₹2000 rupees notes (Reuters)
2000 rupees notes (Reuters)

Early-stage startup investments touch a seven-quarter low

  • Deal volume fell for the second straight quarter to 66 in July-September
  • While the number of deals has seen a downward trend, average deal sizes have seen growth

Mumbai: The number of early stage startup investments in India hit a seven-quarter low, despite a positive fundraising environment, data indicates.

Volume of Seed and Series A deals, generally defined as early stage, fell for the second straight quarter to 66 deals in the September quarter of 2019, from a high of 100 deals in the first quarter.

Graphic by Paras Jain/Mint
Graphic by Paras Jain/Mint

Total investment value too, fell for the third straight quarter, from $333 million in Q4 last year, to $216 million last quarter, according to data from Venture Intelligence, a startup data tracker.

Investors attribute the fall to a number of factors.

“The deals are angel and seed stage have dried up as there are no good lead investors. The focus of all angel networks has moved from showcasing quality deals to earning membership fees and transaction fees. There is no additional incentive to lead deals," said Sanjay Mehta, founder and partner at 100x VC, an early stage investment firm.

“If seed stage deals are not happening then the funnel for early stage and Series A shrinks automatically," he added.

The fall in early stage deals has attracted the interest of a number of new investors that are keen to invest in this space.

Sequoia Capital, which has backed firms such as Oyo, Byju’s and Zomato, has for the first time, raised a dedicated seed fund this year of $150-200 million, as it seeks to invest from Surge, an accelerator programme it started earlier this year.

Similarly, funds such as Matrix Partners, which generally prefer to do Series A or B deals, are also looking at seed stage deals actively now, given that early entry can provide a massive exit if the startup manages to scale well, said two people directly aware of their plans, requesting anonymity.

While the number of deals has seen a downward trend in the last several quarters, average deal sizes have seen growth, indicating that investors are willing to invest more, but in fewer companies, thus becoming pickier. The average size of an early stage cheque has gone from $2.1 million in Q1 2018, to $3.27 million for the last quarter, the data indicates.

“The deal volume moves in cycles. There is usually a flurry of activity when funds raise capital every couple of years and then they work with the portfolio and consolidate positions. Activity will improve again once the winners from the previous cohort emerge," said Shivakumar Ramswami, founder of Indigoedge, an early stage investment banking firm.

“The pipeline or general entrepreneur activity is high and will remain so for the next few decades. Therefore deal flow should not be affected," he added.

Early stage deals aside, the broader fundraising environment has still been positive, with startups raising $2.5 billion last quarter, the highest in any quarter this year, and 25% higher than the last two quarters, Mint reported on October 1.

“To my mind, the deal pipeline has become very high quality with time, with new entrepreneurs coming in with innovative business models, in non-lending based fintech firms, ecommerce and enterprise software," said Ramakant Sharma, co-founder of home furnishing startup Livspace, and an active angel investor.