Deal sizes and valuations across early-stage funding in the country increased in 2022, particularly in the first half of the year, despite the ongoing funding winter. Overall, in the calendar year 2022, early-stage startups raised around $664 million in funding across 368 deals, which is a significant increase compared with $594 million across 316 deals in CY2021.
Despite the slowdown, valuations for seed and pre-series A rounds remained at a similar level to 2021, with half the deals at $5-$10-million valuation range for a 20% equity dilution, according to a report compiled by venture debt firm InnoVen Capital. InnoVen’s ‘Early-Stage Investment Insights Report’ studied investment activity across seed & pre-series A stage by analysing market information, along with a survey conducted with 20 leading institutional early-stage investors.
The report said CY2022 started with a strong momentum building from the funding bull-run of CY2021, but things slowed down considerably during the second half of the year. In 2022, only 20% of the early-stage investors surveyed reported an increase in the quantum of their investments as compared to CY2021. Almost 40% of investors reported a decrease in the number of deals they closed.
Commenting on the findings, Tarana Lalwani, partner, InnoVen Capital India, said in 2023, he anticipates the slowdown that began in 2022 to persist. “However, we expect the early-stage environment to maintain its momentum, with an increased focus on governance and more extensive due diligence process, which will see more viable and sustainable business models getting funded.”
Survey respondents chose B2B platforms, fintech, and enterprise SaaS as the top three sectors they invested in 2022. Around 60% of investors had over a third of their new investments at a pre-revenue stage, which demonstrates that top-notch founding teams with an idea can raise capital. In CY2023, most investors (57%) anticipate a further slowdown in funding activity given the weak macro. Investors chose fintech, enterprise saas and climate tech as the top three sectors of focus this year.
Only a third of early-stage respondents (35%) feel that emergence of angel syndicates has been positive for the overall ecosystem. Most believe that angel syndicates have led to many founders skipping institutional seed rounds, crashing deals and diligence timelines, leading to a higher entry valuation.
Respondents also highlighted that higher activity levels across seed stage by large established VCs (including Tier-1 VC seed programmes) have driven up valuations and blurred the lines between seed and Series A. While evaluating new deals, investors overwhelmingly chose the quality of the founding team as the most important factor as there wasn’t much traction or track record to evaluate at the early-stage.
Bengaluru, the NCR and Mumbai continued to form the core of the startup eco-system. Over two-thirds of early-stage investments made by respondents were in companies that are headquartered in Bangalore or the NCR.