By Pearl Agarwal
The pre-seed stage is more than just the start of a journey; it’s where the foundation of resilience, sustainable growth, and future viability is set, particularly important in the challenging Indian startup ecosystem. With the rise of bridge rounds and shutdowns in 2024, sustainability and resilience are more important than ever. A recent study by Venture Intelligence found that only 25% of seed-funded startups from 2021-2022 managed to secure series A funding by 2023-2024. This low success rate is largely attributed to inflated seed rounds and inadequate customer validation.
In 2021-2022, capital was flowing freely, with many startups raising $3 million to $5 million at valuations of $25 million to $30 million, often without a fully developed product. We saw $5 million+ rounds happening within one week of fundraising, with many startups launching without foundational research. This pressure often led startups to pursue rapid growth without solid market validation or a clear product-market fit. Consequently, many struggled to secure follow-on funding or stay afloat, leading to closures.
Strengthening Pre-Seed Checks: A Multi-Level Approach
To address these challenges, investors are implementing stricter checks as the portfolio companies progress from pre-seed to seed and series A stages. We prioritise solid proof of growth by focusing on three key areas: customer acquisition, retention, and monetisation.
1. Customer Acquisition
For sustainable growth, startups must demonstrate efficient customer acquisition, ideally with a reasonable customer acquisition cost (CAC) and a significant portion of customers arriving organically. Heavy reliance on paid acquisition without organic traction can indicate a lack of market fit and unsustainable demand.
Investors look for early signs of probability mass function (PMF) through organic customer growth, typically driven by word-of-mouth referrals. Startups with a significant proportion of new customers arriving through referrals show they are beginning to establish a foothold in the market and meet real customer needs.
2. Retention and Usage
High retention and consistent usage validate the startup’s core value proposition. By analysing retention cohorts, investors assess if users remain engaged over time. Metrics like repeat usage, time spent on the platform, and engagement patterns provide insight into whether the product meets a persistent need. High retention indicates that users find lasting value, confirming PMF.
In both B2B and B2C startups, retention data serves as a reliable indicator of potential scalability. Acquiring new users without strong retention signals weak market alignment and poses long-term risks to growth.
3. Monetisation
A startup’s ability to generate revenue and its growth potential are key indicators of sustainability. Metrics such as the percentage of paying customers, average revenue per user (ARPU), and increasing wallet share are critical. Successful monetisation proves that customers value the product enough to pay for it and supports the startup’s journey towards financial viability.
As the Indian startup ecosystem matures, investors are increasingly looking for evidence of a clear revenue model and positive gross and contribution margins, which signal a pathway to profitability. While immediate profitability may not be essential, these metrics provide insight into a startup’s ability to scale sustainably.
Shifting Focus: Revenue Milestones Over Unicorn Status
As the Indian ecosystem evolves, there’s a growing emphasis on building revenue-generating businesses instead of simply pursuing unicorn valuations. The Indicorns Tracker from Titan Capital has highlighted this shift, urging startups to focus on meaningful revenue milestones, like reaching ₹100 cr, rather than a billion-dollar valuation. This approach is particularly relevant in India, where purchasing power varies, and high valuations alone may not indicate stability.
Prioritising revenue milestones over valuation growth reflects the broader need for financial sustainability. Startups that achieve steady revenue growth are better positioned to maintain operations, scale gradually, and reach unicorn status on solid terms. Moreover, buoyant capital markets are supporting companies with solid revenue growth and a path to profitability, creating a pathway to clear liquidity in the public markets. Investors are now focused on supporting startups that grow efficiently, ensuring that founders establish strong gross and contribution margins and signalling a sustainable business model driven by market demand rather than continuous capital influx.
Today, success in the Indian startup ecosystem depends on well-founded growth strategies prioritising sustainable revenue and customer retention. This refined approach to pre-seed investing ensures that startups are not just scaling rapidly but are equipped with the stability and resilience needed to navigate the challenging path to long-term growth.
(Pearl Agarwal, Founder and Managing Partner, Eximius Ventures.)
Views are personal and do not represent the stand of this publication.
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