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Around 57% of investors anticipate a further slowdown in funding activity given the weak macro, in 2023, according to a report.

Fintech, enterprise software as a service (SaaS) and climatetech emerged as top three sectors in focus this year, it found.

Innoven capital, Asia’s venture debt firm, released the 7th edition of the ‘Early-Stage Investment Insights Report’, outlining current trends in the early-stage Indian startup ecosystem. 

The report focuses on investment activity across seed and pre-Series A stages by analysing market information, and a survey conducted with 20 leading institutional early-stage investors. 

About 35% of early-stage respondents felt that the emergence of Angel syndicates has been positive for the overall ecosystem. Most believe that angel syndicates have led to many founders skipping institutional seed rounds, crashing deal and due diligence timelines, and a higher entry valuation.

“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 a more extensive due diligence process, which will see more viable and sustainable business models getting funded,” Tarana Lalwani, Partner, InnoVen Capital India, said.

Respondents also highlighted that higher activity levels in the seed stage by large established VCs (including Tier-1 VC seed programmes) have driven up valuations and blurred the lines between seed and Series A. While evaluating new deals, investors overwhelmingly chose the quality of the founding team as the most important factor, as there isn’t much traction or track record to evaluate at early-stage.

The majority of the respondents (funds) have relied on domestic pools of capital to raise funds. The report highlighted that 20% of respondents have 100% domestic limited partners (LPs). Family offices and UHNIs are the top sources for domestic capital, followed by funds of funds like SIDBI.

However, Bengaluru, NCR, and Mumbai continue to form the core of the startup ecosystem, with more than two-thirds of early-stage investments made in companies that are headquartered in these cities. Similarly, Hyderabad, Pune, and Chennai, saw an overall 5% increase in the total early-stage deal flow individually.

The report pointed out that only 20% of the survey respondents reported an increase in the quantum of their investments in 2022 as compared to the previous year. 

Almost 40% of investors reported a decrease in the number of deals they closed. Despite the slowdown, valuations for seed and pre-advance rounds remained at a similar level to 2021, with half the deals in the $5–10 MM valuation range and 20% above the $10 MM valuation.

Respondents chose B2B (business-to-business) platforms, fintech, and enterprise SaaS as the top three sectors they invested in 2022, with 60% of investors claiming they had over a third of their new investments at a pre-revenue stage, which demonstrates that founding teams with an idea can raise capital.

Founded in 2008, InnoVen Capital is a venture debt provider in India that offers multiple debt capital solutions, including venture debt, acquisition finance, growth loans, working capital, among others.

It has completed over 300 transactions with more than 200 start- ups, including about 35 unicorns such as Swiggy, BYJU’S , boAt, Dailyhunt, Licious, Ofbusiness Eruditus, Infra.Market, Pharmeasy, Xpressbees, Shiprocket, Elasticrun, Oyo Rooms, CureFit, Udaan, Zetwerk, Moglix, Firstcry, Mensa Brands, Blackbuck, Rebel Foods, BharatPe, Cars24, Spinny, Slice, Vedantu, Dealshare, and many more.

This year The following investors participated in the report including Blume Ventures, WaterBridge Ventures, India Quotient, Kae Capital, Better Capital, omnivore ,  YourNest, Eximus Ventures, India Angel Networks, Inflection Point Ventures, Leo Capital, White Venture Capital, Good Capital, WEH Ventures, Escape Velocity Accelerator, First Cheque, All In, Aureolis, Equanimity, Sauce.VC.