Why fewer than 1 in 3 seed-funded Indian startups get Series A funding

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Q. Very interesting report that you've just released on the state of the startup ecosystem in India around the Series A, early-stage startups. Maybe you could start by just walking us through some of the most important salient findings that you've consolidated in this report and we'll go from there…

Series A has been looked at as a choke point in the ecosystem. But I think it's now important to look at it as a key filtering stage rather than as a choke point. The rate of growth in CAGR terms of Series A funding between 2017 to 2020, the five-year period, it's a healthy 8% growth. And despite that in the last year when the funding winter was supposed to have started, we found that series A investment was actually up compared to even 2021; so we are talking about around 289 investment series A in 2022 compared to 269 investments in the previous year and actually it is well above average in the last 7 years, which was around 269.

In that sense, there is series A funding to be had. Of course, given the current correction in 2023 we expect to see a slowdown probably closer to the average than below. But the key message is whether it is seed like we talked about or Series A, the fact is that early stage investments and the kind of pockets of capital available to startups, with obviously the right metrics and the founder profile and so on, is much better than what it was even just three years ago. So that is a very encouraging sign. 

And these blips—we have seen this if there is anything that is known about venture capital whether it is here or in advanced ecosystems like Silicon Valley—it will go through ups and downs. It is just that the latest cycle was elongated because of the easy availablity to capital. But the point is that in India, the domestic capital and funds formation has set a set solid base. For example, we tracked around 9 billion dollars of VC funds India dedicated venture capital funds have been raised in just the last one year right, and this money is waiting to find homes. And this money can only find home in India and dedicated Indian startups. So whether it is the Silicon Valley or home-grown funds like 314 capital, Bloom Ventures, Chiratae Ventures and so on—everybody has raised between $200 million typical of Indian money, to $2 billion dollars in the case of Sequoia capital. So that's the kind of money that's available, and a lot of it is still dry powder waiting to be invested.

These are specialists in the early stage, so therefore, I think for the right companies once the valuation reset etc happens, we will see more seed deals and Series A deals—if not 2021 levels, that's going to be a bit of catching up to do, but hopefully at least the 2022 levels can be crossed, come end of the year. 

Q. Could you put this in context for us? What is that metric like in some other countries?

The mortality in India at the series A stage is in tune with what we hear of in other markets. And what is very encouraging is how once a series A, the filter, whether it is the 29% that we've tracked for this particular cohort, improves very dramatically from there to Series B, Series C. It is as good as 50% and then from there on; it goes up to 62 and even 70 percent between series C and the later stages. So, this is very healthy, from what I understand, compared to international numbers and comparable at the seed and Series A filtration stage. 

Q. What would you say are some of the common factors or mistakes that startups make before looking to raise Series A?

When it comes to series A, investors demand metrics in terms of what have you done with that seed capital? For example, if it's a B2B SaaS company, they're looking at numbers like monthly recurring revenue or annual recurring revenue. There is a certain clear metric to be crossed before which a series A check can be aspired for.

But if you look at consumer startups where you really cannot aspire for, let's say, actual revenues not with seed capital, some kind of proof points are possible. What is your usage, even if there's no revenue—how many users have you managed to sign up and what is the engagement of those users? So those kinds of proxy measures for even revenue, those become far more important. 

At the seed stage, because the filters are a bit more of art than science, a lot more cheques get written—that's the nature of the beast. But when it comes to Series A investors, especially in this environment, they are that much more demanding in terms of key metrics that you have met, in terms of those milestones set at the seed stage, before which a Series A investor would cut a cheque. 

Q. Do you get a sense that in the current scenario they are focusing more on growth stage startups that may already be in their portfolios?

Existing investments are the number one focus for investors who are already invested into the company. That's very clear. They are putting their house in order and there we are seeing, unfortunately, quite a bit of blow up in terms of companies like Go Mechanic, which has gone in for a fire sale. These are companies which have either gone back to existing investors or tried to raise external money; that's the time when diligence has been that much more intense and lot of governance issues have cropped up. It is not just one case as we know. 

So, essentially, one, funds are putting their existing portfolio into a lot of lenses before which they would commit even more capital. When it comes to external investors, the bar is even higher. That is clearly the sense. But having raised a lot of capital from LPs, funds cannot sit on that for too long. So there is also a pressure to deploy, and clearly the standards expected are much higher. But there is money to be had. For example, last week we heard of a company which was founded just off blocks right now by ex-Puma India executives and they had a cheque waiting for them from a domestic VC for as much as $55 million. So for the right founders and the right opportunity, whether it is technology or non-technology, there is money to be had. 

Q. You also track unicorns very closely, unicorn formation and so on. Give us a sense of what's happened on that front? 

The last unicorn that we tracked was as far back as September 2022, and if anything, the challenge is going to be in terms of how many of them actually manage to retain their unicorn status, rather than   any addition to that list, at least for the some time to come. There may be some one-off cases that   come up but these are not going to be the consumer internet variety, which we were minting almost one per week if not more often. That has really cooled off.

The challenge, given how there is news flow of write downs of the existing unicorns, typically by the public market investors that they have raised money from, is that it's also a sign that actual capital being deployed at these companies at what is called a down round or a lower valuation than the previous round, is kind of around the corner for quite a few of these, unfortunately. The big-ticket investors—the Softbanks, the Tigers—they are the ones who created these unicorns, and frankly, they are missing from the ecosystem right now. We don’t see too much happening right now, not at least this year. 

Q. Another thing we thought was interesting in the report was that it says that startups from Bangalore were most favoured, followed by NCR and Mumbai. Do you think this is likely to change in the coming years in a post-COVID scenario and what can we do to cultivate more regional startup hubs?

Oh absolutely, whether it's the quarter, three years, five years, however you slice the data, Bangalore is head and shoulders above any other ecosystem out there. Even if we take a little bit of analysis on, let's say, B2C versus a B2B startups, Bangalore scores quite high, regardless of what whether it is deep technology, artificial intelligence, EVs. All of these are new and emerging even in this funding scenario that VCs are willing to bet on. You will find that these startups are typically either already in Bangalore or gravitating to Bangalore. 

NCR obviously had a lot of consumer companies, and therefore, a little bit of cooling off is to be expected for NCR. Mumbai is retaining a few, because for fintech, it’s a great place to be. Similarly I would say Chennai has always been the sass capital of the country and now is getting more of a fintech flavour as well. So it's good to see that spread happening but like in the US where it is Silicon Valley hugely above and then others are areas like Miami or Austin or the triangle in the northeast. How can we use the playbook that some other ecosystems have and build on your strengths rather than try and fix weaknesses?

Just to pick an example: B2B SaaS obviously is the strength of Chennai and it makes sense for Chennai to double down on that rather than try and create more consumer startups. If these companies need to kind of take wings and go off to Bangalore and grow from there, I would say   that's perfectly fine. That’s the mature way to look at it.

With a lot of these new technologies emerging, how can some of these other ecosystems latch on to those early—AI, EV and so on? That's really where the governments can keep focus on and obviously   use the best examples from other states to build on top of that.

Summary