Startups prefer larger first cheques to small angel rounds

While VCs are in the lookout for promising startups to bet early, startups have gone wiser with many holding back the temptation of securing funding at the angel stage. Instead, they are opting to raise the first cheque at early growth stage after the initial market validation of the product.

This is indicated by the fact that the average capital raised by early-stage startups in India has doubled over the last three years due to increased interest shown by large venture funds in early bets.

At the same time, the number of companies getting funds has come down, a report appearing in ET points out.

In what could be taken as maturing of the Indian startup ecosystem, founders prefer as much as possible to forego the angel rounds in favour of raising a larger amount in the later stage. Significantly, it is averaging at more than $1.2 million, whereas three years ago a seed-stage round size was typical $60,000, according to data compiled by startup tracker Tracxn.

A late fund raising not only gives the founders a fatter cheque, it also has the added benefit of the longer runway and larger corpus at a lower level of dilution.

The larger funds are ready and willing to offer approximately $1-1.5 million for roughly 15-25% dilution. Hence now it makes better sense for startups to get angels to participate in the same round with institutional backing.

In the first quarter of 2019, the total number of funding rounds went down over 33% in comparison to the previous year, showed Tracxn data.

Though, the total investment inflow saw about 46% jump and hit a record high at $2.75 billion. This investment trends clearly show that there are high investment interest and deal closures in growth and late-stage companies.

This is much in the same pattern as the global trend.

A KPMG study also notes that world over, the first-timers slipped in Q1 in seeking investment as compared to years 2017 and 2018. That is probably due to cyclicality as follow on fundraisers are able to close processes at a faster rate usually given the established relationship and strategic directions, it explains.

There is a contrarian view too. Rather than this being seen as the startups deferring investments for larger sum later, it could also mean that early stage funds are being cautious and are not ready to get their hands burnt in new ideas without the market validation. In contrast, proven ideas and teams are getting thumbs up by investors, says an analyst.

Meanwhile, the total number of funding rounds in the first quarter of 2019 fell more than 50% compared to 2016, added Tracxn data.

At the same time, the number of startups established has shown a decline of 86% to 1,800 in 2018 in comparison to figures in 2015.