Fintech, SaaS, and Climate-tech to be on Investors' Radar in 2023: Report Given the bad environment, the majority of investors (57%) expect a further reduction in fundraising activities in 2023. Fintech, Enterprise SaaS, and Climate-tech are the top three industries on investors' radars this year.
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Mumbai-based venture debt firm InnoVen Capital has released the 7th edition of the 'Early-Stage Investment Insights Report', outlining current trends in the early-stage (Seed/Pre-A) Indian startup ecosystem. The report examines investment activity at the seed and pre-series A stages using market data analysis and a survey of 20 institutional early-stage investors.
Here are some insights from the report.
Deal sizes and valuations increased in 2022, particularly in the first half of the year
The year 2022 began with a solid continuation of the momentum from 2021, but things significantly slowed down in the second half of the year. Only 20% of survey participants indicated that the amount of their investments had increased from 2021 to 2022. Nearly 40% of investors reported a drop in the volume of transactions they completed. Despite the slowdown, valuations for seed and Pre-A rounds held steady at a level comparable to that of 2021, with 20% of deals valued above $10 million and half at between USD $5 and USD $10 million.
The top 3 sectors last year for early-stage investors were B2B platforms, Fintech, and SaaS
The top three industries in which respondents planned to make investments in 2022 were B2B platforms, Fintech, and Enterprise SaaS. Pre-revenue investments accounted for over a third of the new investments made by 60% of investors, showing that strong founding teams with a great idea can raise money.
50% of investors expect a slower funding environment in 2023, 30% expect it to be flat
Given the bad environment, the majority of investors (57%) expect a further reduction in fundraising activities in 2023. Fintech, Enterprise SaaS, and Climate-tech are the top three industries on investors' radar this year.
Only 35% of early-stage respondents believe that the development of angel syndicates has improved the ecosystem as a whole. The general consensus is that angel syndicates have caused many founders to forego institutional seed investments, to crash deal/diligence timeframes, and to value their companies more highly at entrance.
The increased seed stage activity by large, well-established VCs (particularly Tier-1 VC seed programmes) has raised valuations and blurred the distinctions between Seed and Series A, according to respondents. As there isn't much traction or track record to examine at this early stage, investors overwhelmingly selected the quality of the founding team as the most significant criteria when evaluating new ventures.
Bengaluru, NCR and Mumbai continue to form the core of the startup ecosystem
Over two thirds of early-stage investments made by respondents were in companies that are headquartered in Bangalore or NCR. There has been increasing activity in Hyderabad, Pune, and Chennai, with all three seeing 5% of the total early-stage deal flow individually.
Sources of funding were domestic capital markets
The majority of responders (Funds) have raised money primarily through local capital markets. 20% of those surveyed have just domestic limited partners (LPs). The top two domestic capital sources are family offices and UHNIs, followed by funds of funds like SIDBI.
According to Tarana Lalwani, Partner, InnoVen Capital India, "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."
Started in 2008, InnoVen Capital India offers multiple debt capital solutions, including venture debt, acquisition finance, growth loans, working capital etc. To date, the platform has completed over 300 transactions with more than 200 startups, including 35+ unicorns.
