TC Debate: Is there a huge Series A crunch in India?

Our new section TC Debate is going in full swing and we have already discussed two hot topics: Are Indian investors too stringent when it comes to investing in startups? And which e-com model leads to profitability first? In this edition, we are discussing another important topic: Is there a huge Series A crunch in India, as often complained by some investors and entrepreneurs? And, why is Series A funding not happening?

To discuss this, we got on board Rohan Bhargava, co-founder of cash back sites Pouringpounds.com (UK) and Cashkaro (India), which recently received $750,000 from a group of 10-12 independent UK-based angel investors; and Karthee Madasamy, managing director, Qualcomm Ventures India, which has invested in over 10 companies in India.

Rohan Bhargava (for the motion)

While VCs and investors are proactive in meeting new businesses and exploring tech startups, they are extremely risk averse in making investment decisions. It is possible that this hesitation stems from the recent e-commerce experience of many VCs where many companies deployed capital aggressively in 2011 and 2012. Thus far, their experience has been mixed since growth rates have not matched initial expectations. Consequently, VCs are more cautious now.

At a recent technology event, several leading VCs mentioned that their minimum criteria for investing, even at a Series A stage, is to see a clear path for a $100 million exit. This is often hard to demonstrate for startups where the funding is needed to prove the merits of the concept, build scalable technology and marketing. I feel many VCs shall miss great opportunities with this mind-set.

On the contrary, VCs and investors outside India are far more willing to back proven ideas and strong teams that have been able to demonstrate initial traction. Perhaps, this is also reflective of the more mature nature of those markets.

Karthee Madasamy (against the motion)

I don't think there is a Series A crunch in India. When we came to India in 2007, there not many investors were available for startups to raise money. Now, the scenario has changed. A number of investors are willing to support startups in their early stages.

It is obvious that Series A funding will come only when companies start showing some kind of validation in terms of traction or revenues. Entrepreneurs need to convince VCs why they should put money in their company and what benefits they would get. These days, a number of startups are going global, getting some traction overseas and generating revenues. So over a period of time, this will evolve and VCs will start putting Series A funding.

Most of our investee companies went on to raise next round of funding at a higher valuation. So, it is not fair to say a Series A crunch exists in the country.

Conclusion

While things are on the up and up, there is still a Series A crunch in the country, like in any other market (including the US). There are specific reasons for the same—one of these could be that Indian companies are taking longer to achieve certain milestones in terms of traction or revenues. As long as startups don't grow faster, investors will continue to adopt a 'wait-and-watch' strategy.

Another reason could be that India has not produced many successful global companies to boost the confidence of VCs to put in money and support startups in their growth stage.

(Edited by Joby Puthuparampil Johnson)