Startup valuations likely to drop, warn venture capital funds

A majority of venture capital funds believe that the seed stage of funding for start-ups will see maximum activity during the year while the average deal size will be between USD 1 million and USD 5 million, a survey says.

According to a survey by News Corp-owned VCCircle Network, the year will not be good for start-ups looking to raise funds in Series B, C and D as venture capital investors believe that valuations for these rounds will drop.

"Nearly 70 per cent of the VCs believe that the seed stage will see the most activity in the current year and 77 per cent are of the view that the average deal size will be between USD 1 million and USD 5 million," the survey noted.

Only 23 per cent of those who participated in the survey showed interest in investing in the e-commerce space while 46 per cent indicated their interest in investing in start-ups in the consumer service and product space.

"The survey has predicted more challenges for start-ups in 2016. While mid stage venture funding deals had hit a speed bump a few months ago, early stage funding had remained robust, keeping hopes alive for start-ups looking for initial financing support," VCCircle Network Founder Sahad P V said.

"However, if the first month of 2016 is anything to go by, even angel and seed stage investors seem to have tightened their purse strings."

The survey further said about 62 per cent of venture capital and private equity investors believe exit valuations will come down or remain flat this year.

Some 46 per cent of venture capital funds believe that the focus for Indian start-ups during the year will be 'increased focus on profitability'.

"About 31 per cent think it will be 'mergers and acquisitions and consolidation' while 23 per cent predict it will be shutdowns, job cuts and scaling down of operations," the report said.

The survey was carried out among 21 firms over a span of eight weeks (January-February 2016).