early-stage startup investors: Most early­-stage investors see muted 2023 play, says report

Over 80% of investors in the early-stage startup ecosystem believe that the investment activity in 2023 will be at a slower pace than last year, a report by venture-debt firm InnoVen Capital said.

For the report, the firm surveyed 20 early-stage investors including Blume Ventures, WaterBridge Ventures, India Quotient, Kae Capital and others.

ET reported earlier this month that early-stage startups that were earlier deemed immune from the funding winter have also seen a decline in funding during the first quarter of 2023. The InnoVen Capital report also pointed out that while 2022 started off strongly building on from the momentum of 2021, things slowed down considerably during the second half of 2022.

“In 2022, only 20% of the survey respondents reported an increase in the quantum of their investments as compared to 2021. Almost 40% of investors reported a decrease in the number of deals they closed,” the report said.

According to Venture Intelligence data, during January-March, Seed- and Series-A investment rounds saw $712 million in funding, less than half of the $1.92 billion recorded in the same quarter last year. The number of deals also fell from 248 to 115 during this period.

Speaking to ET, Ashish Sharma, managing partner at InnoVen Capital, said that the bar for investors even in the early-stage ecosystem has gone up.

“In the early-stage, investors don’t have valuation concerns as much as they have for growth and late-stage startups. Despite the dry powder, investors are still going slow because the bar has gone up. The whole fear of missing out isn’t there. They are being thoughtful in building conviction that the model is truly differentiated and can deliver positive unit economics over time,” he said.

The InnoVen Capital report also pegged that 55% of the surveyed investors believed early-stage companies to be generally overvalued in 2022.

The report also noted that despite the overall slowdown in venture capital funding during 2022, valuations for Seed or Pre-Series-A investment rounds remained at a similar level to 2021, with almost half of the deals being signed in the $5-$10 million valuation range. Almost a fifth of the early-stage startups secured a valuation above $10 million, it added.

Looking forward, Sharma told ET that investors in the early-stage space would be looking for quality founders, pointing out that there is an “over-indexing” on quality of the founding team.

“Investors are looking for mission driven founders who can execute and are resilient. When the market is hot, you always get some founders who are looking for quick success and instant gratification. Investors believe that the market will go sideways, with a negative bias and they are looking for founders who are ready to get into the trenches, and build for the long term, even if the funding environment remains tight,” he said.

“Investors do favour second-time founders, or someone coming in with an CXO experience of a large company, as they have an execution track record and the ability to attract good talent as well as raise capital,” Sharma added.

The focus on increased due diligence highlighted in the report has also featured in late and growth-stage deals. ET had reported earlier that deal closures are taking longer times because of mismatch in valuation expectations between founders and potential investors, in addition to the deeper due diligence being conducted by investors. These elongated timelines are similar to what was witnessed in the pre-pandemic years of 2018-2019.

(Graphics & illustrations by Rahul Awasthi)

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