Younger the better: Investors flock to early-stage startups

The startup ecosystem in India has been developing rapidly, leading to an increase in investments directed towards new startups. This indicates that founding teams with innovative ideas are capable of attracting investments, even during the ongoing funding winter.

Despite this challenging time, investment in early-stage startups has been witnessed in 2022. The B2B, fintech, and enterprise SaaS sectors have emerged as the most successful in attracting early-stage funding.

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The year 2022 has been recognised as a year of reckoning for Indian startups, due to the sharp decline in funding (down by 40% YoY) that set in the post a blockbuster 2021. However, the impact was not the same across the board. Interestingly, early-stage startups remained largely safe and were not slammed by the prevailing ‘funding winter’ i.e. the extended period of reduced capital inflows. They raised funds of around US$ 664 million across 368 deals in the year 2022, according to a report by InnoVen Capital. It is a substantial spike in fund-raising, as against the US$ 594 million funds raised across 316 deals in 2021. 

According to a PricewaterhouseCoopers (PwC) report, early-stage startups accounted for 60-62% of the total deal volume in 2022. The top three sectors that attracted investments during the year were B2B (business-to-business) platforms, fintech, and enterprise SaaS (Software as a Service). 

When asked why fintech startups are leading in the startup ecosystem, Rahul Tandon, Chief Product Officer, Safexpay said, Fintech startups have been at the forefront of meeting digital needs, providing innovative solutions to simplify banking and financial experiences. Fintech companies have also demonstrated a keen aptitude for employing automated customer services technology, such as chatbots and AI interfaces, to help customers perform basic tasks and minimize staffing expenses.

He added that investors had recognized the potential of this industry and are eager to invest in such startups as it presents the chance to enter the early stages of emerging markets and reap the benefits of substantial growth that may occur as the industry and technology advance. Given that fintech startups are usually smaller in scale, they may be able to act more nimbly and effectively than established companies, enabling them to seize market share and establish a dominant position.

It is worth noting that two-thirds of early-stage start-up investments in 2022 came from Bangalore or NCR. The cities Hyderabad, Pune, and Chennai individually registered a 5% increase in total early-stage investment. Bangalore, NCR (National Capital Region) and Mumbai remained the nerve centres of the start-up ecosystem.

While evaluating new deals in 2022, the investors have primarily focussed on the quality of the ‘founding team’ as the most important factor, since there was hardly any track record for their evaluation at the early stage. It was noted by InnoVen that more than one-third of new investments were at a pre-revenue stage, indicating that founding teams with innovative ideas can attract funding. 

Start-ups are now known to be the driving force of innovation-led economic growth. As the number of new start-ups in the country is rising, the number of risk-taking investors looking to inject funds into early-stage start-ups is also going up. 

Ankur Mittal, co-founder of Inflection Point Ventures says that the unallocated funds that a private equity (PE) or VC firm has on hand (called dry powder), have been increasingly flowing from late-stage to early-stage start-ups. Besides there have also been many early-stage incubation programmes launched during the last three to four years. These include Sequoia Surge, Accel Atom or YC Continuity, which are promoting more opportunities for planting funds. Top-performing sectors like fintech, SaaS, and the newly added climate-tech, are expected to garner most of the VC investments in the coming months.

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