The Series-B cliff – Good Capital

While reading a report on startup funding in India, I came across this chart of growth-stage startup data.

And while funding amounts point to a growing, healthy investment ecosystem…

… The number of deals getting funded at growth is essentially flat since 2016/17.

It’s clearly odd for the deal count to be flat in the face of an expanding market opportunity [ref. footnote 1].

At a firm-level, this isn’t the case at all. In fact, VCs who have been here a while (Accel, Sequoia, etc.) have significantly increased AUM and invested it into growth for their portfolio over this period.But I believe the deal count is down because of a general scarcity in the number of unique investors. This graph demonstrates across stages:

[Inc42 Indian Startup Funding Report]

Unique investor count is moving in the wrong direction altogether!

Part of this is skewed downward because of a controversial “angel tax” policy issue in 2018. But my primary focus is the limited universe for Series A+ startups.

And startups I’m talking to can’t think of more than 6-7 “first-choice” VC funds at that stage.

The knock-on effect of this dynamic is felt at the seed stage. GPs making seed investments need to feel secure that they will find enough unique choices of downstream capital to give their portfolio a good shot at the next round.

And if you have effectively 15-20 individuals deciding what makes it past a Series B, that’s going to limit the opportunity for diverse and genuinely new ideas to see the light of day.

Opportunities missed

It would be a pity if the ecosystem adapts to the current status quo as normal.

In fact, I’ve observed a clear shift in the local ecosystem where the “current accepted wisdom” is avoiding large opportunities:

1. Startups building moats around data:
With an ecosystem-wide emphasis on the noble goal of clear & early paths to profitability, few startups are even thinking about building moats around data anymore.

2. Subscription products targeting global customers:
Similarly, (i.) a widely-acknowledged belief that local B2B customers have come-of-age, and (ii.) a natural tendency to find early customers in local markets is turning entrepreneurs away from chasing global customers.

The fact remains that India has a cost advantage. And maturing technology talent means that we can deliver user experiences that match expectations of global customers.

In fact, I believe globally-targeted subscription products shouldn’t be limited to just B2B.

How do you do deal with this

Our approach has been to foster relationships with global VCs, create exposure early for our partner companies, and enable both sides to have access to better opportunities.

I feel strongly about this because even the limited time I have spent in mature ecosystems like the Bay Area has demonstrated the diversity of potent startup ideas that emerge when freedom of choice is with the entrepreneur.

While the later stage has a number of capable firms focused on India (DST, Falcon Edge, Greenoaks, Tiger, etc.), the $3-$10ish mn cheque size still doesn’t have enough global VCs on the scene.

VCs tend to naturally focus on their own markets. I’m seeing some very early signs of global VCs, with an AUM > $400mn, starting to include Indian within their opportunistic bucket. This starts as simply as sending a partner to explore the local market, with this wedge only expanding over time.

Footnotes

Evidenced by key developments like rampant consumer adoption (>350mn smartphones), fast & cheap mobile data (avg. consumption > 8GB/pp/month, massive proliferation of digital payments (>1bn monthly transactions via UPI), large startups showing signs of longevity, etc.

Other things we’re reading:

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