raised $20 million already.
Echo-effect on later rounds
Another crowded category is the branded budget hotel marketplace where OyoRooms is one of the well-funded players. Says Ritesh Agarwal, 21, its founder, "Expensive early rounds do impact future valuations. Having gone through a couple of rounds, my learning is that investors know what they are investing in--which is to build a 20x or 40x company . In that case, a few million dollars extra don't matter since your conviction is that it'll be a way larger company ." Founders should, however, consider potential downside risks because of unjustifiable valuations and also quick dilution of the founding teams' shareholding.
Says Rao of LocalOye, "I've seen many startups raising impractically large rounds at steep valuation. This can make life difficult for the startup in the next round because they will have to maintain that exponentially fast-growing valuation in the next round. And most times, between Series A and B, the startup hasn't solved every problem out there, especially that of scale. This results in a down round next time."
Lunia of India Quotient takes a crack at the future: "What may happen going forward is that we'll see below-par companies shut or pivot to a niche model to survive instead of down rounds which value the company lower than its previous round." Young founders need to know that the game begins with Series A; it's not even a milestone, and definitely not the end," he says.
In the past year, young Indian startups, some of which are not even incorporated as companies, have raked in $3-5 million in funds as investors lay very early bets in search of the next unicorn - those billion dollar companies which are not so mythical anymore.
Overnight doubling of valuations, competitive bids and the use of funds to lock out rivals are the new normal for the fledgling Indian startup ecosystem which has attracted unprecedented capital of late.
Early-stage round sizes doubled in a year
Says Rao, who started LocalOye back in 2013, "Startups which boast of either of these three things are able to command a higher valuation at Series A- multiple term-sheets and hence VCs to choose from, riding a wave (being part of a hot industry) or having great traction."
According to startup data collector Tracxn!, the average size of Series A and B rounds combined more than doubled from $6.68 million in the first quarter of 2014 to $14.29 million in the same period this year, with a big bump up taking place in Series B rounds. What used to be historically a Series A round at $2-3 million is raised at the seedstages buoyed by an upcoming group of active entrepreneurturned-angel investors and pureplay VCs entering the ecosystem at the idea stage, backing teams and not the business. Says Albinder Dhindsa, co-founder of express delivery venture Grofers, which raised $45 million in little over two months from Sequoia Capital and Tiger Global earlier this year, "We are one of the first in what is going to be a long list of early stage companies that achieve $100 million plus valuation within a couple of years of starting. Investors are a lot more willing to bet aggressively early now as the market is very competitive, both for new companies and for investors to get access to these companies."
Competition fuels soaring valuations
Aggressive fund-raising abilities, shorter time gap between funding rounds and a go-for-broke attitude of the founding teams are some of the cachets that distinguish a potential winner from the rest of the flock. Investors say they are sanguine about the success of a few of these startups, justifying their expensive deal making, which will offset the losses made on the ones who fail."VCs are hungry for such deals because of the large market that exists here. Indian consumers are responding very quickly to any new service that's better than their current options. With the entry of newer Series A investors like Tiger, the competition has increased significantly, again driving up the valuation. Almost all VCs are clearly chasing only the potential number one or two in any space," says Anand Lunia, founder of early-stage fund India Quotient. Over the past two years, as many as 120 startups have raised more than $3 million without having done a seed or angel round. Seventeen startups have raised more than $10 million in their first round of funding without raising any seed capital.This signals that institutional investors are willing to wager on ventures right at inception."As an investor, if you have to play in this market, you need to pay up. The best founders, however, target a valuation that is at least 10 to 12 times the total capital raised in prior rounds. This ensures that the business is growing in a capital-efficient manner and there is sufficient value creation between rounds," says Tarun Davda, director at Matrix Partners, which has invested in Ola, TinyOwl and Practo among others.
Getting to the capital efficiency stage though is still some time away for a majority of these startups. The immediate goal is to take a leadership position, for which founders say they need capital and that, too, in abundance. Harshvardhan Mandad, 25, co-founder & CEO of Mumbai-based fooddelivery app TinyOwl, says if given a chance he'd like his company to grow in a stable way and without having to raise funds every two months, a sentiment echoed by many other young entrepreneurs. But the reality is starkly different for this fast-growing company which is having to fiercely fight competitors like Zomato, Food panda and a swarm of other food delivery startups. TinyOwl will need to build a gargantuan war chest, says Mandad. "We would raise another big round soon if we have to achieve our milestones like that of being in 50 cities by the year-end." The one-year-old Mumbai-based venture has in all raised $20 million already.
Echo-effect on later rounds
Another crowded category is the branded budget hotel marketplace where OyoRooms is one of the well-funded players. Says Ritesh Agarwal, 21, its founder, "Expensive early rounds do impact future valuations. Having gone through a couple of rounds, my learning is that investors know what they are investing in--which is to build a 20x or 40x company . In that case, a few million dollars extra don't matter since your conviction is that it'll be a way larger company ." Founders should, however, consider potential downside risks because of unjustifiable valuations and also quick dilution of the founding teams' shareholding.
Says Rao of LocalOye, "I've seen many startups raising impractically large rounds at steep valuation. This can make life difficult for the startup in the next round because they will have to maintain that exponentially fast-growing valuation in the next round. And most times, between Series A and B, the startup hasn't solved every problem out there, especially that of scale. This results in a down round next time."
Lunia of India Quotient takes a crack at the future: "What may happen going forward is that we'll see below-par companies shut or pivot to a niche model to survive instead of down rounds which value the company lower than its previous round." Young founders need to know that the game begins with Series A; it's not even a milestone, and definitely not the end," he says.
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