Early stage funding in Indian startups shrink

Investors are writing larger cheques for fewer startups.

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Even as Indian technology startups raised a whopping USD 10.9 billion in the first nine months of 2019, investments in seed and early stage startups nosedived to hit seven-quarter low, according to data by startup data tracker Venture Intelligence, cited by local news site Mint.

The number of seed and series A deals fell to 66 in the September quarter from 100 deals in the first quarter of 2019, while total investment value went down for the third quarter straight, from USD 333 million in Q4 last year to USD 216 million last quarter, Venture Intelligence report said.

Overall, the total number of deals fell by 26% to 937 transactions, indicating investors have become cautious and are writing larger cheques for fewer startups that require mid and late-stage funding of over USD 50 million. This was true for early stage rounds as well, where despite the fewer deals, the average size of an early stage cheque went up to USD 3.27 million for the last quarter from USD 2.1 million in Q1 2018.

The angel and seed fund rounds have reduced for the lack of “good lead investors” while angel networks have moved focus on “showcasing quality deals to earning membership fees and transaction fees”, Sanjay Mehta, founder and partner at 100x VC, an early stage investment firm, told Mint.

Fall in seed stage deals automatically shrink funnel for early stage and series A deals, Mehta said.

Realizing the trend, some of the investors keen to invest in early stage startups, have started focusing on seed rounds, the report said. For instance, Sequoia Capital raised a dedicated seed fund this year of USD 150-200 million with an aim to invest in startups selected for its newly launched accelerator programme Surge.

Meanwhile, the Mint report, quoting sources, said Matrix Partners, which generally prefers to do series A or B deals, is also looking at seed stage deals actively now, given that early entry can provide a massive exit if the startup manages to scale well.