Following the funding slowdown of 2022, and one that has continued this year, start-up valuations have become a topic of debate. More than half (55 per cent) of domestic investors believe that early-stage start-ups in India are overvalued, and a lot of it could be because of seed-stage cohorts and programmes initiated by Tier 1 VCs (like Sequoia, Accel, Lightspeed, others).
Additionally, the mushrooming of “angel syndicates have led to many founders skipping institutional seed rounds, crashing of deal/diligence timelines and a higher entry valuation”, found InnoVen Capital in its ‘Early-Stage Investment Insights Report 2023’.
Not to mention the increased activity in the early-stage deal space by larger VCs (and even foreign funds) that have played their part in “driven-up valuations and blurred lines between Seed and Series A” of Indian start-ups. The hyper-valuation and media frenzy has also led more than 60 per cent of early-stage VCs to fund pre-revenue startups. “Finding a differentiated business model along with a good team continues to be a key challenge for investors,” per the report.
InnoVen Capital further shared that ~40 per cent of investors reported a decrease in the number of deals they closed in 2022. But “despite the slowdown, valuations for seed/Pre-A rounds remained at a similar level to 2021, with half the deals at a $5-10 million valuation range and 20 per cent above $10 million valuation," it revealed.
Things haven’t looked up yet, and the funding slowdown is expected to continue well into 2023. Some say it could even continue till the first quarter of 2024. “50 per cent of investors expect a slower funding environment, while 30 per cent expect it to be flat,” according to InnoVen Capital’s findings.
Only 10 per cent of investors believe that the slowdown in 2023 will be severe. However, top-performing sectors like fintech, SaaS, and the newly added climate-tech could pocket most of the VC dollars over the next few quarters.
Tarana Lalwani, Partner at InnoVen Capital India, shared: “As we head into 2023, we anticipate the slowdown that began in 2022 to persist. However, we expect the early-stage environment to maintain its momentum, with an increased focus on governance and more extensive due diligence process - which will see more viable and sustainable business models getting funded.”
FAQs
Amid this, a lot of investors also felt that the startups in their portfolios were overvalued and started re-evaluating the valuations. This resulted in prominent backers of many Indian startups slashing the latter's valuations on their books.
How are early stage startups valued? ›
The discounted cash flow or DCF is the most widely used income approach technique. Income approach techniques seek to determine the value of a company by assessing the value of the future cash flows to be received by the shareholders or the business.
How can angel investors give a boost to the start up economy in India? ›
By offering entrepreneurs access to funding in exchange for equity or convertible debt, they help companies build prototypes, conduct market research, and build a skilled team. This funding helps them turn a mere business concept into a profit-making operation.
What is venture debt for early stage startups? ›
Venture debt is a loan designed for fast-growing investor-backed startups. It most often is secured at the same time or soon after an equity round—and is typically used to extend runway to the next round.
Why are so many startups failing in India? ›
Almost all of the reasons why Indian businesses fail early are connected to innovation and leadership: inadequate business models, bad planning, flawed consumer insights, or a lack of unique ideas.
Why are startups in India not profitable? ›
The most common reason why startups in India perish is because they do not have the right product in the right market in the first place. Contrary to what many people assume, finding the right market is just as important as making the product.
Why do early-stage startups fail? ›
A startup is a company in the initial stages of business. Business owners say they've failed because the money ran out, being in the wrong market, a lack of research, bad partnerships, ineffective marketing, and not being an industry expert.
What is the failure rate of early-stage startups? ›
The failure rate for new startups is currently 90%. 10% of new businesses don't survive the first year. First-time startup founders have a success rate of 18%.
What is the biggest benefit of an angel investor? ›
The major advantage of receiving funding from an angel investor is that there is less risk than taking out a small business loan. Unlike loans, there is no requirement to pay back the funding from an angel investor as they take equity in exchange for financing. Angel investors typically have experience in investing.
How do angel investors make their money back? ›
During an angel investment round, investors can purchase equity in the company, giving them a certain percentage of the ownership. This equity stake can then be cashed out at a later date when the company has increased in valuation, earning a profit for the investors.
They typically seek higher returns compared to traditional investments, and are willing to take on greater risks to support the development of new businesses.
Should I invest in early-stage startups? ›
Exponential Growth Potential: Early-stage startups possess the capacity for explosive growth, often yielding returns that far exceed traditional investments. A tracxn report reveals that early investors in India's Unicorns experienced a remarkable 130x multiple on their invested capital.
How do early-stage VCs make money? ›
VCs start making real money when their companies exit, but first, they have to “return the fund”: the initial dollars their LPs invested (in the previous case, this would be the first $100M). Once the fund is returned, typically 20% of any additional returns go back to the VC, with 80% to the LPs.
Why do VCs invest in startups? ›
Venture capitalists usually invest in startups with the expectation of making a significant return on their investment. The structure of the expected return is based on the high risk associated with investing in early-stage companies and the potential for high rewards if the startup succeeds.
Is India's market overvalued? ›
“Current stock market valuations in India are healthy and reflect the country's growth potential… The large cap and the small cap are fairly valued with the midcap segment being slightly overvalued.
Is any startup in India profitable? ›
The profits again rose by 90.5% to Rs 40 crore in FY23 against revenues of Rs 6386 crore. No wonder, Nykaa remained amongst India's Top 5 profitable startups as per APAC News Network.
How are startups valued in India? ›
In start-up valuation, the most often used multiples are the following: enterprise value-to-revenue (EV/R), enterprise value-to-EBITDA (EV/EBITDA), enterprise value-to-EBIT (EV/EBIT), and enterprise value-to-free cash flows (EV/FCF).
What is the current situation of startups in India? ›
India now boasts the world's third-largest startup ecosystem, with over 140,000 registered startups and a unicorn emerging every 20 days. This growth has been supported by top-tier higher education institutions, government capital expenditure, and widespread internet penetration.
