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Early-stage VC investments in Q1FY23 up 30% on year even as growth-stage investments come under pressure

However, late-stage investments fell over 11% to $9.1 billion during the first quarter of 2022-23 from $10.3 billion a year earlier, according to data compiled by analytics firm Tracxn Technologies.

July 01, 2022 / 09:37 AM IST
(Representative Image)

(Representative Image)

Early-stage venture capital (VC) investments in India rose by nearly a third in the first quarter of 2022-23 (FY23) from a year earlier as investors turned cautious and made smaller-sized and longer-duration bets amid a correction in global financial markets.

In April-June 2022, early-stage VC investments in India (up to Series A rounds) rose over 28 percent to $1.50 billion from $1.17 billion a year earlier, according to data compiled by data analytics firm Tracxn Technologies. The data also showed that the average size of early-stage deals more than doubled to $3.94 million in the first quarter of FY23 from $1.92 million in April-June 2021.

With central banks across the globe raising interest rates to tame soaring inflation, global financial markets have slumped over the last three months. Consequently, large investors are cutting their exposure to high-growth technology companies, and thus tech valuations across the world have been hit the hardest.

Catching ’em young

VC firms, including some of the world’s most aggressive investors, including Tiger Global Management and SoftBank, have said that they will cut their investments this year. VCs are thus investing more actively at early stages, which are typically smaller deals and have longer-duration cycles.

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Moneycontrol had reported earlier this week that Tiger Global Management, one of the world’s most aggressive tech investors, had upped its Series A investments in India this year, in what was a shift in strategy for the New York-based Hedge fund company, which typically invests at later stages. The shift in strategy came at a time when the value of the company’s public stock holdings slumped to $26 billion at the end of the March quarter.

“Over the last six-eight months, Tiger Global, Falcon Edge and all such funds, which have a hedge-fund approach, have gotten burnt very badly with the market coming down. So, they are going to be cash-strapped and are going to hold on to their investments. They might not stop, but I am given to understand that they might slow down their investments,” said Vikram Gupta, founder and managing partner, IvyCap Ventures Advisors.

“And if you look at the bigger startup picture, out of the over 60,000 registered startups, about 25,000 have got angel, seed or pre-Series A funding. But only about 1,200 are Series A funded, and of those, 100+ have translated into being unicorns,” Gupta said.

“So, there’s that huge potential for building many more unicorns. But there are challenges at Series A. You need conviction, cost is high, fund sizes are small, fund economics don’t allow you to hire good quality resources, among others. So, there’s a lot of gap at Series A and funds are looking to disrupt that, and so are we,” he added.

Series A focus

Gupta’s comments come at a time when some of the world’s biggest VC firms, such as Sequoia Capital, Matrix Partners, Accel and Elevation Capital, which invest at early stages, have raised or are in the process of raising their largest-ever India-focused funds, suggesting more dry powder for early-stage investments.

Sequoia Capital India, which recently raised $2.8 billion in a fund for Indian and Southeast Asian startups, has earmarked $300 million for early-stage investments through Surge, its startup accelerator programme. The VC firm also recently raised the ceiling for its seed-level investments through Surge to as much as $3 million.

“Angel investing in India is exploding — there’s tremendous interest for Series A investments in India from institutional investors. India needs more capital. So, while we are caught in this notion of competition, we are still one-tenth in terms of venture investing in the world, so there’s obviously a lot of room for more capital to come in,” said Vani Kola, founder of Kalaari capital.

“We should actively collaborate with this capital that is coming in, there are micro VC funds, which have a size of about $10 million, and they also have a role to play here because founders need capital at different stages of their companies’ life,” Kola added.

Late-stage investments have lost pace

Late-stage investments (Series B onwards), meanwhile, fell over 11 percent to $9.1 billion during the first quarter of 2022-23 (FY23) from $10.3 billion a year earlier, the data showed.

The average size of late-stage deals, meanwhile, was little changed at $75 million in April-June 2022 from $77 million in the first quarter of FY21.

Late-stage deals had fallen below the $1 billion-mark in May 2022 for the first time in about 12 months, but in June 2022, late-stage deals regained momentum, and topped $1.8 billion, the data showed.

“I would say early-stage investments have not slowed down at all. I don’t know if they have picked up, but they haven’t slowed down at all and I don’t think they will slow down either,” Kola said.

“Late-stage investments and growth-stage investments, in fact, have slowed down considerably. When you talk about early-stage investments, India has tremendous potential over the next 10 years, so we are very bullish and so are other investors, so I don’t think early-stage investments will slow down. We are looking to do what we did last year, investing about $75-90 million dollars across these deals,” Kola added.

Padmaja Ruparel, co-founder of Indian Angel Network, meanwhile, said that she expects overall funding to slow down compared to last year but added that companies across stages that are able to project stronger financial metrics will be able to raise capital irrespective of the macroeconomic situation.

“I would say what happened last year was unprecedented and that obviously won’t be the case this year,” said Ruparel.

“But having said that, investors’ job is to invest so they will continue doing that. The competition for term sheets will be less intense, and valuations will drop, which is the case already for some companies. But overall, it (funding) will not end suddenly. Companies with stronger unit economics and those in early stages that are able to show a clear path to profitability will be able to raise funds,” Ruparel added.
Nikhil Patwardhan
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