Tech startups in a bubble-like situation

Mumbai: A high concentration of investments in technology startups coupled with the failure of many such ventures to deliver on their growth promises according to industry experts have created a ‘bubble’ like situation in technology startups in India.

According to the survey conducted by Innoven Capital, one of Asia’s leading venture lending platform, about 65 per cent of the respondents believes that Indian startups are in a technology bubble, of which 18 per cent felt that it is close to bursting soon.

The survey captured responses from over 170 startup leaders across bootstrapped as well as funded ventures. Indian startups had raised about $4 billion in 2016 with about 70 per cent of the investment flowing into technology startups. The excessive concentration of investment in technology startups has pushed their valuations higher, which is not being justified by the returns these companies are generating.

“Many of them have failed to deliver the promised returns. This will have an impact on the future fund raising plans of technology startups in India. Only companies with strong business models and growth visibility or younger startups with some great ideas would be able to raise capital smoothly. This has already started happening with investors preferring those firms which has attained strong market leadership and have developed profitable business models,” said Ajay Hattangdi, group CEO, Innoven Capital India.

On the fundraising environment in 2016, 63 per cent of the respondents who attempted to raise funds confirmed that they had an unfavourable funding experience in 2016 with almost half of them not being able to raise any funding and the rest raised either a sub-optimal external round or a bridge round.

While difficulty in raising equity funding was voted as the top business challenge, followed by difficulty in managing talent and market creation in 2016, entrepreneurs are still uncertain whether fundraising will be still challenging in 2017 as well. It revealed that about 94 per cent of the respondents are looking to raise funding in 2017, with VC backed companies aiming to raise an average of $12.5 million.