Over half of early-stage deals in CY21 valued above $5 million: Innoven report

Early-stage start-ups in the seed and pre-Series A stages mopped up close to $594 million in funding in CY21, which was 63% higher than the total funding volume in CY20, a new report by venture debt firm Innoven Capital said. Apart from a spike in funding volumes, CY21 also witnessed a 30% year-on-year growth in the number of individual deals along with a 20% y-o-y increase in average deal sizes.

The report by Innoven Capital was based on a large-scale survey with inputs from reputed early-stage institutional investors such as 3one4 Capital, Blume Ventures, First Cheque Ventures, Indian Angel Network, India Quotient, Inflection Point Ventures, Kae Capital, Mumbai Angels, and many others.

The report also said the average deal size increased from $1.5 million in CY20 to $1.8 million in CY21 across 316 recorded early-stage deals. Average valuations continued to go up, with 56% of deals being valued between $5 million and $10 million. However, the majority of investors (47%) expect the funding activity to see some slowdown this year.

Fintech, B2B platforms and SaaS were the most favoured sectors last year. For CY22, investors indicated SaaS, Web 3.0, fintech, health-tech & creator economy as high focus areas.

More than 30% of the start-ups funded in CY21 were at the pre-revenue stage, which demonstrates the ability of great founding teams to raise seed capital at a concept or early traction stage.

Most early-stage investors (52%) feel that the emergence of Angel Syndicates has been positive for the overall ecosystem. However, they believe that higher activity levels in the seed stage by large established VCs and Tier-1 VC seed programmes have increased competition and driven valuations higher.

Early-stage investment activity has proven to be resilient in 2021 with bigger transaction sizes at higher valuations and an increase in the number of Angel Syndicates which are all clear indicators of a maturing early-stage ecosystem. Although the market sentiment shows muted hints of slowdown, however, we expect the early-stage funding environment to remain strong. At InnoVen we continue to be optimistic and look forward to engaging with founders and investors,” Tarana Lalwani, partner, InnoVen Capital India, said.

Early-stage investors chose the quality of the founding team as the most important factor they focus on while evaluating deals, followed by the attractiveness of the sector. The survey also highlighted investors having a high preference for more than one founder, with 76% of funded start-ups comprising two co-founders.

The majority of the investors relied on the domestic pool of capital for their funds. In fact, 29% of them have 100% domestic Limited Partners (LP’s). Family Offices and UHNIs are the top sources of domestic capital in the VC ecosystem followed by funds of funds like SIDBI.

Bengaluru start-ups continued to attract the most number of early-stage deals with 279 deals in CY21. The Delhi-NCR regions recorded 123 deals, while Mumbai city recorded another 71 deals in the same year.

Bengaluru and Mumbai together got two out of every three investments last year. However, in CY21 Pune and Chennai also made it to the top five cities in terms of early-stage funding activity.