The Anatomy of Seed Deals in India: Insights and Evolution

The Indian startup ecosystem has come of age in the last two decades. What started as an adaptation of US consumer internet businesses for India in late 2000s, soon grew into a lifeforce of its own with rapid rise in India focused playbooks, consolidation of India’s leadership in software, public-private partnership in scaling financial rails & products, a rally towards make-in-India, and most recently, a race to the space. India has certainly benefited from a multitude of factors, both geo-political and social, but at the core of its success lies the Cambrian explosion of talent and capital chasing innovation. It has been particularly pivotal for the 0 to 1 journey of an entrepreneur which has historically been the most perilous. 

In this article, we discuss the anatomy of seed deals in India in the last two years, compare it with the state of the union a decade ago and provide insights into the startup ecosystem.

[For the purpose of this article, we define seed deals as investment rounds in which start-ups raised a total capital of $0.5-5M. Such deals accounted for c40% of total fundraises of less than $5M in 2023.]

The gold rush has subsided, but the shovels remain aplenty

As expected, we saw significant correction in early stage investments in 2023, with seed deals reducing from a high of 288 investments in 2022 to 193 investments in 2023. The total value of investments declined from $488M in 2022 to $347M in 2023. This 33% decline in volume and 29% decline in investment value was largely driven by a raging interest rate cycle and the change of sentiment post the peak of liquidity in 2021.

However, even amidst the sharpest rate hikes in the last two decades, and a prolonged monetary tightening, coupled with geopolitical tensions across the globe, the deal activity remained strong when compared to the investment activity a decade ago. Compared to 146 seed investments raising a total of $187M in 2013, the early stage seed investments in 2023 stood at almost 2x in terms of capital deployed.

This underlines the fact that the Indian startup ecosystem has significantly expanded in the last decade across all the vectors of talent, breadth of innovation, and capital. A quick look at investors in seed deals show that when compared to 2013, the total number of lead investors have grown by c2.7x to 339 and the total number of participating investors have grown by c2.2x to 1230. A higher growth in investors that lead rounds vs. those that participate underscores significant expansion in smart capital chasing conviction across a broad range of end markets, thus deepening innovation in the country. 

Figure 1: Total seed investments in 2022-23 vs. 2013 

We also note that while the overall seed deal activity remained low in 2023 when compared to the year before, the market seems to have bottomed in the first quarter (JFM) of 2023 with a total of 37 deals during that period. The seed deal activity since then has recovered to over 50 seed deals/quarter; however it remains low compared to 90+ deals/quarter during the heydays of 2021 and early 2022. 

Figure 2: Seed investment volume bottomed in Q1 2023

As table stakes mature, the blinds increase

While investors may have re-calibrated their bar for pulling the trigger in the aftermath of the 2021 bubble, the ecosystem continues to have a lot of dry powder that was raised amidst the flood of liquidity in 2020-21. As a result, many seasoned investors as well as first time fund managers, particularly at the early stage, are sitting on a lot of cash eager to find promising investments. This, coupled with increasing confidence in India’s capability to create large outcomes,  has led to a significant increase in the size of seed investments over the last decade. 

Compared to c44 startups that raised more than $1.5M in their first early stage round in 2013, c92 startups raised rounds larger than $1.5M in 2023. The contribution of larger rounds in overall deal activity continued to increase over last year as well with c47% of total seed investments in 2023 being larger than $1.5M vs. c40% in 2022. 

In our view, the increase in round size in 2023 over 2022, in spite of a weakening investment environment, can largely be attributed to large pools of capital chasing fewer high quality startups. It also highlights risk aversion in some sense as it can be argued that a lesser number of smaller rounds imply a lesser number of high-risk experimental and/or optionality checks.

