$279 Million of Investments madein Early-Stage Startups through the Pandemic

InnoVen Capital, a venture debt firm, has released the 5th edition of the ‘Early-Stage Investment Insights Report FY 2020-21,' outlining current trends in the Indian start-up ecosystem at the seed/pre-A stage. The report analyses market data and a survey of 16 leading institutional early-stage investors to focus on investment activity across the Seed and Pre-Series A stages.

Despite a few months of slowdown caused by the pandemic, the funding momentum from 2019 continued into 2020, with $279 million of investments made. B2B, Consumer, and EdTech were the most popular sectors among those polled. The majority of investors (74 percent) expect funding activity to remain stable or increase this year. This year's top sectors for investors include Enterprise SaaS, HealthTech, FinTech, and EdTech.

Over 80% of respondents invested more this year than last, with the majority of investments ranging from $500K to $2000 million. Seed/Pre-A round valuations continue to rise, with half of all deals valued at more than $5 million. Almost 75 percent of those polled believe that valuations are on the high side, owing to intense competition for high-quality deals and the entry of large established VCs into this space.

Investors stated that the founding team's quality is by far the most important factor they consider when evaluating deals. Almost half of their portfolio companies raised a follow-on round in the last two years. Companies that failed to raise a follow-on round did so primarily because they were addressing a niche market opportunity.

The survey also revealed a preference for companies with more than one founder, with two co-founders accounting for 89 percent of funded start-ups.

The core of the start-up ecosystem remains in Bangalore, NCR, and Mumbai. Over two-thirds of the companies that invested were based in Bangalore or the National Capital Region.

During the late 1990s technology boom, early-stage investing in India took off. All stakeholders in the startup ecosystem, including investors and entrepreneurs, were attempting to understand innovation, entrepreneurship, and scale in the Indian context. Given the collapse of the technology investing sector in 2001, the boom was clear.

According to a report by InnoVen Capital, the amount of early-stage funding pumped into Indian startups increased by 6% to $279 million in 2020.

Investors closed fewer deals last year, as expected. The number of early-stage funding transactions decreased from 205 in 2019 to 178 in 2020.

As a result, the increase in seed funding is largely due to an increase in average deal size, which has increased by 23 percent to $1.6 million. This demonstrates that investors were selective, but not averse to investing heavily in promising startups. Last year's top draws were startups in EdTech, B2B platforms, and consumer tech.

However, despite the pandemic, early-stage investment activity has remained resilient, with larger transaction sizes and higher valuations, indicating a maturing early-stage ecosystem, according to Tarana Lalwani, Senior Director, InnoVen Capital India.

Early-stage startup valuations increased last year as a result of intense competition for high-quality deals and the entry of large established venture capital firms. At least half of the seed funding deals were worth more than $5 million.

The outlook for early-stage startups in 2021 appears promising, as investors anticipate that the current rate of funding will be maintained.

After the pandemic-caused lockdown harmed startups across industries in 2020, investors became wary. Investors closed the money tap as the lockdown disrupted revenue streams and upended earlier projections. According to Venture Intelligence, startup funding deals fell by more than 30% in the first half of 2020, to 272 transactions.

According to the report, 73% of respondents believe that a professional CEO will lead the company in the future.

Late-stage founders are the most open to the idea of a professional CEO running their business over the next 2-3 years, with 56 percent believing so. This is more common in the United States (for example, Google, Microsoft, eBay, LinkedIn, and Uber), but there aren't many examples in India yet.

Investors stated that the founding team's quality is by far the most important factor they consider when evaluating deals. Almost half of their portfolio companies from the previous two years were able to raise a follow-on round.

According to the report, the main reason for companies failing to raise a follow-on round was that they were addressing a niche market opportunity.

“By continuing to partner with some of the most prominent early-stage institutional investors in the country, we continue to deepen our understanding of the early-stage ecosystem. We are pleased to release the fifth edition of this report. Early-stage investment activity has proven to be resilient despite the pandemic, with bigger transaction sizes and higher valuations, a clear sign of a maturing early-stage ecosystem. At InnoVen we continue to be optimistic, and look forward to engaging with founders and investors.” remarked Tarana Lalwani, senior director, InnoVen Capital India.

The 'Early-Stage Investment Insights Report FY21' analyses and forecasts pre-series A/Seed investment activity. InnoVen Capital India Private Limited (“InnoVen Capital”) prepared the report with input from reputable early-stage institutional investors. 3one4 Capital, Artha Ventures, Blume Ventures, First Cheque Ventures, Indian Angel Network, India Quotient, Inflection Point Ventures, Kae Capital, Mumbai Angels, Omnivore, Orios Venture Partners, Stanford Angels,, Titan Capital, Waterbridge Ventures, and YourNest Capital were among the investors who contributed to this edition of the report.

The InnoVen Capital India Start-up Outlook report is an annual report that provides an outlook on the sentiment prevailing in the start-up ecosystem through the eyes of founders. The survey is distributed to founders and senior executives and covers a wide range of companies at various stages of development, including early-stage, growth-stage, and late-stage. It covers a wide range of topics such as the funding environment, exits, focus areas, challenges, and other issues that founders are concerned about. The sixth Start-up Outlook report was based on a survey of about 100 start-up leaders.