India: Furniture, home decor startups just had a great funding year, but challenges loom

Home improvement sector in India, consisting of home furniture and décor, was always seen as a huge opportunity, given that there are no organised players in the sector. But it was also a minefield for venture capital players, because this had never been tried before, and studies had shown people wanted to experience furniture in stores before buying it.

That has now changed drastically in urban areas. Startups have built user-friendly websites and apps, where users can virtually re-create rooms with various furniture choices on the sites.

Investors noticed that the quality of startups in the sector had gone up and duly entered with big amounts of funding in 2015, which was anyway a great year as hedge funds joined VC firms in a funding boom that saw more than $8 billion invested in Indian startups.

The rise in funding in the home furniture and décor sector has been staggering. In 2015, the sector drew $191 million in funding in 23 deals, up from just $41 million in six deals in 2014. That in turn was more than three times the funding raised in 2013.

YoY funding

Funding trends year-on-year. Source: Tracxn

Clearly, 2014 was an inflection point, and a year later funding went up on a steeper curve. The skyrocketing funding has happened thanks to some big-sized deals. Pepperfry, the online furniture marketplace, alone raised $100 million, followed by rival Urban Ladder, which raised $50 million. Such amounts of funding drew many more startups in the furniture and home décor commerce segment, and the total number of startups in the sector has grown to as many as 259, according to Tracxn, a data analytics firm that provides financial information on start-ups.

Marketplace startups have garnered a total of $135 million in funding, followed by private label startups that got $109 million.

By the third quarter of the year, furniture rental startups had also emerged as a fast-growing category, catering to young people who often change cities and do not want the burden of transporting heavy furniture.

Accel Partners has been the most active investor in this category, having funded three companies — Zansaar, CapriCoast, and Rentomojo — in four funding rounds. Sequoia Capital invested in Urban Ladder and Home Lane, while Norwest Venture Partners participated in four rounds of funding in Pepperfry, India’s largest marketplace for furniture.

Funding rounds

Number of deals soared in 2015. Source: Tracxn

Such players are now facing more competition with Flipkart and Snapdeal, the two well-funded e-commerce majors, also launching furniture delivery services. Amazon India, which has grown rapidly in the two years since its India launch, has also started foraying into the business.

This year might be tougher for startups trying to raise later rounds of funding. The funding activity last year was completely dominated by 20 early stage rounds, more than three times the number of late rounds. And unlike last year, when fundraising was easy, venture capital firms are asking cash-burning marketplaces for clear pathways to profitability. Such firms might struggle to control discounts without hurting growth, and put a lid on growing costs.

Rentals and technology firms such as Infurnia and 3dphy, that provide augmented and virtual reality tech in the sector, have more opportunities to score funding because that sub-sector is still under-funded and the startups are relatively new.

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