While round size continued to inch higher, the entry valuations corrected to a more sober level with more than 70% of startups in 2022-23 raising their seed rounds at less than $10M post money valuation. However, when compared to a decade ago, the seed stage valuations have clearly ballooned – in 2013, almost 85% of the startups raised capital at less than $10M post and almost 70% raised at less than $5M post money valuation. 

Figure 3: Seed valuations and round sizes in 2022-23 vs. 2013

Startups now come in all shapes and sizes

What was predominantly a consumption story a decade back, has now become a holistic narrative. Innovation has become a household phenomenon, and founders with all kinds of experience are now embracing this path. 

Compared to 2013, when more than 70% of the funded founders had more than 10 years of experience, both 2022 & 2023 cohorts were a lot more evenly distributed amongst founders of varying experience, with experienced founders (>10 years exp) contributing just under 40% to overall seed deals. On the other hand, the representation of young founders (<5 years exp) amongst early stage investments increased to c36% in 2023 vs. c31% in 2022. 

Figure 4: Change in founder mix in 2022-23 vs. 2013

As the number of entrepreneurs have almost exploded in the last decade, the canvas for innovation has also expanded significantly. We are not just a consumer internet phenomenon anymore and our startups are no longer a derivative of US business models. This has reflected in the diversity of the sectors which raised capital in 2022-23. While SaaS/AI and Consumer remained the largest sectors in terms of total deals, the contribution of other emergent sectors or frontier sectors also remained high. A significant number of deals happened in emerging markets like Space tech, Defence tech, Climate etc [bucketed under Others in the image below].  

As the first generation of technology startups have matured and as public private partnership has evolved into a symbiotic relationship, we now see experienced operators, with shorter learning curves & deep business insights, increasingly starting new companies. The depth of talent pool in SaaS and FinTech has improved significantly over the last decade as operators from both incumbents & India’s big-techs are increasingly starting new companies. B2B commerce is also gaining traction with the consolidation of manufacturing, formalisation of 25%+ MSMEs and digitally-native next generation of traditional business owners taking charge.

On the other hand, we have seen a declining interest and deal activity in more saturated or turbulent sectors like Consumer Internet, Edtech and Health. We expect some of these categories will likely be re-imagined with the use of AI where we are seeing early applications in areas like radiology, customised learning modules and webtoons, amongst others.

Figure 5: Break up of seed investments across sectors in 2022-23 vs. 2013

The roots of innovation starting to run deep and wide

In the previous decade, large tech companies in India produced the highest number of funded startups in the country. More than 100 funded startups came out of Flipkart alone. However, the concentration of talent pools have started to reduce and in 2022-23, no single company produced more than 2% of funded startups. The top 8 companies (mostly tech behemoths like Flipkart, Amazon, Microsoft, Google, Oyo, Uber, etc) contributed only 10% of seed funded startups, as the last employer of the founders before starting up.

However, when we look at lifetime experience of founders, the top 15 companies contributed over 35% of the total seed funded startups in 2022-23. Interestingly, these companies not only include new economy tech giants but also old economy incumbents like Reliance, ICICI, TCS, Amex, HSBC, etc. This implies that the innovation is no longer just driven by the outsiders with disruptive perspectives but also industry insiders with deep domain expertise. The right to win is shifting from ‘sheer force of will’ to ‘unique insights’.

Figure 6: Genesis of startups in 2022-23 as per last job experience vs lifetime experience 

Not just VCs, but Angels, Sharks & Dragons also seeding Unicorns

The make-up of risk capital has drastically changed in the last 5 years. What used to be a small friends & family round of a few ten thousand dollars to bootstrap product journey of a startup has now transformed into a professional seed / pre-seed round of several hundred thousand dollars. These new sets of investors, who typically invest much before VCs do, have many names – angels, sharks and dragons; but they have a similar characteristics: most of them provide what we call paying-it-forward capital – i.e. they are investing back into the ecosystem from which they earned their riches. 

