Funding winter bypasses early & seed stage dealmakers

Steep slowdown in late-stage investments in Indian tech startups

Funding winter bypasses early & seed stage dealmakers
This is despite a steep slowdown in late-stage investments in the Indian tech start-up ecosystem, which has led to unicorns and large startups restructuring their business and laying off employees to increase their runway.

Despite an ongoing funding winter and a global economic slowdown due to rising fuel prices and inflation, early-stage (pre-Series A and Series A) and seed-stage deals have been in throttle mode. This is despite a steep slowdown in late-stage investments in the Indian tech start-up ecosystem, which has led to unicorns and large startups restructuring their business and laying off employees to increase their runway.

Data from private deal tracker Tracxn showed that despite a slight slowdown in the number of seed stage and early stage deals in CY2022, investment volumes (total value of deals) have in fact improved when compared to the previous calendar year. This trend indicates a positive investor sentiment among early-stage VC funds as investors gradually increase their cheque sizes despite a cautionary economic environment, according to analysts and investors that FE spoke with.

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In Q2 of 2022, seed-stage funding volumes increased to $464.1 million, registering an 8.2% y-o-y increase over the same quarter last year (Q2 2021). While In Q1 of 2022, the Indian start-up ecosystem reported $493.5 million in total seed-stage deal volume, a 33% y-o-y increase over the same quarter in the previous year (Q1 2021), according to Tracxn data. However, in both Q2 and Q1 of 2022, the number of unique seed-stage deals dropped significantly by 20% and 37% y-o-y, respectively.

In addition, early-stage (pre-Series A and Series A) deal volumes have also shown a steeper increase in CY2022. In Q2 of 2022, the total early-stage deal volume stood at $1.3 billion, a 68% y-o-y increase compared to $787.8 million in deals recorded in the same quarter last year. While in Q1 of 2022, early-stage deal volumes stood at $1.2 billion, which is a 25% y-o-y increase in comparison to $935.5 million in deal flow in the same quarter last year.

Tracxn data also showed that the current early-stage deal volumes have been the highest since 2019. And for the first time ever, early-stage volumes hit the billion-dollar mark in a single quarter in Q3 of 2021. Since then, early-stage volumes have continuously surpassed the $1-billion mark every quarter.

Early-stage VC fund Prime Ventures told FE that it plans to give out average cheque sizes between $500,000 to $3 million this year. This is higher than its 2020 average size of $700,000 to $1.6 million.

Shashank Randev, co-founder of early-stage VC fund 100X.VC said the fund also increased its average cheque size from Rs 20-25 lakh when it first started out in 2019, to Rs 1-1.25 core per round in 2022.

To date, 100X.VC has invested in more than 80 companies, and more than 75% of these companies have gone on to raise follow-on rounds from large prominent investors. In addition, around 10% of them have also successfully raised Series A and above in the range of $5 million to $25 million, Randev said.

“When many of our portfolio firms went on to raise Series A and beyond within a short span of time, it was clear that there was a lack of discoverable deals for growth stage VCs who have been scouting for those kinds of opportunities…As the ability of start-ups to raise pre-series and series A deals have shortened, despite this winter years, several global VC firms have dedicated India-focused funds recently,” added Randev.

India-focused VC funds raised a whopping $14.1 billion in capital to be deployed in startups in the first half of 2022, according to a report published by Silicon Valley Bank. This is more than a 3X growth compared with last year when VC funds raised only $4.2 billion in capital for Indian startups. The tech-based commercial lender also said in its report that around 76 new funds were launched in the country this year, compared with just 28 in the previous year. Some of the notable include Sequoia India’s $825-million growth fund, Elevation Capital’s Fund VIII worth $670 million, Accel India’s sixth fund worth $550 million and many others.

However, the start of 2022 for the Indian start-up ecosystem was a rough ride. More than 30 different tech start-ups in the country have resorted to layoffs or restructuring in 2022 alone as investors were spooked by tech stock crashes in the US and in India. The crisis followed in Indian stock markets as well with both retail and institutional investors losing close to Rs 1.8 trillion across six main listed companies including Zomato, Paytm, CarTrade, Policybazaar, Nykaa, and Fino.

However, this has had an effect on early-stage deal-making as well. Founders looking for funds for their new ideas in 2022 have been seeking a far lower valuation when compared to the previous years, and this has also revived investor sentiment among early-stage investors.

Randev said that even though his fund is yet to see an exit, he expects a few exits to roll in from the next financial year. “Overall, I expect VCs to get their returns in a shorter duration compared to the last decade. Initially, in 2019, there were obscene valuations being thrown around, but this time, with a realistic valuation and VC chasing reasonable metrics, exit timelines may be lowered to 5 years timeline, compared to 7-8 years (prior to 2019),” added Randev.

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