Mumbai: Series A startup investments have fallen for the first time in five quarters because of a narrowing pipeline and traditional Series A investors showing increased interest in investing in seed-stage deals.
Investments fell more than one-fifth from $360 million in the December quarter to $282 million in the March quarter, according to data tracker Tracxn.
Most companies in well-funded sectors such as food-tech, logistics and fintech have already crossed the Series A stage, according to venture capital (VC) investors. This is leading to a slowdown in deal activity at that stage. Deal volume is also at its lowest in five quarters, from a high of 64 deals in the September quarter to 42 in the past quarter.
“Hot spaces such as fintech, content, and social commerce have already completed Series As in 2018. We are seeing a good amount of activity in the consumer space from investors, but these models tend to scale with a lot less capital than consumer tech companies. This means that the gap between seed and Series A rounds will be much higher," said Shivakumar Ramaswami, founder, Indigoedge, a startup investment banking firm.
Series A is generally the first institutional funding round for a startup after it has raised seed money from friends, family, angel investors, and others.
Series A deals have also declined as the pipeline for seed deals, from where such deals originate, has narrowed. The March quarter saw 88 seed funding rounds worth $63 million—the lowest in five quarters.
Increasingly, startups have shown a tendency to raise bigger seed rounds and postpone Series A fund-raising. This has meant that those who usually invest in Series A to C stages have also started investing in seed rounds. Marquee VC funds such as Sequoia Capital and Matrix Partners are doing more seed deals. Sequoia has even dedicated a fund named Surge to seed investments.
“We are seeing this more and more. The Surge programme by Sequoia is a clear example of wanting to enter companies earlier. This strategy has worked well for funds such as Matrix, Accel and Nexus in the past. We are, thus, seeing more of the same," said Ramaswami.
There is significant round size drift around Series A and B, with larger investors coming into the seed stage, according to Pranav Pai, founding partner, 3One4 Capital. “We are seeing A rounds creep towards $7-10 million range because seed rounds are now hitting $2-3 million. Larger funds are more comfortable doing seed rounds," he said.
The slowdown is also a result of investors becoming more cautious in making Series A investments, having faced difficulties in raising further rounds of funding for these investee startups
“Series A deals may be stagnating as several early funds have observed that Series B fund raises have become more difficult and are, in turn, raising the bar on new Series A transactions," said Niren Shah, managing director and India head of VC firm Norwest Venture Partners.
The number of early-stage VCs hasn’t really grown, though the number of seed and angel investors have continued to increase exponentially, said Shah.
Part of the early-stage VC bandwidth has been diverted to help their current companies get Series B and C financing.
