The strong flow of PE/VC investments into Indian start-ups, especially early-stage startups, is expected to continue unabated in the second half of this calendar year despite the ongoing funding slowdown in growth and late-stage companies. The keenness to support start-up for Series A and Series B funding rounds is backed by “super normal returns” seen on such bets made by private equity players and VC funds, said experts and industry insiders.

Dhiraj Rajendran, Executive Director-Kotak Private Equity, Kotak Investment Advisors Ltd., said that most PE investors are looking to back early-stage startups even today. “As of now, I am not seeing slowdown in PE investments in the early stages of the spectrum as one is seeing or expecting to see in the late stage ventures. My definition of start-ups is early-stage companies (Series A and B)—they will get the required level of capital. It may not grow as high as last year (2021), but I do see this trend of increased interest sustaining in the second half of this year as well,” he added.

Experts said this is also because the angel and seed fund ecosystem has matured well over the last few years in India.

Dipanjan Basu, Partner and CFO, Fireside Ventures said, “We continue to see vibrancy in funding in early stage start-ups. However, the bar on innovation and product market fit has gone up. Angel and early stage investors look for differentiation in offerings and the level of diligence is deeper. At the pre-series A level, several VC funds have adequate liquidity and, hence, we don’t see a slowdown in funding for high-performing differentiated start-ups with strong unit economics.”

PE and VC investments in start-ups in the first half of 2022 were up 53 per cent y-o-y to $13 billion.

Vivek Soni, PE Leader, EY India, pointed out that factors including India’s strong growth, supportive policies from the government, a strong talent pool in the technology domain, growing penetration of digital infrastructure, and increasing technology budgets of India Inc. will help this flow of investments into Indian start-ups in the near future.

While India saw the emergence of 44 unicorns in 2021, in recent times, the buzz about “funding winter” amidst volatile macro-economic conditions is growing.

Deepak Gupta, General Partner at WEH Ventures, said that a lot of the dollars last year in the hot market were deployed in large deals, but as valuations have crumbled, these deals have scaled back a lot. “But VCs are carrying good enough dry powder, so they are busy doing smaller cheques in seed and pre-Series A to keep playing in the uncertain market while waiting for the clouds to clear,” Gupta added.

Talking about the valutions, Rajendran said that although valuations have increased in early-stage companies, it is not to the extent one saw in late stage and therefore deals are reasonably-sized and continue to evince interest from investors. “Investors in the PE and VC space have seen supernormal returns by investing at the early end of the spectrum,” he said.