The flush of global liquidity & maturing of the tech ecosystem in India in the last 5 years has led to many IPOs, share buybacks, secondary exits and M&A – all leading to wealth in the hands of individuals who want to give back to the ecosystem. This has led to a sharp increase in super angels as well as micro VC funds who not only provide high risk capital but also help founders with advice & expertise, thus improving initial chances of success. This has been particularly pivotal to the growth of the startup ecosystem in the last 5 years and the spread of innovation across all kinds of products & services.    

While there are more than 100 micro VCs in India today, top 20 micro VCs invested in more than 30% of all the seed investments that happened in 2022-23, making them one of the largest groups of investors. Similarly top 16 angels (out of 1,000s) invested in more than 20% of all the seed investments that happened in 2022-23. 15 out of these 16 angels are founders of successful startups who actively invest to pay it forward to the ecosystem. 

Figure 7: Top 20 micro VCs participated in 141 or c30% of seed investments in 2022-23 

Figure 8: Top 16 Angels participated in 103 or c20% of seed investments in 2022-23

It’s Day 1!

In traditional finance, people talk in terms of P&L, cashflow and balance sheet. A decade ago, while popular tech jargons like GMV, contribution margin, unit economics, retention, right to win, were common amongst a handful of VCs and tech entrepreneurs, they were not really mainstream in India by any stretch of imagination. 

10 years later, thanks to Shark Tank, these jargons have become household knowledge. Entrepreneurship has become mainstream in India. CNBC could never do what Shark Tank has done – it has captured the imagination of the working class, and brought business & economics into every Indian households’ dinner table conversations, weaving the DNA of entrepreneurship into the social fabric of our country.

India’s startup story might be two decades old, but it’s still Day 1 for the entrepreneurs of this country, and this day is brighter than ever! 

Reflections: as we Venture through the VC Highway

Past Perfect, Present Continuous!

Venture Highway (VH) is 9 years old and we are young in an investing world, known for its excruciatingly long feedback loops. As the year draws to a close, I reflect on our journey against the backdrop of bull runs, Covid, bull runs again, global wars, bear runs – some important lessons and stories of personal growth!

When I joined VH in 2018, just after exiting my start-up, I felt like having moved straight from the factory floor to the corner office – why? Suddenly everyone was accepting my LinkedIn invite! Little did I realize then, the high mental agility and execution chops required to be an investor, especially when Venture Highway did and continues to operate like a Startup masquerading as a VC (This is our real tagline!)

The last 5 years have been ‘coming of age’ for VH, as we earnestly went about building the institution, trying to move the center of gravity from the “people behind it” to the Organization! 

The foundational question: Why should founders take our capital?

We are paranoid about this question, however, not for the most popular reason that one shouldn’t miss the next ‘AirBnB’ or ‘Google’! Large outcomes, after all, are an output metric, even if the most important one in Venture math. Our real focus has always been the ‘process’ – how we show up, how earnestly so, how soon, with respect & integrity. One example is our commitment to ‘high ROI for founders’ time’ (Yes we have an internal dashboard that measures #days from 1st engagement to saying “No” or “Yes”) 

One incident stands out in memory: We had to, with a heavy heart, bow out of an investment, and did so within 24 hours. In our 1st 3-hour marathon session with this highly experienced founder, we felt the chemistry and shared a deep empathy towards the problem statement. This depth of engagement also made us realise, unfortunately, that some slivers of the offering could compete with an existing portfolio, in the future. “I would have loved to have you guys on board, but a fast “No” is something I value even more”, he said. 

Sometimes our real wins have been great founder relationships, even if at the cost of a deal!

“How do you win deals against the popular names in your industry?”, is an oft-asked question by our LPs (Limited Partners). Our answer: “We don’t play the brand card, we play the ‘see our work’ card”. Some of our most cherished investments have been so organic that we failed to realize the line when we crossed over from being “brainstorming partners” to becoming an investor. However, this style comes with its costs, the most expensive being when, after the engagement, we still miss the opportunity to partner with these amazing founders. Yes, we feel absolutely gutted when it happens, fortunately very rarely so, but we would never change our ways – ‘GoodWill’ cannot be hunted after all, it has to be earned!

