MUMBAI - February 19, 2015.

While angel investors and accelerators have been broadly supportive ofinnovation in India across sectors ranging from IT to healthcare, closerscrutiny by larger foreign investors have stopped start-ups progressing to thenext stage of funding by uncovering flaws in their business plans or companyrecords.

The ensuing funding chokehold - being felt particularly acutely fornon-tech start-ups in India at the moment - has even given rise to its ownterminology, known in venture capital circles as 'Series-A crunch'.

Findings by Indian deal database VCCEdge illustrate this growingphenomenon... Their research shows that while completed angel and seeding finance roseto 283 last year (up from 117 in 2011), Series-A deals fell to 74 from 119,over the same period.

Their data also shows that VCs invested over $2bn across 246 deals in2014 (including 60 seed investments), compared to $1.4bn of funding across 217deals the year before. (Indian start-ups typically look for $1-3m as they scale up, two tothree years on from receiving their initial investment.)

Aneesh Khanna, the entrepreneur behind healthcare firm MyLabYogi, raisedUS $160k of seed funding from Hyderabad Angels two years ago but has beenunsuccessful in achieving further financing, since.

"Big investors were interested in the SaaS, e-commerce and mobilesectors last season, leaving us at a loss in healthcare" he said.

Blume Ventures’ founding partner, Karthik Reddy, says a criticalbottleneck has been created by companies competing for post-seed funding, whereno single entities are being granted Series-A cash.

His fund has witnessed only a handful of tech-related start-ups -including Grey Orange Robotics and price comparison site, Zopper - successfullyscaling up globally by acquiring follow-on funding in recent times, notablyfrom the same US investment firm, Tiger Global.

Venture Intelligence, an Indian analytics firm that provides informationand analysis on private company financials and transactions, says its researchshows funded companies in the country increased to 230 in 2013 (from 160 in2010), but that the volume of start-ups securing re-funding over the sameperiod fell to 32 in 2013 (from 43, over the same period).

Serial entrepreneur Krishnan Ganesh, behind online tutoring businessTutorVista and healthcare provider Portea Medical, says barriers coming down toregistering a company in India, and getting initial investment to get it offthe ground are part of the issue.

Larger investors coming in after the seeding stage don't demonstrate thesame rigour in evaluating these companies, leading to them being rejected forSeries-A funding by venture capitalists looking squarely at validation andproof of concept," he explains.

Harvard Business School lecturer Shikhar Ghosh says India is not theonly country where the quality of start-ups hasn't kept pace... His study of 2,000 venture-backed companies in the US - between 2004 to2010 - found only 24 per cent were able to return profits for their investors.

One person active in the angel investment scene in India is Mumbai-basedRehan Yar Khan, who has successfully seeded half a dozen Indian businesses at$30k-$100k per deal, in the past four years.

"While the number of angels, investors and incubators hasgrown," he says, "the quality of start-ups is playing catch-up on agrand scale... As such, over the last decade, the start-up mortality rate hasrisen globally."

Smaller investors are so keen to back 'the next big thing' in India thatsome are even funding start-ups by backing business ideas without amonetisation plan, so long as they can see the required level of engagedadoption.

Start-ups are consequently becoming more savvy about who they take seedcapital from, so as to insure themselves against hitting the follow-up fundingwall that so many of their peers face.

An answer to avoiding the crunch could soon be to use seed stageinvestors who are responding to the problem by opening up their own first andsecond round funding channels, too.

Regardless, founder of crowdfunding platform Wishberry, Anshulika Dubey,advises all entrepreneurs in India to exercise comprehensive due diligence whentaking initial capital from anyone.

"Entrepreneurs shouldconsider who they want on board, and vet funders properly to see exactly whatthey have done prior in their investment space," he advises.