Investors Prefer Fintech, SaaS, and Climatetech in 2023

• ByStartupStory     |    April 27, 2023

According to a report, a majority of investors, around 57%, are expecting a decline in funding activity in 2023 due to the weak macroeconomic conditions. The report highlights Fintech, enterprise software as a service (SaaS), and climatetech as the top three sectors in focus for this year. Innoven Capital, a venture debt firm in Asia, recently published the 7th edition of the ‘Early-Stage Investment Insights Report,’ which provides an overview of current trends in the Indian startup ecosystem.

The report is centered on analyzing investment activity in seed and pre-Series A stages through market research and a survey of 20 institutional early-stage investors. According to the report, approximately 35% of early-stage respondents expressed positivity about the emergence of Angel syndicates in the overall ecosystem. The report further notes that most investors believe that the advent of angel syndicates has resulted in many founders bypassing institutional seed rounds, resulting in expedited deal and due diligence timelines and a higher entry valuation.

Tarana Lalwani, a Partner at InnoVen Capital India, anticipates a continuation of the slowdown that started in 2022 as we enter 2023. Despite this, Lalwani expects the early-stage ecosystem to sustain its momentum, with a greater emphasis on governance and a more thorough due diligence process. These developments will result in an increase in funding for viable and sustainable business models.

The survey respondents also noted that increased activity by large established VCs, including Tier-1 VC seed programmes, has raised valuations and created a blurred line between seed and Series A stages. Investors primarily prioritize the quality of the founding team when evaluating new deals, given the limited traction or track record at the early-stage. This factor was deemed the most important, according to the report.

The majority of the funds surveyed have relied on domestic sources of capital for fundraising. According to the report, 20% of respondents had entirely domestic limited partners (LPs). Family offices and UHNIs were the leading sources of domestic capital, followed by funds of funds such as SIDBI. Bengaluru, NCR, and Mumbai remained the core of the startup ecosystem, accounting for over two-thirds of early-stage investments made in companies headquartered in these cities. Furthermore, Hyderabad, Pune, and Chennai experienced a 5% increase in total early-stage deal flow individually. However, the report noted that only 20% of the survey respondents reported an increase in their investment quantum in 2022 compared to the previous year.

The report found that almost 40% of investors witnessed a decline in the number of deals they closed. However, despite the slowdown, seed and pre-advance round valuations remained consistent with 2021. The majority of deals (50%) were in the $5–10 MM valuation range, with 20% above $10 MM. B2B platforms, fintech, and enterprise SaaS were the top three sectors for investments, according to 60% of investors. Furthermore, the report highlighted that more than one-third of new investments were at a pre-revenue stage, indicating that founding teams with an innovative idea can attract funding.

InnoVen Capital, founded in 2008, is an Indian venture debt provider that offers various debt capital solutions, including growth loans, venture debt, acquisition finance, and working capital. The company has worked with over 200 startups and completed over 300 transactions, including with around 35 unicorns such as Dailyhunt, Ofbusiness, Pharmeasy, Swiggy, Licious, BYJU’S, boAt, Xpressbees, Elasticrun, Oyo Rooms, Infra.Market, Zetwerk, Udaan, CureFit, Firstcry, Mensa Brands, Moglix, Rebel Foods, Blackbuck, Cars24, Spinny, Vedantu, BharatPe, Dealshare, Slice, and more.

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