Early-stage deal activity picks up after Covid-19 crisis slowed investments

Other funds such as Inventus Capital Partners, Lightspeed Venture Partners, Matrix Partners, Waterbridge Ventures and Orios Venture Partners said …
Illustration: Rahul Awasthi
Illustration: Rahul Awasthi

Early stage venture investments have picked up significantly since July, after a relatively slow period of deal-making in the previous quarter, multiple investors told ET as the pandemic throws up opportunities for new digital businesses prompting more entrepreneurs to enter the fray.

Deal flow and the number of new startup ideas that a venture firm evaluates, registered an over 50% uptick compared to the last quarters, according to at least six funds that ET spoke to, with some also attesting to an improvement in the quality of founders .

“There has been a gradual realization in July and August that the current post Covid-19 world is going to be the new normal for some time to come,” said Karan Mohla, executive director at Chiratae Ventures India Advisors, which is evaluating more than 250 deals every month a level comparable to its deal flow in January.

Other funds such as Inventus Capital Partners, Lightspeed Venture Partners, Matrix Partners, Waterbridge Ventures and Orios Venture Partners said deal activity had picked up relative to the quarter April-June 2020.

The massive fundraising of Jio Platforms has also piqued the interest of many new investors eager to grab a share in India’s digital and technology sector in India, said venture capitalists who’ve been galvanised into action also by the realisation that the calendar year is ending.

In contrast, in the first half of 2019 –one of the busiest years for early stage VC funds and startup investments—total number of early stage deals totalled 476 compared to 240 in 2020, Tracxn data showed.

“New investments had slowed down for a quarter, but now the pace of deals is similar to last year. It is exciting to see founders who have factored in the new world and are starting up,” said Vikram Vaidyanathan, managing director, Matrix Partners India who reckons there is an “overall jump in mass digital adoption” across every sector from fintech to agriculture, health, education, consumer and gaming, “so it’s a broader set of sectors that seem interesting,” he said.

Graphic: Rahul Awasthi
Graphic: Rahul Awasthi

The fund has invested in six startups since the lockdown began in March including in CampK12, Vegrow, Zupee, and GoDutch, with three more deals yet to be announced.

In a recent interview with ET, Dev Khare, a partner at Lightspeed said that his fund had been investing through Covid-19. “When we look at our investment track record or investments done per year… it is actually very consistent over the last 20 years…. markets will go up and down in the short term but in the long term (India) is up into the right direction.” The fund has disclosed recent investments in ed tech startup FrontRow and Apna, a platform for blue collar workers.

Early stage fund Whiteboard Capital said it has seen at least a 30% increase in deal evaluations during the last six weeks compared to the level in April and May. “We have committed to four new investments in the last six weeks in addition to five follow-on rounds in our existing portfolio, that is the highest investing activity for us since the inception of the firm,” said Anshu Prasher, a partner at the fund.

Alpha Wave Incubation, a fund managed by Falcon Edge Capital said it has closed five deals with another five in the pipeline.

Among the sectors registering growth due to a natural tailwind from the pandemic include online essentials, education, health care, gaming, and online content, leading to a spurt in deals. Some funds are also backing startups in robotics, IoT, biotech and social commerce.

Investors are also eager to deploy funds as several top venture funds have raised large corpuses for early stage investments in the last eight months. Lightspeed raised a dedicated $275million fund last month, while Accel snagged about $550 million. Sequoia Capital launched a separate $200 million Surge fund for early stage ventures. These funds aim to cut the first institutional cheque in startups.

“There is a lot of dry powder in the ecosystem and it is expected that the top tier funds alone will back about 300 startups in the next two years. There is a set of other funds as well with their own niches which will back local startups,” said an investor directly aware of the matter.

Even as competition grows in the $1-2 million rounds, valuations are holding up to pre-covid-19 levels, and not seeing an immediate spike.

“In earlier stages it’s still about founder-market fit and innovation of ideas so there is not much difference in valuation compared to pre-covid-19 levels,” said Manish Kheterpal managing partner at Waterbridge Ventures. In contrast, investors aren’t willing to “pay GMV multiples anymore but look at unit economics and path to profitability-based multiples,” while making late-stage investments, he said.