“It was the best of times, it was the worst of times…”

Ask anyone in the Indian startup ecosystem about the state of the state—the answer will inevitably paint the last three years as a “golden period” for Indian startups and investors. Thanks in large part to VC-funded discounts and Jio-fuelled dirt-cheap data, the online market in India is booming like never before. Everything from ride-hailing to food delivery to e-commerce has become a mainstream consumer market rather than the niches they were earlier. Billions of dollars of new investor capital has entered the country and more than a dozen startups have reached the exalted unicorn status. Most importantly, for the first time ever, the Indian startup ecosystem is seeing large exits, starting from $30-40 million cheques all the way up to the Flipkart mega-deal.

The best of times, right?

Not quite.

While billions of dollars of VC money has been invested, most of this has gone to mid-to-late stage deals beyond Series B. On the other hand, early-stage funding has seen a sharp, almost precipitous, drop in the last two years.

According to data from research firm Tracxn, the number of investments in 2018 fell 22% year-on-year to 870. More worryingly, the number of seed and angel deals have more than halved from the peak of 1,030 in 2016 to 484 in 2018.

This trend continued in the January-March 2019 quarter, with just 147 early-stage firms raising funding. According to data from VCCircle, while venture deals alone fell by a third year-on-year – 71 in the January-March 2019 quarter, the decline in seed deals was even sharper. The number of startups getting funded more than halved to just 76 in this quarter.

So what explains this peculiar pattern?

Endgame SoftBank

The one-word answer would be Japanese investment behemoth SoftBank.

The traditional VC-funded startup playbook went something like this. Raise a small seed round to get off the ground. Follow it up with a larger Series A round to reach product-market-fit. Raise Series B and beyond to fund growth and put you on the path to an exit for the investors. Going from seed to Series B would take three to four years on average, while the exit would take a further four to five years.

But SoftBank’s billions completely disrupted this playbook. Ambitious startup founders and VCs no longer needed to have the discipline and patience to experiment with small cheques and double down on proven winners. Instead, the playbook consisted of making large investments right from the get-go in the hope that this capital will help the startup get onto SoftBank’s radar and secure a $100 million-plus follow-on investment.


Sumanth Raghavendra

Sumanth is a serial entrepreneur with more than eighteen years experience in running startups. He is currently the founder of Deck App Technologies, a Bangalore-based startup attempting to re-imagine productivity software for the Post-PC era. Sumanth’s columns appear regularly in leading publications. He holds MBA degrees from the Indian Institute of Management, Bangalore and Thunderbird, The American Graduate School of International Management, USA.

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