Scalability major reason for startups’ failure to raise follow-on round: Innoven Capital

Scalability is one of the top reasons behind startups’ failure to raise funds, according to a study from venture debt firm InnoVen Capital.

About 41% respondent startups in the study cited scalability as the main reason behind a startup’s inability to raise capital. A highly competitive space and team dynamics with a 24% share each, and no profitability mass function ( 12%) were other reasons for startups to fail, according to the annual report Early Stage Investment Insights Report published Friday.

Also read: Scalability comes with a fair share of brutality, says PayU’s Rau

A budget for 16-18 months was found to be the ideal runway for raising seed rounds, the report said. The report was based on market information and survey conducted with 18 early stage investors, the Mumbai-based debt lending firm said in a statement.

“Consumer internet, enterprise tech/AI, fintech and edtech emerged as the most active sectors for early stage investors. Investors believe that this trend will continue but indicated that they would like to do more in enterprise tech and AI and fintech in 2020,” the statement added.

Early stage funding in 2019 more than doubled to Rs 693 crore, as against Rs 334 crore, a year earlier. This jump was propelled by a 22% increase in number of deals and a 70% increase in deal size, the report said.

The group included Mumbai Angels, Indian Angel Network, Chennai Angels, Hyderabad Angels, LetsVenture, Axilor Ventures, Blume Ventures, Kae Capital, KStart, Waterbridge Ventures, Artha Ventures, India Quotient, Venture Catalysts, Stanford Angels, Angel List, Dream Incubator, Lead Angels and Sauce.vc.

Other key findings:

• A two member founding team was most successful in raising funds. About 89% of the startups have two co-founders in the sample group of the report
• The report also highlighted a no product market fit and niche addressable market as the biggest red-flags for early-stage investors in 2019
• There was also a decline seen in funded startups with at least one female co-founder, from 17% in 2018 to 12% in 2019
• Bangalore, NCR (National Capital Region) and Mumbai continued to form the core of the start-up eco-system, the report said. Share of Bangalore (37%) and Mumbai (20%) hovered around at 2018 levels while NCR saw a significant rise, increasing from 17% in 2018 to 29%

Also read: SaaS, B2B marketplaces, electric vehicles make waves in tech funding deal charts