Part of acting like a startup requires us to reimagine the venture landscape ever so often at a foundational level. Nurturing and growing young talent for the startup ecosystem is one such foundational aspect, we are committed to contribute towards. In the last 3 years, we have had the privilege of working with 37 amazing Student Venture Partners (SVP), students from the country’s marquee institutions. These young girls and boys were part of our structured 8-week ‘all you need to know about startups’ SVP program. At the end of every season, our favourite question to these folks would be “Why consulting and not a startup?” Their recurring answer: “We did not know much about the startup ecosystem, until this program, but consulting is well understood and seniors can help us”. We aim to change this and help young talent discover the world of startups and starting-up early on: after all, two of our portfolio companies were started from dorm rooms!

What is a business, if not its people! One of our trademark questions to founder teams is “What collective skills & attributes solve for your individual blindspots?”. It applies to VCs as well – each of us a product of our biases, heavily weighted lessons from the last failed or successful investment, some of us more intuition-first while some analysis-first. When I look back at all our VH team interactions over the last many years, our diversity covers for our individual blindspots. One of my biggest lessons as a leader is that radical transparency starts with You and being comfortable showing your vulnerability to your team even if it is saying “I was wrong”. At VH, we have always celebrated owning our mistakes and being able to rely on each other’s intellectual and moral support. Safe spaces inside and in our Board rooms, in our view, are fundamental to authentic conversations. 

Specifically, as we look back at 2023, perhaps the most excitingly tumultuous year in the history of the world, the Venture ecosystem was also deeply impacted. As Ray Dalio says “the best lessons are learnt in painful situations” – the lesson being valuations, investments, and funding climate are and always will be the variables behind that single constant: that one idea/technology that would be the foundation of a sustainable enterprise, structurally strong and deeply impactful. Anchored with this 1st principle belief, VH has invested in 9 deals in 2023 across areas in fintech, AI, manufacturing tech, and SAAS to name a few. Rajit Mehta, MD of Max India, one of our panellists at our recent founder’s event, which brought leaders from bootstrapped, family businesses to exchange ideas with our funded startups, said “As a business, we think of survival and that we are here to stay, this drives many of our business decisions”. 

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In a social media world that rewards black & white opinions, the reality of the nuance is often lost – painful corrections are part of evolution and only lead to stronger foundations.

If I were to summarize one big lesson in all these years, it is that:

As an investor, one needs to have loosely-held opinions and very tightly-held values

In this context, while one cannot necessarily model out the bull runs, pandemics, wars, and bear-runs etc. etc., what will always stay is the founders’ thirst to create, innovate and impact.  In this world of Creation, as VH learns and grows, we would continue striving to become the most ‘mindful and conscious’ partner to these visionaries. 

2024 here we come… 

Reimagining Values in the New Tech Era: Founders Unplugged 

At Venture Highway’s yearly founder event, we had a mix of tech-first founders and old-school leaders. 

Merging modern and traditional approaches, we exchanged stories that offered fresh insights into business. In the context of differing ideologies—Traditional vs. Tech—the event sparked genuine and thought-provoking discussions. It became a unique gathering where the old and new schools of thought converged, delving into the intricacies of building companies from various perspectives.

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Founders from the VH family Mohit (Chalo),  Abhilash (Ivy Homes), Pravin (GoBetter), and Aditya (Cheq), along with Stalwarts like Dr. A. Velumani (Thyrocare), Irshad Mecca (Farida Group), and Rajit Mehta (Max India) delved deep into their journeys, navigating differences to find common ground

Why This Dialogue Matters:

In a world with varied business philosophies, the significance of this dialogue becomes evident. The landscape is shifting, with once-abundant VC funding facing seasonal drought, putting profitability at the forefront. In this evolving scenario, where the ebbs and flows of business dynamics are more pronounced than ever, we hope that the insights shared by our tech and traditional leaders will help future founders plan their way forward.

