scorecardCatching ‘em early: Early-stage startups shine as their investor pool widens
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Catching ‘em early: Early-stage startups shine as their investor pool widens

Catching ‘em early: Early-stage startups shine as their investor pool widens
Business4 min read
  • Domestic investors are active in early-stage startup funding, experts say.

  • The rise in the number of platforms that pool individuals to invest are also reducing the barriers to entry.

  • ‘India has over 100 micro funds and a reasonable number of early-stage VCs are bringing in a lot of institutional money for investing in startups.’

  • ‘We see a rise in the number of family offices, incubators, and accelerators, sector-specific or agnostic, which is driving higher capital deployment.’
Early-stage startups have remained largely unscathed by the funding winter that set in last year. In 2022, when fundraising by startups fell 33% to $24 billion, funds to early-stage startups grew by 12%, according to a PricewaterhouseCoopers (PwC) report.

Apart from the growing number of new startups, the number of investors looking to pump in money into early-stage startups are also going up.

“Many VC (venture capital) firms invest more in early-stage startups because of the smaller cheques and greater potential for growth and higher returns. Furthermore, traditional growth-stage venture capital firms do not want to miss out on potentially great startups and want to catch these founders early in their journey,” says Ankur Mittal, co-founder of Inflection Point Ventures.

Mittal also says that dry powder – which is unallocated funds that a private equity (PE) or VC firm has on hand – has been increasingly flowing from late-stage to early-stage startups. Early-stage startups accounted for 60-62% of the total deal volume in 2022, according to the PwC report.

The country has also seen many early-stage incubation programmes in the last three to four years be it Sequoia Surge, Accel Atom or YC Continuity, aiding more opportunities for fund deployment.

The big deal about small deals

On the other hand, the tapering down of foreign fund investments amidst the high-interest rate regime mostly affected late-stage startups, say experts. Funding to late-stage startups fell by 52% in 2022, as per PWC.

“The big-ticket-size deals in growth and late stages from large funds are foreign in nature where domestic capital is limited. However, domestic investors, who are also expanding in size and fund small deals, will continue to invest in early-stage startups,” says Vinod Shankar, co-founder and partner at Java Capital.

Anil Joshi, managing partner at Unicorn India Ventures says that India has over 100 micro funds and a reasonable number of early-stage VCs are bringing in a lot of institutional money for investing in startups.

“The Indian angel ecosystem has also grown and has angel groups in almost every emerging startup hub like Surat, Nagpur, Jaipur,” Joshi added.

Moreoso, there is also a case of investors discovering Bharat – with new and emerging startups that are rapidly mushrooming in Tier-2 and Tier-3 cities. Also, domestic investors are turning active too.

“The early-stage funding in India has been more or less at the same level as was in 2021 except correction in valuation. The reason for less impact of funding winter is mushrooming of startups across India and not just restricted to metros – the Tier 2-3 cities have seen quality startups and are reasonably sustainable, which are attracting investors from both India and outside India,” says Joshi.

A growing pool of LPs

Early-stage startup funds can range between a few lakh to ₹1 crore or beyond. The increased number of platforms that enable a large number of investors to come and share risks and funds – is also widening the funding universe.

“The LP (limited partner) pool is growing by the day. More senior working professionals, business owners, successful startup founders, and other HNIs (high-networth individuals) are exploring investing in startups as an alternative investment strategy. They are enabled by the growing number of syndicate platforms that accept cheque sizes as small as ₹10,000,” says Sipika Nigam, principal, Artha Venture Fund.

The number of platforms that pool individuals to invest are also reducing the barriers to entry. Some of these barriers include – lack of information and accessibility, large ticket sizes, lack of transparency, limited access to due diligence resources, and lack of risk awareness that existed five to six years ago, explains Mittal.

Due to the rising funding ecosystem, early-stage funding is expected to remain smooth even in 2023. “We see a rise in the number of family offices, incubators, and accelerators, sector-specific or agnostic, which is driving higher capital deployment,” says Nigam.

Mittal says that the small successes that such startups are having in solving real-world problems has also attracted more people towards the asset class.

And a complicated country like India with many problems has a lot of potential for new startups to emerge. “We need more robust financial services, healthcare services and do all of this by keeping the impact on our environment minimal. Climate-tech, deep-tech and fintech will be the most attractive sectors to invest in at an early stage,” says Karteek Pulapaka, co-founder & partner at Java Capital.

As the number of homegrown investors discover startup investing, they will enter the ‘ground floor’ of the startup investment ecosystem – and all this can aid the growth of promising new startups with innovative ideas.

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