Seed Funding Crunch Hits India’s Startup Capital Bengaluru Hardest

This article is an overview of DataLabs by Inc42’s upcoming Annual Indian Tech Startup Funding Report, 2019 which offers a detailed analysis of the investment trends, mergers & acquisitions (M&As), startup policies and macroeconomic factors that influenced the Indian startup ecosystem from 2014-2019. Read all articles in this series

India is home to 24 active startup hubs or cities across 18 states and union territories. If that seems like a lot, consider that that’s just half of the country.

Naturally, there’s a great degree of disparity in the startup ecosystem when it comes to regional growth and diversity. Among the 24 active startup hubs, the top three — Bengaluru, Delhi NCR and Mumbai — have dominated the startup funding activity in India for five straight years (2014 to 2018) across all three major indicators including the value of funding amount, deal count and the number of unique startups funded. The year 2019 was no different as the share of Bengaluru, Delhi NCR and Mumbai in both funding amount and the deal count was 87% and 84% respectively in the total funding.

The dominance of these three cities in investments is primarily due to the socio-economic advantages these three cities have compared to their counterparts, in addition to that the presence of a large number of venture capital investors in these top three hubs. This gives startups operating a competitive edge over startups from other cities when it comes to fundraising.

A big indication of the degree of disparity in terms of availability of investment opportunity is the distribution of unique investors in 24 startup hubs in India in 2019.

For a better understanding of the startup investment activity in these three leading hubs, we will be analysing the capital inflow trends across three primary funding stages — seed, growth and late. Further, the funding stage funnels will indicate how clear the progress track is for startups when it comes to crossing over from these funding stages.

Bengaluru Not Great For Seed Stage Startups, Anymore

Even though the deal count among Bengaluru startups fell slightly (4.3%), the city’s share of the overall deal count in India for 2019 actually increased. With 35% of all deals in 2019, Bengaluru’s share went up from 34% of the overall deal count in 2018.

The startup capital of India recorded total funding of $5.3 Bn across 267 deals in 2019. Compared to the previous year the volume of investment in the city was low. This can be ascertained from the fact that the funding amount witnessed a minimal increase of 1.4%, while the deal count fell.

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The opportunity of investment into new ventures is shrinking with time. This statement can be justified by looking at the CAGR of unique startups funded at the seed stage in comparison to the bridge (primarily Pre-Series A) and late (Series C and beyond) stages. In the case of the seed stage, the CAGR from 2015 to 2019 was -14%, whereas for bridge and late-stage investments were 22 and 13% respectively.

The number of seed-stage funded startups went below 100 for Bengaluru for the first time since 2015.

In the seed stage, the confidence towards enterprise tech startups in Bengaluru continues to remain high, as this was the top sector in terms of startup funded at seed stage in the city in 2018 as well.

Deeptech ended up in the second spot in terms of startups funded at the seed stage in 2019 fuelled by the growing demand for AI/ML-based solutions. On the other hand, fintech, which was second in 2018, came down to fourth in 2019, as the count of unique startups funded at seed stage plunged by 41%.

Delhi Rides On Late-Stage Funding

Startups based in Delhi and the National Capital Region combined raked in funding worth $4.5 Bn across 225 deals in 2019. Similar to Bengaluru, there wasn’t much change in the value of funding amount compared to 2018, whereas the total deal count in 2019 plunged 8% compared to 246 deals in the previous year.

For Delhi, the count of unique startups in enterprise tech, ecommerce and fintech were the highest at seed stage in 2019. When it comes to average ticket size, Delhi with $20 Mn was ahead of Bengaluru ($19.85 Mn) and Mumbai ($8.6 Mn). This also indicates funding predominantly for late-stage startups. Among late-stage startups, the count of funded startups in ecommerce, real estate tech and fintech sectors was higher than others.

Even as late-stage funding grew with the likes of Paytm, Renew Power and Delhivery raising funds, seed funding fell. Just like across most hubs, the crunch in seed-stage investment in Delhi is evident from the count of unique startups funded at seed stage diminishing at -15% (CAGR 2015 to 2019) contrary to the positive growth rate of 12% for late-stage startups. In the case of the year-on-year growth of funding, the amount is similar, with funding amount for late-stage rounds growing at 8%, which is relatively higher than seed-stage funding which has CAGR of 5%.

Despite Surge In Capital Inflow, Mumbai Trails Metro Peers

Mumbai bucked the trend of funding amount falling in Bengaluru and Delhi with startups raising $1.3 Bn across 151 deals in 2019, 27% higher than 2018 ($992 Mn). In contrast, the deal count plunged 11% compared to the previous year, although here too, this is better than Bengaluru and Delhi NCR as the decrease in the total deal count is comparatively lower in Mumbai.

But when it comes to the seed-stage startup ecosystem, compared to Bengaluru and Delhi NCR, Mumbai witnessed a larger decline in the count of unique startups funded. In 2019, the count decreased by 24% compared to 15% and 10% drop in Bengaluru and Delhi NCR respectively. And even when we look at the CAGR of the seed-stage funding from 2015 to 2019, Mumbai has the fastest diminishing rate (-17%) compared to Bengaluru (-14%) and Delhi NCR (-15%).

In comparison to Delhi and Bengaluru, Mumbai seems to have a lesser disparity in the ratio of startups in late-stage to those in the seed-stage, over the past five years (2014-2019). While Bengaluru seems to be seed-stage dominant, Mumbai has a lesser degree of skewness in its funnel, though the sharp drop from the growth stage to late-stage is apparent.

The dominance of these top three cities has been a consistent theme over the years and we do not expect it to wither away in the near future. In the Annual Tech Startup Funding Report 2019, the analysis goes deeper than the top three cities with other hubs such as Hyderabad, Chennai and Pune also coming into focus. Pune, in particular, had an outlier year in 2019.

Find out why and learn about the emerging startups’ hubs in India in the upcoming DataLabs by Inc42 Annual Tech Startup Funding Report 2019.

With Inputs From Nikhil Subramaniam