First, the good news. There seems to be a large amount of money in India making a bet on startups that are merely a few months old, with nothing to show besides a good idea. I get around 5 business plans a day and most of them have already raised some money from friends and family. Many of them have even raised money from seed stage investors—professional investors who are the first outside investors in a startup. This is great news for the Indian startup ecosystem. Thousands of companies are being started all over India and they are getting the backing of angel investors to get going.

This is a phenomenon that the U.S. startup ecosystem has gone through over the last 7-8 years. After significant successful exits, many entrepreneurs have used some of that cash to fund other startups. Silicon Valley has seen a flood of money from wealthy angels backing startups with their cash. However, there was a negative downside to this flood of angel money and the thousands of startups they helped launch. The number of companies getting funding at the Series A stage has not really budged. Series A is typically the investment made by venture capital firms, amounting to $6-10 M in the U.S.

What this means is that more companies are being started but when they get to the point of having to raise Series A, they are finding it enormously challenging. The number of companies getting Series A has not changed over the last many years so this means the competition for Series A has actually increased significantly. What makes things worse is that since angel/seed money was so easy to come by, these companies were not geared to go through the grueling process of raising money from VCs. They have not been subjected to repeated rejection before and few successfully overcome this to go on to raise money. The startup landscape in the U.S. is strewn with dead startups or the living dead that straggle along unable to shut down nor able to raise the money required for growth.

The exact same phenomenon is playing out in India. A lot more startups are being launched with the help of angel money but when they get to the Series A stage, many of them are struggling. We hear of many startups that are closing shop because they are unable to raise the next round of financing. This is the painful stage we are witnessing right now in India.

The few companies that do raise Series A will find their chances of success going forward to again significantly increase. This is because there is plenty of growth capital that exists that is having to fish in a relatively small pond of companies that has successfully raised Series A. This is a strange barbell shape that the US has gone through in recent years—easy seed money, very tough Series A money, and then relatively easy growth capital. We should expect Indian startups to go through that same barbell curve. Unfortunately, we are right now in the bleak period where many startups have raised seed money and are hitting the Series A wall. Startups that survive this period will be left standing stronger with fewer viable competitors.