The Indian startup sector is seeing a shakedown, and quality is winning over quantity

The dollars are disappearing.
The dollars are disappearing.
Image: Reuters/Arko Datta
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With venture capital (VC) investors turning cautious, fewer entrepreneurs entered the Indian startup sector in 2016—and an even smaller number signed up in 2017.

While over 9,800 tech-based startups were incorporated in 2015, the number dropped to 4,630 in 2016, according to data from Bengaluru-based startup research platform Tracxn.

The number of funding deals, too, fell from 536 in 2015 to 460 in 2016, according to data from Chennai-based funding research firm Venture Intelligence. Investors poured in around $2.05 billion into Indian startups in 2015; this fell to $1.5 billion in 2016, the data show.

So far in 2017, only 294 startups have been incorporated, according to data from Traxcn, and 181 funding deals worth $700 million have been signed so far, as per Venture Intelligence data.

However, the shrinking numbers are indicative of only a course correction towards a healthier ecosystem, experts say. Investors have clamped up because they haven’t seen positive returns. This, in turn, is pushing entrepreneurs to perform better and raise the bar.

“We still haven’t seen any big wins that justify VC returns yet, and because of that money has dried up in India,” said Vijay Anand, founder of Chennai-based incubator The Startup Centre. With so many startups closing down, the enthusiasm is a bit low. “That said, this is also the time when sustainable models and great entrepreneurs emerge. So while the quantity has gone down, there is an uptick in the quality of entrepreneurs—and also entrepreneurs not looking at tech startups merely for the coolness factor but also at sustainability, and being mindful of the Indian market realities,” Anand explained. “That is a good thing, I’d say.”

Also, the slowdown in terms of absolute numbers is a result of the spurt in deals in 2015.

“There was an excess of deals… I thought we saw a surfeit of lousy deals, several of which got funded because that’s the way the market works…there is a mob mentality and now you’re seeing a fallout of that,” said Naru Narayanan, president of the Chennai chapter of The Indus Entrepreneurs (TiE), a global non-profit focused on entrepreneurship. According to Narayanan, investors are now becoming more discerning in their approach and that’s improving the quality of entrepreneurs and their businesses.

“About two years ago, a whole lot of brash aggressive entrepreneurs were regularly visible, asking for all kinds of outrageous valuations; those guys have all vanished,” Narayanan said. “When there is a shakeout in the marketplace and people realise that funds are now no longer so easily available, then automatically they tighten their belts and come up with more sensible proposals so I think that that is happening to some extent,” he said. Narayanan now expects a “resurgence in quality deals” over the rest of 2017.