The number of early-stage startup investments in India hit a seven-quarter low, despite a positive fund-raising environment, data indicates.

Volume of seed and Series A deals, generally defined as early-stage, fell for the second straight quarter to 66 deals in the three months ended September, from a high of 100 deals in the first quarter.

Graphic by Paras Jain/Mint
Total investment value, too, fell for the third straight quarter from $333 million in Q4 of last year to $216 million in the September quarter, according to data from Venture Intelligence, a startup data tracker.

Investors attributed the fall to a number of factors. “The deals in angel and seed-stage have dried up as there are no good lead investors. The focus of all angel networks has moved from showcasing quality deals to earning membership fees and transaction fees. There is no additional incentive to lead deals,” said Sanjay Mehta, founder and partner, 100x VC, an early-stage investment firm.

“If seed-stage deals are not happening then the funnel for early-stage and Series A shrinks automatically,” he added.

The fall in early-stage deals has attracted the interest of a number of new investors who are keen to invest in this space. Sequoia Capital, which has backed firms such as Oyo, Byju’s and Zomato, has for the first time, raised a $150-200 million fund dedicated to seed investment this year, as it seeks to invest through Surge, an accelerator programme it started earlier this year.

Similarly, funds such as Matrix Partners, which generally prefer Series A or B deals, are also looking at seed-stage deals actively, given that early entry can provide massive exit opportunities if the startup manages to scale well, said two people directly aware of their plans, requesting anonymity.

While the number of deals has seen a downward trend in the last several quarters, average deal sizes have seen growth, indicating that investors are willing to invest more, but in fewer companies, thus becoming pickier. The average size of an early-stage cheque has gone from $2.1 million in Q1 2018, to $3.27 million in the last quarter, the data indicates.

“The deal volume moves in cycles. There is usually a flurry of activity when funds raise capital every couple of years and then they work with the portfolio and consolidate positions. Activity will improve again once the winners from the previous cohort emerge,” said Shivakumar Ramaswami, founder of IndigoEdge, an early-stage investment banking firm.

 

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