InnoVen Capital's Report States 50% Of Investors Are Expecting A Slowdown In Funding In 2023

InnoVen Capital, a venture debt firm in Asia, released the seventh edition of the ‘Early-Stage Investment Insights Report’, outlining current trends in the early-stage (Seed/Pre-A) Indian start-up ecosystem. The report focused on investment activity across the Seed and Pre-series A stages, by analysing market information, along with a survey conducted with 20 institutional early-stage investors.

The report claimed that the year 2022 started with a strong building from the momentum of 2021, but things slowed down considerably during the second half of the year. In 2022, only 20 per cent of the survey respondents reported an increase in the quantum of their investments as compared to 2021. Almost 40 per cent of investors reported a decrease in the number of deals they closed. Despite the slowdown, valuations for seed/Pre-A rounds remained at a similar level to 2021, with half the deals at a $5 - $10 million valuation range and 20% above $10 million valuation.

Respondents chose B2B platforms, fintech, and enterprise SaaS as the top three sectors they invested in last year. Nearly 60 per cent of investors had over a third of their new investments at a pre-revenue stage, which demonstrated that top-notch founding teams with an idea can raise capital.

In 2023, most investors (57 per cent) anticipated a further slowdown in funding activity. Investors chose Fintech, Enterprise SaaS and Climate-Tech as the top three sectors of focus this year.

The report claimed that only a third of early-stage respondents (35 per cent) felt that the emergence of Angel syndicates has been positive for the overall ecosystem. Most of them expressed that angel syndicates led to many founders skipping institutional seed rounds, crashing deal/diligence timelines, and a higher entry valuation. They also highlighted that higher activity levels in the seed stage by large established VCs (including Tier-1 VC seed programs) have driven up valuations and blurred the lines between Seed and Series A. While evaluating new deals, investors overwhelmingly chose the quality of the founding team as the most important factor as there isn’t much traction or track record to evaluate at an early stage.

Commenting on the findings, Tarana Lalwani, Partner, InnoVen Capital India said, “As we head into 2023, we anticipate the slowdown that began in 2022 to persist. However, we expect the early-stage environment to maintain its momentum, with an increased focus on governance and more extensive due diligence process - which will see more viable and sustainable business models getting funded”.