 "Startups, Indian startups")
Investors are writing bigger checks for early-stage startups, a shift driven by experienced founders, longer product-market fit cycles, and a maturing venture ecosystem.
While seed funding rounds have declined in number, the capital raised per round has surged since 2021, often exceeding $3 million in recent deals, according to industry experts.
"There are more second-time founders and more seasoned operators that are raising money earlier. As a result of that, you are seeing them raising larger money upfront because they have a demonstrated track record in a previous business and they are carrying investors, who backed them earlier, with them," said Vivek Pandit, senior partner, McKinsey.
Larger seed rounds over $3 million now account for 50 per cent of all funding, while sub-$1 million rounds have fallen to a third of their 2017 levels, according to a report by Blume Ventures. This phenomenon is compounded by the increasing cost of technical talent and the need for startups to hit complex milestones before raising subsequent rounds.
"Milestones in several sectors are becoming longer and harder to reach, and to add to that, the product-market fit stage which is required to mitigate some of the risks and justify higher value is just higher as the cost of technical talent is higher," said Pandit.
Venture capital (VC) funds and family offices that invest at the seed stage are now looking at companies that are a little more mature with a proof of concept. Earlier, seed funding would be anywhere between $1 or 2 million; now it has increased up to $5 million," said Maheshwari.
"Had AI not been there, the seed stage was pretty much falling in line with what a typical seed round expected, only from a round size perspective," said Abhishek Srivastava, general partner at Kae Capital.
The emphasis on backing proven entrepreneurs is also altering the landscape for first-time founders. "Second-time founders are backed very quickly. They don't even come out in the market for fundraising activity, we have seen that in the past couple of years," said Maheshwari.
For deep-tech startups, the trend is even more pronounced. "The founders who are coming into the fray are much more seasoned, people in their mid-40s to mid-50s. These people themselves, being senior, are able to put the first million dollars, and unlike before, where entrepreneurs would take VC money early, these guys are delaying it to a great extent to mature more and, at that point in time, take larger checks," said Bhaskar Majumdar, founder and managing partner at Unicorn India Ventures.
While larger rounds provide a longer runway, they also introduce challenges. Maheshwari noted that in case of a larger seed investment, the pressure on the company or the founder increases immediately.
“The concern is around not having a disciplined stage case for milestones. So, what comes with larger funding typically is a more rigorous set of milestones that have to be met," said Pandit.
"There's such a lopsided equation now with respect to the availability of capital versus the availability of talent. A lot of large funds have a bit of a spray-and-play approach, running programmes for early seed rounds. It definitely makes it a bit lopsided where the capital availability is high, but are you really seeing that much absorption happening at that stage? I don't think so," said Srivastava.
As for the conversion rates from seed rounds to Series A, industry players believe the data is still emerging, as there have not been many cycles yet.
"So, typically 33 to 35 per cent go from seed to Series A but that rate has come down to 20 per cent in the recent past. It's asking a lot more for one to move from seed to Series A, and that has a ripple effect,” said Srivastava.
With valuations rising at the seed stage and AI and deep-tech attracting increasing capital, the early-stage investment landscape is transforming. "Now, an average absolute seed stage company would also be 60 to 80 crore. Earlier, not these types of companies, but you could do seed stage for 30 to 40 crore," said Majumdar.
Changing landscape
> Capital raised per round has surged since 2021, often exceeding $3 mn in recent deals, according to industry experts
> Larger seed rounds over $3 million now account for 50% of all funding, according to a report by Blume Ventures
> VC funds and family offices that invest at the seed stage, are now looking at firms that are a little more mature with a proof of concept
> Emphasis on backing proven entrepreneurs altering the landscape for first-time founders
