What’s driving India’s startup revival?

According to data from Venture Intelligence, early-stage cheque sizes averaged $3.84 million in 2022. As of 26 November this year, they’re already at $3.75 million—just $90,000 short, and with four weeks of deals still to be reported, this year’s average is likely to exceed 2022.

The rise in average cheque sizes signals a shift in India’s startup market, which had turned cautious after splurging on lofty valuations in 2022. As several marquee VC-backed companies go public, confidence is returning in startups’ ability to deliver on their business models. Bigger cheques suggest investors once again believe these firms can justify fresh capital.

“Capital is back, but investors are very conscious of not repeating the excesses of 2021 and 2022. We are spending more time on quality of revenue, clarity of product market fit and founder maturity, rather than just headline growth,” said Vikram Gupta, founder and managing partner at IvyCap Ventures.

Deal value is on the mend as well, and that’s despite lower volumes. While 2024 saw early-stage startups raise $1.5 billion across 513 deals, this year so far has seen 432 deals with companies raising a total of $1.6 billion. These numbers, though, are still a shadow of the 2022 heyday, when deal volume hit 643 and startups raised $2.4 billion.

Early-stage investment rounds are defined as ranging between pre-seed (pre-product and pre-revenue) and Series A funding (initial revenue).

“Indian venture capital investors are still being selective. The thought process when giving money to builders is that don’t run out of money too fast, build properly,” said Pranav Pai, managing partner and chief investment officer at 3one4 Capital. “Next year, we’re likely to see fewer rounds, but larger cheques to early-stage startups.”

Seed and Series A struggle

Most Series A equity rounds this year have struggled to cross the $15-million mark. The exception to this has been electric vehicle (EV) manufacturer EKA Mobility, which raised $57 million from the NIIF India-Japan Fund in October this year. The EV company was also the recipient of the largest seed round this year, having raised $23.7 million from Enam Holdings.

However, EKA Mobility is an outlier. Most others have either come close to the $15-million mark or raised just a little more. Dashverse raised $13 million in its Series A round, led by Peak XV with existing investors Z47 and Stellaris Venture Partners participating in the round. Similarly, EaseMyTrip co-founder Prashant Pitti’s new startup Optimo Capital raised $17.5 million in their Series A, with Blume Ventures and Omnivore participating.

“Going into next year, I expect risk appetite to improve, because we now have a healthier IPO and secondary market, and that always feeds confidence back into early stage,” said Gupta. “The volume of deals may rise, but the bar on governance, unit economics and founder quality will stay where it is or get higher.”

While Series A rounds this year have been muted, round sizes peaked between June and December of 2021. The top two spots were taken by Uni Cards’ $75 million round led by General Catalyst, followed by math and science ed-tech Brightchamps, which raised $63 million led by Premji Invest.

While the overall funding had dipped sharply in 2023, Sarvam AI, the sovereign large language model for artificial intelligence still managed to raise $41 million in its Series A, led by Lightspeed Venture Partners with participation from Khosla Ventures and Peak XV Partners.

Notably, over the 2021-2025 period, the most active early-stage investor has been Peak XV, which spun off as a separate entity from Sequoia Capital in 2023. So far, over the period, the firm made 146 early-stage deals. Other active investors in the space include Blume Ventures (144 deals), followed by Accel India (118 deals).

However, a KPMG report points out that despite the surge in funding overall, appetites were diminished on account of uncertain geopolitics. “…macros are still strong, the capital markets are still vibrant, and a lot of capital has been raised that will need to get deployed — so funding should increase as uncertainties calm,” said Nitish Poddar, partner and national leader, private equity, KPMG in India, in a note.

Artificial intelligence continues to dominate venture capital, especially in the early stage here in India as well as globally. Deeptech as a sector, not to mention manufacturing, has also emerged as strong focus areas for VCs. So much so that valuations and cheque sizes are expected to go up, as some early bets like aerospace precision manufacturer Aqeus go public.

“Companies able to show revenue within the range of $5-10 million will get a lot of love. I wouldn’t be surprised if deeptech companies being built right now begin thinking of an IPO two to three years down the line,” said Pai.

IvyCap Ventures’ Gupta said that vertical-specific AI companies, climate and sustainability tech as well as deeptech and industrial technology will see a lot of interest next year. “We also expect more funding for B2B marketplaces and software that improves productivity for traditional sectors like manufacturing, healthcare delivery and education.”