Early stage startup investors are raising larger funds and deploying more than ever despite a shift in sentiment in the last few months.
Seed and Series A investments, generally defined as early stage, hit a 4 year high in 2019, with $1.15 billion raised across 387 deals, compared to the $1.13 billion across 416 deals in 2018, according to data from Venture Intelligence.
However, the fall in the number of deals has been consistent, from 540 in 2015 to 387 last year, indicating fewer companies raising rounds, but deal sizes getting significantly larger.
“We are cautiously optimistic,” said Sanjay Nath, managing partner at early stage fund Blume Ventures, which is closing its third fund of $100 million currently.
“The target addressable market is large and there are many pockets with broken value chains. What is especially interesting is that younger founders care about hard problems to solve even more deeply, from using tech to tackle pollution to providing micro-loans to agri-tech, to improve basic water, sanitation and hygiene,” he added
VCs are also bullish on Indian startups because they are seeing entrepreneurs of higher quality than even a few years ago, even if valuations tend to be on the higher side. However barring certain “hot deals” with a certain marquee founder or leading product, valuations could be muted given that investors turned cautious on high-growth, loss-making tech startups after coworking firm WeWork’s valuation was slashed from $47 billion to $8 billion and its IPO shelved, and other tech listings such as Uber and Lyft also did not perform well.
“We are seeing the second cycle of entrepreneurship where today 70% of founders pitching come with prior startup experience. This was less than 10% five years back,” said Ganapathy Venugopal, co-founder and CEO at Axilor Ventures, an accelerator and early stage fund started by him along with senior former Infosys executives SD Shibulal and S Gopalakrishnan.
The entrepreneurs pitching to VCs today include people who are running their second or third startups, with earlier ventures being sold or shut down, as well as people who have played key roles at large startups, or built up a vertical. So even though they may not be founders there, they come in with product-building experience.
For instance, business-to-business marketplace Udaan was started by former Flipkart executives Sujeet Kumar, Vaibhav Gupta and Amod Malviya, who all built up various verticals, logistics, for example, at Flipkart. Udaan was the fastest Indian startup to achieve a unicorn (billion dollar) valuation, and is currently valued at $2.8 billion.
Founders such as these may command a higher valuation.
“Fear Of Missing Out (FOMO) is coming back to the ecosystem. Everyone wants to get into the best deals, which obviously drives up valuation,” Venugopal added.
“Early stage investing is still quite aggressive and competitive because of the rise and depth of founder quality (people who have delivered 2x exits, Level 1s/2s just below CxOs who are starting up on their own, etc). We now have serial entrepreneurs, so valuations in some cases do tend to get pushed up,” Nath of Blume said.
Further, early stage funds themselves have either raised funds over the last six months or are planning to do so this year, leading to more capital. While Flipkart and Swiggy-backer Accel closed its largest India fund at $550 million last month, India Quotient is deploying $100 million across 2 funds and Lightbox Ventures is also deploying its $200 million third fund, among others.