Startups face fund crunch

Hyderabad: With economy in India and some parts of the world hitting slow lane, accessing capital, the key driver of growth, has become a big challenge for startups, says industry insiders.

They point out that high networth individuals (HNIs) have become extra cautious on angel investments because of slowdown fears.

Further, volatility in stock markets also took a toll on some HNIs.

"Thanks to slow down, accessing capital has become a big problem for startups, especially early and mid-stage ventures.

Cost of capital for startups in India is among the highest in the world. In our country, the discount rate (cost of capital) is around 20 per cent.

Unfortunately, startups are not able to raise funds at that high cost now because of downturn," Raghavendra Adla, founder, Paninian India Private Limited, told The Hans India.

Lack of capital hits early stage startups hard as such ventures burn cash for a certain period to create market space for themselves. However, startups looking for funding rounds above Series B are not feeling the pressure yet.

"Early stage startups are the ones which are facing the pinch of the slowdown. If these startups don't conserve cash, they will have hard time sustaining without funding for the next year or two," said KK Jain, founder of AnyTimeLoan.

Startup founders are also facing a negative trend in valuation as investors are using this current scenario to their advantage. A startup which witnessed higher valuation few months ago is being quoted lower valuation numbers now.

"A founder has to decide whether they want to go downward round in terms of valuation or raise capital at the right time if they have sound fundamentals of business that can support them to wade out two years," Jain added.

According to Raghavendra Adla, bankers are also wary about sanctioning loans as 36 per cent of Mudra loans have turned NPA.

Meanwhile, startups that look towards the government for support are left high and dry as the Centre's assurance of Rs 10,000 crore startup fund is yet to see the light of the day, Adla said.

Amid an unfair ecosystem for startups, the optimistic trend is the entry of new category of startup investors which are coming from traditional businesses, opined Dr Anu Gupta, founder of Kyt Ventures, a pan-India angel network for early stage startups.

"As HNIs have lost substantial wealth in the stock market they are hesitant to take risk in angel investing at this point. However, those engaged in traditional businesses are becoming more open to angel investment as an asset class as they are witnessing closely the evolving market landscape and impact of disruptive startups on their businesses," she explained.

Converting a challenge into an opportunity is what makes an entrepreneur. But, will startups be able to find a solution and convert the adversity of economic slowdown into an opportunity is a big question now.

For startups to flourish in India, the implementation of government policies should be fast-tracked, a structural change in the startup ecosystem is the need of the hour and the government should step up steps to provide access to capital, entrepreneurs say.