The heart of the conversation lay in unravelling the distinct thought processes of bootstrapped/family-run businesses and venture-funded enterprises. The dialogue at the event wasn’t about highlighting differences, but about finding value in diversity. It was an exploration of how values, rooted in authenticity and adaptability, can thrive in the dynamic landscape of the new tech era. We dissected topics like capital allocation, hiring strategies, and board management.

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Here are some highlights from the conversation:

Broader Values

  • VC-backed businesses often focus on short-term growth, aligning with the expectations of investors who have to think in terms of milestones, ensuring the company is growing in the right direction, to continue injecting capital. 
  • Traditional models on the other hand, due to the consistency of capital, can prioritise a broader set of values, including employee well-being, long-term customer relationships etc.
  • Picking investors who understand your business philosophy, and gestation timelines, and can provide patient capital will help VC-backed founders have more leeway for long-term experimentation.

VC Money Mindset vs Bootstrapped Mindset 

  • Bootstrapped enterprises focus on achieving self-sufficiency and maintaining steady progress as they build a foundation for sustainable growth.
  • In contrast, VC-backed ventures place a premium on adaptability, openness, and continuous experimentation, often speeding up the pace of learning to stay abreast with recent developments, and capitalising on industry/market changes to disrupt the incumbent.
  • Traditional founders can learn to experiment with multiple initiatives, fail fast and discover value pools sooner. Adapting to the agility of VC-backed businesses will help them increase the longevity of their companies.

Capital Planning 

  • In contrast to VC-backed enterprises, family-run businesses often exercise caution against excess capital, emphasising a measured and mindful approach to expenditures and workforce expansion.
  • VC-backed ventures often get tempted to increase spending and hire rapidly due to a readily available short-term supply of funds.
  • This underscores the difference in financial strategies, with family-run businesses prioritising a more frugal and value-oriented use of capital. VC-backed businesses need to value their equity and plan capital more cautiously, avoiding the short-term allure of high valuations, which may set them on a dangerous path.

Strategic Triggers for Growth

  • Family-run businesses effectively utilise triggers like financial metrics, market feedback and team dynamics during new project launches, team expansions etc as proxies to understand and initiate strategic steps tailored to their unique journey.
  • VC-backed enterprises should adopt a comparable approach, employing distinct triggers and corresponding actions when activated.
  • The varied triggers and responses underscore the importance of the founder’s perspective in making practical decisions for sustainable growth.

Preserving Organisational Culture 

  • Family-run businesses can prioritise organisational culture, for instance, by providing job security with a “no layoff” policy during business downturns and cultivating employee loyalty.
  • VC-backed companies embrace strategic hiring and firing in line with capital constraints and growth requirements. The ambitious startup talent may also be very distinct from the employees of a traditional business, prioritising personal growth at the organisation instead of thinking more long-term about the employer-employee relationship.

Aligning your Board

  • Family-run businesses foster close-knit founder-investor relationships, emphasising personalised understanding, while VC-backed scenarios prioritise formal interactions and transparency.
  • Distinct communication styles in both dynamics underscore founders’ importance in adapting to unique environments.
  • The entrepreneur-investor dynamic thrives on trust, transparency, and open communication, creating a collaborative environment for growth and success.

Conclusion

Reimagining values in the new tech era isn’t merely a theme; it’s a call to action. 

The fusion of traditional and hyper-growth mindsets birthed a narrative of shared wisdom and collective growth. 

As we reflect on these conversations, we’re reminded that the future isn’t about choosing one path over another – it’s about embracing the richness that lies in the convergence of diverse ideologies. 

The dialogue continues, echoing the heartbeat of innovation and shaping the values that will steer businesses into the new tech era.