After investing billions of dollars in the past two years, venture capitalists (VCs) are now taking a cautious approach on Indian startups as their valuations soar and losses escalate.
Investment by venture capital firms in the country fell $600 million to $1.51 billion in October-December 2015 against $2.12 billion in the same period in 2014, according to a report by CB Insights and KPMG International.
"The entire VC community has become cautious of investing in start-ups. They are analysing a company's strategy thoroughly prior to investing in them," The Financial Express quoted Peesh Chopra, managing partner at Peesh Venture Capital, as saying.
Most e-commerce firms seem to be far away from turning profitable as they burn through huge cash in giving discounts, thus incurring massive losses. Although many of them aim to make profits after two-three years, investors seem to be increasing scrutiny of their business models.
Online retailers, including Flipkart and Snapdeal, have seen multifold rise in their losses as they compete on discounts to attract customers to online shopping.
Flipkart's annual losses shot up 180% to Rs 2,000 crore in the fiscal year ending March 2015, even as the company's revenue tripled and its valuation surged to over $15 billion. Recently, another online retailer, ShopClues, said its valuations rose to over $1.1 billion, joining the unicorn club (firms with billion-dollar valuation) that includes Flipkart, Ola, Snapdeal, Paytm, MuSigma, InMobi, Zomato and Quikr.
"While the first phase of funding was about investing in big markets, now investors want to look at how entrepreneurs manage their business and compete, while investing," Niren Shah, India head of Norwest Venture Partners, told Reuters.
Venture capitalists have also become wary of investing in start-ups as many of them cut jobs and curtailed services over the past few months. Food-tech companies such as TinyOwl, Zomato and Foodpanda laid off employees in big numbers and stopped services in many cities amid growing cost pressures and inability to raise funds.
"The drop in investment does not mean lack of funds, but they are just closely watching the basic fundamentals of companies they are investing in," Milind Sharma, co-founder and vice-president of business at PepperTap, told FE.
