India Startup Funding: Investors Rush for Early-Stage Deals

India's Startup Ecosystem Thrives Amidst Challenges

Despite facing difficulties such as the ongoing coronavirus pandemic, rising unemployment, and a contracting economy, India’s startup landscape is experiencing significant growth and investment.

Traditionally, investors in India have focused on growth-stage and late-stage companies, channeling substantial capital into the nation’s expansive internet market. However, a notable shift is occurring, with early-stage startups now attracting increased attention and funding.

Increased Investor Activity in Early-Stage Ventures

Currently, over 70 early-stage Indian startups are actively engaged in fundraising discussions, with investment sizes ranging from a few million dollars to $100 million. Several noteworthy deals are currently being reported.

It’s important to note that many of these deals are still under negotiation and subject to change, or may not ultimately result in investment. The details of the deals discussed below have not been previously disclosed.

Key Investors and Target Companies

Sequoia Capital India, a leading investment firm in the country, is exploring potential investments in over two dozen Indian startups. These include Register Book, a bookkeeping application provider; Vah Vah, an app offering makeup tutorials from artists; BambooBox, a SaaS platform; and MailModo, an email marketing software company.

Alongside venture fund Nexus, Sequoia Capital India is also considering backing OneCode, an app connecting digital brands with retailers. Furthermore, the firm is in talks to invest in Probo, a trend prediction app, and Rattle, through its dedicated early-stage fund, Surge.

Market Sentiment and Investment Trends

Vaibhav Domkundwar of Better Capital observes that the early-stage startup environment in India is exceptionally vibrant. He notes a surge in pre-seed and seed stage momentum, alongside preemptive rounds at Series A and B stages.

Domkundwar attributes this excitement to a new generation of Indian founders who prioritize product development and effective distribution strategies, leading to a rapid pace of investment in their ventures.

Second-Time Founders and Deal Velocity

Another investor, requesting anonymity, highlights that experienced founders are now securing funding based on concise presentations or Notion documents from prominent angels, unicorn founders, and micro VCs. The speed at which these founders are closing deals is described as “stunning.”

Growth in Funded Companies

Bipin Shah, a partner at Titan Capital, points out that two years ago, only around 30-40 promising companies were receiving funding. However, over the past year, he estimates that over 500 companies have secured seed funding in India. Titan Capital alone has invested in over 60 companies since the beginning of last year.

Unicorn Creation and Public Market Exploration

This increased investment in early-stage deals coincides with a growing number of mature Indian startups achieving unicorn status and several established companies exploring initial public offerings.

India has seen the emergence of 14 unicorns this year, compared to 11 last year and just 6 in 2019. Investors like Tiger Global and Falcon Edge Capital have intensified their focus on India, attracting founders with substantial check sizes, higher valuations, and swift decision-making.

Notable Deals in Progress

GSV is in discussions to invest in Filo, a tutoring app, while payments stack startup Inai has secured a new round from Better Capital and others and will participate in Y Combinator’s upcoming batch. Y Combinator’s previous cohort included a record number of Indian startups.

BrightCHAMPS, a coding and math platform for children, is also in talks with GSV for funding. Indiagold, a platform offering credit against gold reserves, is negotiating a new round with two prominent foreign investors traditionally focused on growth and late-stage deals.

Germany’s Razor Group is in advanced discussions to invest in Upscale, a company replicating the Thrasio model in India. Fintech investor RTP is considering an investment in Refyne, and Fleek, a subscription payment system. Falcon Edge’s AWI is exploring investments in Absolute Foods and Ultrahuman, while AccelData has attracted interest from Bessemmer and WestBridge.

The Benefits of Early-Stage Investment

For investors with significant capital reserves, identifying promising startups in their early stages offers substantial rewards. It allows for acquiring a larger equity stake at a lower valuation, with the potential for significant returns if the startup succeeds. Early investment also mitigates potential losses should the venture encounter difficulties.

Challenges for Micro VCs

However, the increased involvement of larger investors in early-stage deals is creating challenges for smaller firms. An anonymous microfund investor notes that it has become more difficult to source new deals as larger investors aggressively pursue entire rounds independently.

The investor also highlights the emergence of founder groups collectively backing startups, adding to the competitive landscape.

“Optionality Checks” and Potential Risks

These investments are sometimes referred to as “optionality checks,” often targeting second-time founders or those with experience at unicorns or soonicorns. While initially popular with Series A funds, Tiger and Falcon/AWI are now also employing this strategy.

These optionality checks can make it harder for micro VCs and seed VCs to compete, as larger funds can offer smaller checks with potentially less dilution. However, the investor cautions that a lack of follow-on funding from the same investor could negatively impact future fundraising efforts. Additionally, the influx of capital could lead to faster expansion and increased spending.

Continued Investment Activity

Lightspeed India Partners, known for its investments in Oyo Rooms and Udaan, is in talks to back Vegrow, a farmer partnership startup, and 100ms.live, a tool for adding video conferencing to apps, as well as edtech startup Kalaam Labs.

Dyte, a “Stripe for live video calls,” is in discussions with Nexus and Sequoia Capital India. Elevation Capital is nearing an investment in FamPay, a teen credit card provider, at a $150 million valuation. Chiratae Ventures is finalizing an investment in AroLeap and Locale.ai.

Further Deals and Market Trends

Fanplay, a platform for influencer monetization through mobile games, has raised funding from several American micro VCs, though the round is not yet finalized. Advarisk, a due diligence and monitoring platform, is in discussions with multiple investors. Trading signals provider Tradex is in talks with Leo Capital. Audio app Frnd, podcast aggregator Kuku FM, and crop management platform Bharatagri are also seeking funding.

Plug-and-play payments provider Card91 is in discussions with several investors, while Tournafest, Easy Eat, and Stockgro have closed rounds with angel investors. Kosh has secured funding from YC and VentureSouq.

Fundamentum, the firm of tech veteran Nandan Nilekani, is in talks to back Bijak, an agricultural commodity marketplace, and Reshamandi, a supply chain startup.

Investor Confidence and Valuations

A survey by InnoVen Capital revealed that over 80% of investors reported an increase in deal flow for early-stage startups this year compared to 2020. Over 75% of respondents indicated that valuations in recent deals were “on the higher side” due to intense competition and the entry of large VCs.

“Early-stage investment activity has proven to be resilient despite the pandemic, with bigger transaction sizes and higher valuations, a clear sign of a maturing early-stage ecosystem,” said Tarana Lalwani, senior director at InnoVen Capital India.