There appears to be somewhat of a slowdown in early stage deal-making in India, if the various numbers reported by consulting and data intelligence firms are anything to go by. While private equity (PE) and venture capital (VC) deals, when seen as a whole, have increased, the action has shifted more towards late-stage deals involving more mature companies.

According to data from Tracxn, the volume of investments in startups in the first quarter of calendar year 2019 declined 25% sequentially to $2.4 billion. This has also been accompanied by lesser number of deals.

Angel investor Sanjay Mehta, who invests in diverse startups through his proprietary fund Mehta Ventures, tells Fortune India in an interview that traditional angel networks are failing to serve the purpose with which they had set out to invest in early-stage companies. These networks are being replaced by newly established arms of established PE investors who are scouting for a good pipeline of early-stage companies in which they can invest in, says Mehta, whose fund has made 99 investments since March 2012 and realised a modified internal rate of return of 64% on its investments.

Mehta – who has invested in companies including Box8, Saffronstays, Wow! Momo, Zippr, and some global blockchain companies – sees large corporates playing an increasingly important role in fostering the early-stage funding ecosystem going forward, by investing in startups based on ideas that are relevant to their core industry.

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What is the reason for the slowdown that we have seen in early-stage deals activity and what does that mean for new startups looking to raise seed funding?

The time around 2014-15 was a boom time for angel investors when valuation were high and a lot of money was coming into Indian startups. But that scenario has changed since these investors have realised that early-stage investments could be liquid assets, which they don’t know how to exit. Most of the investors who entered the market after 2015 came in due to the sheer lure of making quick money. But angel investing is not just about money. You need to spend time with the entrepreneur and the company you are backing to help the idea grow. It is about passion. But many new-age angel investors are purely financial investors in nature, who have no time for their investee companies.

So the market had become frothy and now there is a dearth of good lead investors in new startups, as angel networks have become more concerned about managing funds, and less focussed on fostering an ecosystem in which startups can thrive. Many good investors have quit angel networks and started their own funds.

My concern is what happens to companies that have received some amount of funding and embarked on growth plans? There may be no dry powder to back them in the next round and if they don’t get follow-on funding they might need to scale down or shut shop.

Are there any alternate channels of funding emerging from early-stage companies?

Startups are directly approaching VCs and micro-VCs, instead of coming to angel networks. These VCs have their own limited partners (LPs) who are driven by their investment thesis. They are very choosy in terms of the number of deals that they do and so you see the number of deals being closed reducing.

Many large investors are also floating their own accelerator programmes. For example, Sequoia has done that with Surge and Kalaari Capital has floated KStart. The reason is that there wasn’t a good pipeline of promising companies coming from the angel networks for them to invest in.

A lot of corporate entities have also opened up their purses for seed and early-stage investments. They are also paying richer valuations compared to angels since they have larger balance sheets and the investments are being done with a strategic intent, relevant to their existing line of business. At least half of the top 200 companies in India turnover will have a corporate venture arm by 2020. Today possibly less than 10% have one. They would also have made 1-2 acquisitions per company by then. So I see around ₹2,500 crore of seed capital coming in from these large corporates that will help early stage companies.

What are the sectors and kind of entrepreneurs that angel investors are looking to back in 2019?

All of us used to look at the quality of the founder, the size of the market in which they are operating, their business model and quality of their intellectual property. But now investors are looking at the ability of the founder/s to raise future capital as well. Earlier, this was only a criteria that was looked at during a Series C or D round of fundraise. But the ability of an entrepreneur to communicate his ideas and business plan are becoming important for early stage investors as well.

A big factor in the Indian startup ecosystem at present is Jio. Most companies that are successful in raising funds have worked out an angle to align with Jio – either ride on the telecom network they have created or partake in their new commerce plans. A lot of investment decisions are being driven by the Jio factor at present. In terms of sectors, I think we will see investment opportunities in new sub-sectors within fintech, entertainment and automotive technologies.

You were quite bullish on cryptocurrencies earlier, but that asset class has faced headwinds in recent times. Are you still bullish?

Globally crypto had had a good year with regulations around settling in place in many countries and the ambiguity getting cleared. Unfortunately that has not happened in India yet. Crypto is still very useful from a blockchain point of view as it allows for the creation of a transparent, user-driven, trust-based digital economy where power shifts in the hands of the users and not an intermediary. This helps in bringing in process efficiencies and bringing down cost of services. So many new business models based on this type of blockchain technology will emerge. I invest in the equity of blockchain companies and am still open to invest in any company that has the right kind of idea based on blockchain.

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