Early-stage investors are increasingly turning to serial entrepreneurs, experienced founders, and high-profile employees for new investments where investors are backing concept stage ventures and even pre-revenue stage startups, according to data compiled by InnoVen Capital.
Around 17% of funded start-ups in India were in the pre-revenue stage in 2019, compared to 12% in 2018. Among the funded startups in 2019, some 82% of founders had experience of more than 5 years while the majority (89%) of funded start-ups had at least co-founders, the report said.
The report compiled by InnoVen through inputs from 18 early-stage investors showed that most investors look for a clearly defined addressable market, product-market fit, and room for scalability of a product before making an investment. Around 78% of the startups that were turned down by early-stage backers either had no product-market fit or were addressing a niche market opportunity.
Investors also point out to the Flipkart’s (Myntra & Jabong) exit to Walmart which saw many employees cashing out crores in employee stock options. Some of these employees, especially in the senior management and C-level team have turned to entrepreneurship post large exits.
“Post the exit of C-level management at Flipkart and Myntra, a bulk of the senior employees have cashed out due to different reasons…and such exits and management changes will become a major trigger for an inflow of funding into early-stage startups. Today VCs are openly and vocally welcoming such high-profile employees and experienced founders. Earlier the amount of money an angel investor used to commit was around $500k to $1 million but last few years there have been some seed-stage investments reaching up to $20 million," said Anand Lunia, managing partner at India Quotient.
InnoVen’s report also showed that early-stage funding in India more than doubled in 2019, when compared to 2018, largely led by a 22% YoY increase in the number of deals and a 70% YoY increase in the average size of the deal. The average deal size across early-stage startups in India increased to ₹7.5 crore in 2019, compared to ₹4.4 crore in 2018.
In 2019, the Indian startup ecosystem recorded around 93 early-stage investments totaling to ₹693 crore, which is a two-fold increase compared to ₹334 crore in 2018 across 76 early-stage deals. Average valuation in early-stage deals also went up by 15% YoY in 2019 touching around ₹17.9 crore ($2.6 million).
However, almost 50% of early-stage investors felt that the valuations in 2019 were on the higher side due to intense competition for quality of deals, the report said. A majority (56%) of early-stage investors surveyed by InnoVen said that they foresee some correction in startup valuations in 2020
Bangalore, Delhi-NCR and Mumbai continue to lead investments in the early-stage segment. The report added that share of Bangalore (37%) and Mumbai (20%) hovered around at 2018 levels while Delhi-NCR saw a significant rise, increasing from 17% in 2018 to around 29% of the deals in 2019.
"The startup ecosystem in India is now the 3rd largest ecosystem after the US and China. As the institutional equity investor base, in Series A and B stages, becomes well established, the early-stage investors will get more chances to get external validation on their previous investments. The pool of early-stage investors is now very deep with local VC’s, Global VC’s, Chinese, Japanese investors all looking to find the right opportunities," Ashish Sharma, chief executive of InnoVen Capital told Mint in an emailed response.