Accelerator->Angel->VC flow is still struggling to find its equilibrium in India

I had fun moderating the panel on early stage financing at India Internet Day. Vccircle has an interesting article.

Deal progression

The key issues are as under:

1. Too few deals are progressing from accelerators to angel, and from angel to Series A. Only 5% of deals going from accelerators to Series A might not be very different from success rate without accelerators.
2. Angel stage valuations are stretched relative to Series A valuations. At 20% success in getting to Series A, a Series A valuation of 35 cr would be a breakeven point for angels (7 cr angel valuation is typical). At 20 cr, the stage is not paying back for itself.
3. Its taking too long for deals to progress. While accelerators (admittedly apart from Mukund’s Microsoft accelerator :-) ) aim to get to next round of financing as the startup graduates from the accelerator, it is taking an additional year to get to angel financing. Angel to VC is another 2 years on average. This slow progression may also be responsible for higher failure rate. Accelerators might do well to extend the runway.
4. Lot of “recycling” – the same company going from one accelerator to another, from one angel round to another. Again points to the time it takes to build companies, and the need for early stage investors to keep supporting the good ones.
5. Too little mortality – “fail fast” seems to be good advice, but little practice.

Of course, the above applies only to startups which are in the funding play. Note that the data was gathered from about a dozen “premier” accelerators/incubators and angel funds – so while I believe this is directionally right, its not the most comprehensive survey.

5 Responses to “Accelerator->Angel->VC flow is still struggling to find its equilibrium in India”

  1. Sumanth says:

    Here is why the math looks fishy:
    If these percentage numbers are correct, it implies that there were a total of 370 companies that were received seed funding three years back…or a multiple thereof which is even more unlikely. Considering that most of these seed type of investment options have opened up only in the last two-three years, either this top of the funnel number is wrong or the timelines are not correct (if it is the latter, the conclusions about velocity etc are therefore non-sequitur).

    While I am at it, let me point out a couple of other points that are wrong:
    1) Your second point about stretched valuations is inaccurate because the 20 crore valuation that has been mentioned for Series A investments is a minimum rather than a mean or medium figure. Even if the unlikely event that the sample here consists of 370 companies at the top of the funnel and only 20 of those graduated to Series A – at least three of those 20 companies (that I know of) have returned 20X to their angel investors and therefore the mean/median would have been much higher if actually measured against this group.

    2) “Fail fast” refers to experiments/initiatives within a company – it doesn’t imply that the company fails and shuts shop, so your last point cannot be made one way or the other from the data that you have summarized.

    Finally, there are many companies that I know of who are currently in an accelerator – almost all of these have received seed funding, many of them have Angel financing and some of them even have institutional investors – all of this much before graduating from the program. So it is probably not prudent to mix accelerators with the funding chain…

  2. Alok Mittal says:

    Sumanth, trust us with simple stuff like this. Sample took care of the timelines :-)

  3. Sumanth says:

    Out of the “dozen “premier” accelerators/incubators and angel funds”, how many of them were around 3 years back? My guess would be close to zero…in which case pretty much all the points made here are not based on actual/statistically-meaningful data.

  4. Alok Mittal says:

    Sumanth, see above in post. “Note that the data was gathered from about a dozen “premier” accelerators/incubators and angel funds”

  5. Sumanth says:

    Are these numbers based on empirical data or are they more like guesstimates? If the former, could you quote the source please?

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