Early-stage startup investing is the new sweet spot for VC investors

Making the Year 2022 “Catch-22” Scenario in Indian Capital Market. Both secondary and primary markets have shown higher volatility this year than the bull market in 2021, with the largest number of startups becoming unicorns.

With the start of the year 2022, the US and Europe started showing signs of recession, turning into funding for the winter around the world by the first quarter of 2022.

In the first half of this calendar year, the amount of funding to Indian startups was quite high, but it was mainly concentrated in the early and early stages. According to Entrackr data, around 596 early-stage startups raised funds in H1 2022 compared to the late/growth phase, which accounted for only 226 deals.

From Q2 2022, later-stage (Post-Series A) venture capital funding for Indian startups is decreasing, and investors become more cautious and consider small-sized and long-term investments in early-stage startups amid improving global financial markets. Period bets. And the prevailing funding winter.

Several VC funds have raised fresh capital to invest in India. So they have a huge dry powder available, but again here’s the catch-22 situation that VCs have capital, still, winter funding.

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early stage startup investing

We have seen in conversations with investors that they have advanced their thesis and are very selective in their investment decisions by prioritizing investments in Enterprise SaaS, B2B models, where cash burn is low and there is recurring revenue. The valuations in SaaS and D2C sectors have also improved by at least 25 per cent.

One of the reasons why early-stage startup investing remains an attractive proposition for many investors is the potential for exponential growth. Investors want to capitalize on the first come opportunity to take a stake at a fair valuation and get significant returns from it by exiting the Series A/B round or later. Early stage investors have also earned almost 10x, 22x, 35x to 80x returns.

Most of the late-stage startups burning cash and those showing near-term profitability visibility could also lure VC money into winter funding like Squad Stake raised Series B and Sunstone raised Series C last month.

With the increasing chaos surrounding the ed-tech giant in recent times, investors may be cautious about investing in unicorn start-ups in the future, and hence investing in early-stage start-ups may be a better and safer option. Is. The numbers also confirm this. According to a research report by Tracxn, in the first quarter of 2022, early-stage VC investments in India (up to Series A rounds) grew 28 percent to $1.50 billion from $1.17 billion a year ago. Also analyzed, the average size of early-stage deals increased by 200% to $3.94 million in Q1 FY23 from $1.92 million in Q1 2021.

Investors are also keen to partner with startups that are building sustainable business models using technologies such asblockchain,web 3.0,artificial intelligence (AI)Robotics, and Internet of Things (IoT), among other areas such as D2C. Recently, in Swastik Investment Banking we got 4 Startups in Seed Stage and Series A, but could not get investor interest for Series B Stage Startups. from VC fund

Given the huge potential in India’s deep tech ecosystem, I believe early stage startups in tech-based solutions and global tech startups in the D2C segment can grow at par.

Mr. Amit Pamnani, Chief Investment Officer for Investment Banking at Swastika Investmart Ltd.

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