Early stage startup investment is the new sweet spot for VC investors

With the start of the year 2022, US & Europe started giving slowdown signals which turned to fund winter across the globe by Q1 of 2022 onwards.

In the first half of this calendar year, the amount of funding in Indian startups was significantly higher but it was primarily concentrated in the early and seed stages. As per Entrackr data, around 596 early-stage startups raised funds in H1 2022 as compared to the late/growth stage, which accounts only for 226 deals.

From Q2 2022, Venture capital Funding at a later stage (Post-series A) to Indian startups is decelerating, and investors turn more watchful and make smaller-sized and long-duration bets on early-stage startups amid a correction in global financial markets and prevailing funding winter.

Many VC funds have raised new capital for investment in India. So there is an enormous dry powder available with them, but again there is a Catch-22 situation here that VCs have capital, still, there is funding winter.

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We have been observed by a conversation with Investors that they have pivoted their thesis and are very selective in their investment decisions by preferring investment in Enterprise SaaS, B2B models where cash burn is low and recurring revenues are there. Valuation has also been corrected by at least 25% in SaaS and D2C sectors.

One of the reason why early-stage startup investment remains an attractive proposition for many investors is exponential growth probabilities. Investors desire to garb the first come opportunity to take the stake at a reasonable valuation and reap the significant return from it by taking exit in Series A/ B rounds or later. Early-stage investors have generated around 10x, 22x, 35x to 80 times returns also.

Most of the late-stage startups are burning cash and those who are showing visibility of profits in the near term can entice VC money in funding winter also like Squad Stake raised series B and Sunstone raised Series C last month.

With the increasing chaos around the ed-tech giant in recent times, investors in the future might stay vigilant to investing in unicorn start-ups, and therefore investing in an early-stage start-up could be a better and safer choice. Numbers substantiate the same too. In Q1 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 a research report by Tracxn. It is also analyzed that the average size of early-stage deals grew 200% to $3.94 million in Q1 FY23 from $1.92 million in Q1 2021.

Investors are also keen to partner with startups that are creating sustainable business models using technologies such asblockchain,Web 3.0,artificial intelligence (AI), robotics, and the Internet of Things (IoT), among other fields like D2C.Recently, we at Swastika Investment banking got 4 startups funded at the seed stage and series A, but could not get investors’ interest for the Series B stage startup from VC funds.

Looking into such huge potential in India’s deep tech ecosystem, I believe early-stage startups in tech-based solutions and the D2C segment may have impending growth at par with global tech startups.

Mr. Amit Pamnani, Chief Investment Officer for Investment Banking at Swastika Investmart Ltd.

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