Dispatch from Bangalore - News & Updates

The Intensifying Talent War and Funding Frenzy in India's Startup Ecosystem

A startup founder, experiencing a week of little rest, received a Sunday phone call from a co-founder. A key engineer expressed feelings of burnout and considered resigning. For the founder, with crucial investor meetings scheduled later that day, retaining this developer became the immediate priority.

The Challenge of Hiring in Bangalore

A common sentiment among Bangalore startup founders is that recruiting two or three engineers currently demands more effort and time than securing new funding. Startups with substantial backing are offering significant financial incentives to attract and keep skilled personnel, creating difficulties for newer ventures attempting to expand. Utilizing recruitment agencies proves costly and still requires over a month to finalize a hire.

Rising Salary Expectations

An engineer with two to three years of experience at a well-known startup now anticipates an annual salary of around $70,000, a substantial increase from approximately $40,000 just a year ago. One founder, questioning a colleague, discovered that a competent QA engineer now commands roughly $35,000 annually, up from about $20,000 previously.

Competition for Top Talent

Founders report that engineers employed by unicorn fintech companies like CRED and RazorPay are the most challenging to recruit. Professionals from these firms often expect salaries reaching $150,000 per year, or even higher – frequently exceeding the founders’ own compensation at early-stage startups.

The Impact of ESOPs and Remote Work

This fierce competition for talent stems from recently established unicorns expanding their employee stock option pools, a benefit that was less common just three years prior. Furthermore, the growing acceptance of remote work is driving aggressive hiring by U.S. and European startups within India.

A Record Year for Unicorns

India has witnessed a record number of 16 new unicorns this year, fueled by significant investments from firms like Tiger Global, Falcon Edge, and SoftBank, at an unprecedented rate for the South Asian nation.

Record Funding Levels

Indian startups secured a record $10.46 billion in funding during the first half of 2021, a considerable increase from $4 billion in the same period last year and $5.4 billion in the first half of 2019, according to data from Tracxn. Total funding for all of 2020 reached $11.6 billion.

Increasing Round Sizes

The average seed round size in India rose to $1.1 million in the first half of 2021, compared to $800,000 last year and $740,000 in 2019, as reported by Tracxn. Average Series A funding checks have increased to $7.67 million this year, up from $4.3 million in 2020 and $5.92 million in 2019.

Shifting Power Dynamics

Even early-stage startups are attracting significant attention, with numerous investors seeking opportunities. Some experienced founders now possess the connections and confidence to bypass established accelerator programs like Sequoia Capital India’s Surge and Y Combinator, while still accessing their benefits.

Direct Funding and Angel Investment

Some startups are foregoing traditional funds for their seed financing, relying instead on capital and reputation accumulated by founders who are now writing checks to promising early-stage ventures.

Founders Negotiating from Strength

The abundance of available capital and increased competition among investors have altered the balance of power. Founders are increasingly able to negotiate favorable terms, retaining rights and preferential treatments.

The Paradox of Choice

Recently, two founders discussed a unique challenge: numerous investors had offered funding, but they had limited equity to distribute. They began strategizing how to allocate shares and politely request some investors to reduce their proposed investment amounts.

Concerns of a Potential Correction

Despite the current exuberance, some investors express concerns that the rapid growth may not be sustainable.

Early Funding Concerns

Several prominent investors believe that some startups are accepting funding from Tiger Global, Falcon Edge, and SoftBank too early in their development. They suggest that high valuations, coupled with unmet performance targets, could hinder future funding rounds.

The "Race, Not the Horse" Mentality

One investor pointed to examples like Upstox, which received funding from Tiger Global but later saw Tiger invest in its competitor, Groww. Another investor summarized this approach as “Tiger is backing the race, not the horse.”

Preparing for a Down Cycle

Many investors are preparing for a potential market downturn. However, investment activity continues to accelerate.

Ongoing Funding Rounds

Bangalore-based edtech company Brightchamps is nearing a funding round with a valuation exceeding $500 million, while Ola Electric is in discussions for a round valued at over $3 billion. Fidelity and Goldman Sachs are considering investing in a pre-IPO round of Paytm.

Further Investment Activity

ShareChat is poised to raise $150 million to $200 million from Temasek and others at a pre-money valuation of $2.8 billion. Prosus Ventures is in advanced talks to lead an investment in Upstox.

Continued Investor Interest

Sequoia is evaluating an investment in Gitcoin and revisiting Dive, while Infra.Market, previously valued at $200 million and $1 billion, is seeking a valuation exceeding $2 billion. Numerous other recently established unicorns are also actively pursuing new funding rounds. BharatPe, Open, and Yap are also finalizing new rounds, as reported by TechCrunch.

Emerging Opportunities in Crypto

In Bangalore, another sense of urgency is developing. Several founders are launching cryptocurrency startups targeting global customers, but Indian investors have largely avoided this sector due to regulatory uncertainty. Consequently, these startups are securing funding from international sources.

Growing Interest in Crypto

However, this may be changing. Venture funds including Sequoia Capital India, Lightspeed, Accel, WEH, and Kalaari are currently developing their investment strategies for crypto startups.