Early-stage investment heats up, and biggies want a piece of this pie

One of the biggest trends in the funding boom during the pandemic has been the strengthening of the angel and early-stage investment ecosystem.

While many startup founders back in the day — including Flipkart’s Sachin Bansal and Binny Bansal (not related) — would find it difficult to raise investor money. Many would even wait for a couple of years before getting that first cheque.  

Fast-forward to 2021, investors have been piling on to invest in early-stage startups. From the start of the year, till November, over $13.6 billion has been invested across 3,479 early-stage deals, according to YourStory Research.

The investors range from second-time entrepreneurs and celebrities, to early-stage focused venture capital investors, which started investing in the last two or three years.   

Among the investors, Kunal Shah — who sold his coupon app Freecharge to Snapdeal and founded credit card payment reward points platform Cred — is the most active investor in the angel ecosystem.

Kunal has been involved in 58 deals with disclosed and undisclosed funding values. Among the disclosed deals, he is involved in deals cumulatively valuing around $252.7 million. This is followed by Mumbai-based Venture Catalysts, which has invested upwards of $121.7 million across 46 deals in a similar fashion. 

The ecosystem is scaling so fast that even founders creating firms beyond metro cities are confident about raising capital.

“About two years ago, if I was building a startup in Bhopal then financial backers would doubt as to how much I will be able to scale my business from a Tier II city as there are hiring challenges, among many other things. But now, if I write an email with a pitch and presentation they take note of it,” Amitesh Mishra, co-founder of Bhopal-based Zyoga, an AI-based fitness app, told YourStory in an earlier interaction. 

Looking at the opportunity, about two-year-old angel investment firm Inflection Point Ventures also doubled the number of investments in 2021 compared to last year.

“When COVID-19 outbreak had only happened, many investors were holding on to their cash. But we decided to increase the number of investments we make to scoop up good founders and firms,” says Vinay Bansal, Founder and Chief Executive Officer, Inflection Point Ventures.

The Gurugram-based early-stage investor exited payments platform BharatPe, and edtech platform Pedagogy, the latter was acquired by Vedantu which became a unicorn in September this year.

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With the Indian startup ecosystem maturing and practically sneezing a couple of unicorns every week, investors want to give their money to young founders and become a part early on in their journey.

To this step, Sequoia Capital launched its Surge programme to back startups, who could just have a pitch deck, while Accel’s Atom, which is an early-stage investment arm, provides the initial cheque without expecting any stake dilution.

Bessemer Venture Partners — which has been in India for at least 15 years — launched its India-focused early-stage investment fund on 30 November 2021. The backer of unicorns, including Swiggy and Urban Company, launched a massive $220 million, clearly wanting a piece of this burgeoning pie.

Why, you ask? Because if an investor, or an investment firm, stays in a company from seed till exit, which these days could come in the form of an initial public offering (IPO), then the returns generated on the investment are manifold.

For instance, when software-as-a-service (SaaS) firm FreshworksFreshworks got listed on NASDAQ, in September, Accel’s $1 million investment, from 2011, was worth $800 million.

This is probably why New York-based Tiger Global Management, which historically has been investing in startups during their growth stage, has lately been leading investments in Series B rounds. To cite a few examples, take Tiger Global’s Series B round in society app MyGate, microblogging Koo App, and the recent investment in Slice.

The $220 million round led by Tiger Global bought the credit-card disbursing platform’s valuation to over $1 billion — making it India’s 41st unicorn of 2021.

“The investment thesis as we knew before the pandemic has also changed. Now bigger investment firms are not necessarily looking at the name of the rounds, which they would earlier. But the focus is more on the growth of a startup,” says Kunal Bajaj, Head of Capital Network, Blume Ventures.

“If you take Slice, for example, it is the second-largest credit card disburser, which is a very big tag. So, an investment firm could look at the round but also the speed at which a company is growing,” adds Kunal.

This investment cycle does not stop at the biggies. European investment firms are also making inroads in the startup ecosystem.

Munich-based Picus Capital, has already made eight investments between pre-seed and Series A, and is also looking to also increase this number. The investment firm's global portfolio is worth $700 million.

“Startup ecosystems in developing countries such as India, Pakistan and South East Asian nations have a lot of potential and we want to back such companies,” Florian Reichert, partner and managing director, Picus Capital, who handles investments in emerging markets, told YourStory.

While new investment firms eye India, Artha Venture Fund, an angel to pre-seed investor, also has ambitions of leading and investing in Series A rounds.

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But when more institutional investors start crowding at early stages, how do home-grown venture capital firms, who would majorly invest between Series A and Series C rounds, cope up?

Inflection Point Ventures, which invested across 50-55 deals in 2021, has decided to not double down on the number of investments in 2022.

“To be sure, we are not reducing the number of deals. But we will not be doubling our investments as we feel the market has heated up a bit and the pricing has started to go upwards. We would want to see what kind of returns we get on our investments. If the opportunity arises we would take big bets,” says Inflection Point Ventures' Vinay.

But Mumbai-based Lightbox Ventures, which usually invests in three to five startups in a year, will increase the number of investments.

“We haven’t decided on a number yet. There will be an incremental increase. But we will definitely look to increase the number of startups and also the sectors we invest in, within the consumer space,” says Siddharth Talwar, Partner, Lightbox Ventures.

While Lightbox would be entering consumer-facing sectors including kiranas, cryptos and gaming, Blume Venture believes in their investing chops and the ecosystem they provide to attract quality entrepreneurs and startups.

“The kind of direction and help we give to our portfolio companies is different from what a new firm will give. We have a team of more than 20 people, who assist in finding the right candidate for our portfolio companies. And we also assist to raise follow-on rounds,” says Blume’s Kunal.

Some firms have also taken up brand-building activities, by bringing founders from their portfolio firms to speak with aspiring entrepreneurs.

“People should believe that having a brand like us on their cap table will increase their chances of getting better follow-on rounds,” says an individual at a growth-stage VC firm, seeking anonymity.

It remains to be seen as to how these dynamics will play out in the larger scheme of things. But homegrown firms will - most likely - find a way to either change their playbook or invest in less-crowded sectors.

No matter how things pan out, the startup ecosystem stands to gain.