India’s early-stage start-ups are overvalued due to VC seed programmes & angel syndicates, claims report

Following the funding slowdown of 2022, and one that has continued this year, start-up valuations have become a topic of debate. More than half (55 per cent) of domestic investors believe that early-stage start-ups in India are overvalued, and a lot of it could be because of seed-stage cohorts and programmes initiated by Tier 1 VCs (like Sequoia, Accel, Lightspeed, others). 

Additionally, the mushrooming of “angel syndicates have led to many founders skipping institutional seed rounds, crashing of deal/diligence timelines and a higher entry valuation”, found InnoVen Capital in its ‘Early-Stage Investment Insights Report 2023’.

Not to mention the increased activity in the early-stage deal space by larger VCs (and even foreign funds) that have played their part in “driven-up valuations and blurred lines between Seed and Series A” of Indian start-ups. The hyper-valuation and media frenzy has also led more than 60 per cent of early-stage VCs to fund pre-revenue startups. “Finding a differentiated business model along with a good team continues to be a key challenge for investors,” per the report.

InnoVen Capital further shared that ~40 per cent of investors reported a decrease in the number of deals they closed in 2022. But “despite the slowdown, valuations for seed/Pre-A rounds remained at a similar level to 2021, with half the deals at a $5-10 million valuation range and 20 per cent above $10 million valuation," it revealed.

Things haven’t looked up yet, and the funding slowdown is expected to continue well into 2023. Some say it could even continue till the first quarter of 2024. “50 per cent of investors expect a slower funding environment, while 30 per cent expect it to be flat,” according to InnoVen Capital’s findings. 

Only 10 per cent of investors believe that the slowdown in 2023 will be severe. However, top-performing sectors like fintech, SaaS, and the newly added climate-tech could pocket most of the VC dollars over the next few quarters. 

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