Early Stage Investment Into Indian Start-Ups More Than Doubled In 2019

According to a report by InnoVen Capital, which focused on investments across angel and pre-series A rounds, the investments amounted to INR 693 crore, driven by both the number of deals and their average size.
Early Stage Investment Into Indian Start-Ups More Than Doubled In 2019
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Early stage investors poured in double the funds into the Indian start-up ecosystem in 2019 compared to last year, according to a report by venture debt firm InnoVen Capital.

The report, which focused on investments across angel and pre-series A rounds, said that the investments amounted to INR 693 crore, versus INR 334 crore last year.

The staggering improvement was driven by both the number of deals and their average size. While the number of deals rose 22 per cent, the average deal size increased 70 per cent to INR 7.5 crore.

“Early stage investment activity has been very robust this year...the competitive intensity in early stage has gone up, with a large set of institutional & angel investors looking to find the right opportunities,” said Ashish Sharma, chief executive officer of InnoVen Capital India.

In its fourth year of existence, the report is based on market information and a survey of 18 institutional early stage investors including Blume Ventures, Kae Capital, and Sauce.vc.

Investing Into Ideas

Over the last few years, the start-up ecosystem in India has grown at a staggering rate, with entrepreneurs and venture capitalists, both cropping up on the scene in equal measure. With investments no longer being restricted to tried and tested business models, there has been a paradigm shift in terms of how fund managers look at ideas and companies. Potentially disruptive business models are increasingly getting backed as investors hope to latch on to the next big unicorn.

Investors have become more open to funding start-ups before they start generating revenue, the InnoVen report said. The share of pre-revenue start-ups that got funded rose to 17 per cent in 2019 compared to 12 per cent a year earlier, driven by concept stage firms which were launched by second time entrepreneurs or experienced first-timers.

However, despite this steady growth in investing into ideas, 82 per cent of start-ups that got funded during the year had founders with five or more years of experience. This was up from 55 per cent in 2017.

Trends

While fintech continues to be among the most opted for areas of investment, with several start-ups looking to digitize different stages of the financial services landscape in India, enterprise tech and artificial intelligence are areas where these money managers are looking to focus more into.

Almost 50 per cent of the investors feel that valuations this year were on the higher side but the majority see a correction happening in 2020. The average valuation in early stage deals rose 15 per cent year-over-year to INR 17.9 crore in 2019.

According to the report, a VC round is still the most common form of exit for early investors, with most expecting to exit within 4-6 years of investment.

Bangalore and Mumbai continued to form the largest part of the ecosystem, combining to take 57 per cent of the overall pie while the National Capital Region saw a rise to 29 per cent from 17 per cent a year earlier.

Red Flags

For investors, the biggest red flags while investing were start-ups focusing on niche markets, or not having the right product market fit.

Scalability at 41 per cent emerged as the biggest challenge for start-ups failing to raise follow-on rounds.

Despite the broader focus on supporting more female entrepreneurs, the number of start-ups with at least one female co-founder declined to 12 per cent in 2019 from 17 per cent a year earlier.

What Investors Look For

The founder’s vision and background are among the most important qualities in a founder when it comes to raising funds, according to the report.

While raising a pre-series A round, most investors believe entrepreneurs should keep a runway of 16-18 months before thinking about new funding, the report said.

According to the investors who participated, finding a differentiated business model was the most common answer when asked about the challenges in finding the right start-up.

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