Growth stage investments hit a record $1 bn in January-June
3 min read.Updated: 07 Jul 2019, 10:53 PM ISTM. Sriram
Startups raised $1.17 bn in first half of 2019 in growth phase against $994 mn a year ago
Several new funds—A91, Iron Pillar and Mirae—are now exclusively targeting the growth stage
Growth stage investments in Indian startups set a record by breaching the billion-dollar mark in the first half of this year, as new investors doubled down on Series B and C rounds, generally considered the growth stage for startups.
The startups have raised a total of $1.17 billion in the first six months of 2019, rising from $994 million in the same period last year, and a 47% surge from $616 million in 2017, according to data from Venture Intelligence, a startup data tracker.
However, the number of deals has remained largely flat in the last four years, falling from 85 last year to 76 this year. This indicates that deal sizes have grown in recent years, with the total investment increasing in the same period. The average deal size has increased from $10.26 million in 2016 to $15.44 million this year so far.
“This year, like last year, we are seeing a decent number of growth stage deals happening, unlike the lull we had seen the year before. It’s a function of both the availability of capital and availability of companies that are ready to absorb growth capital," said Prerna Bhutani, partner at India Quotient, an early-stage investor.
This year, Series C rounds have reached as much as $72 million, highlighted by two-wheeler rental startup Bounce’s fundraise last month, led by US-based funds B Capital Group and Falcon Edge Capital. Bounce’s rival Vogo, as well as student housing startup Stanza Living, are in talks to raise about $50 million in Series C and B rounds respectively, according to Mint reports.
This has also followed the entry of new investors dedicated to growth stage deals alone. In the past year, at least three new funds—A91 Partners, a $350 million fund set up by three former managing directors at Sequoia Capital, V.T. Bharadwaj, Gautam Mago, and Abhay Pandey; Iron Pillar, a fund set by former Morgan Creek executive Anand Prasanna and Sameer Nath, a former managing director at Citi Bank; and Mirae Asset Global Investments—have targeted this space exclusively.
In the mid-stage market, “the quality of deals has improved in terms of founder experience, business model sustainability, time and ability to scale," said Sameer Nath, managing partner, Iron Pillar, a $90 million fund. “Second, the number of participants has increased. A few venture growth specialists have followed Iron Pillar into the market but we are also observing global VCs, hedge funds and corporate VCs get more active, some of whom do not yet have a local presence," he said.
“Third, the round sizes have expanded. We are seeing more capital get raised at the Series B and C stage. This is linked to the first two trends," according to Nath.
Other growth stage investors include Belgian firm Sofina, US-based Steadview Capital and Sands Capital, and Singapore’s Hillhouse Capital.
Despite the robust investments, the absence of depth in the growth stage market and excessive valuations worry investors.
“There are early indications of valuation inflation in certain tech segments, which we are monitoring," said Nath.
“While there is an increased interest from international investors, they also usually follow in companies backed by select early investors. We need both breadth and depth at this stage," said Bhutani.
Investors say the vacant space is currently filled by overseas investors and over time will get supplemented and replaced by local funds. For India-based funds, the proposition would be that they are local and more focused and have greater ability to add value.
Further, traditional growth stage investors, such as Sequoia Capital and Accel Partners, are now favouring early-stage deals, including Sequoia’s Surge, a dedicated fund for the seed stage. Venture growth firm Norwest Venture Partners is also looking to focus on the growth stage market, managing director Niren Shah had said in April.