Early-stage deals halved in the first six months of the year, while the number of technology businesses that were set up sharply slowed, data shared by venture capital industry tracker Tracxn showed.
Investment rounds in the under-$5 million category fell 50% to 240 deals, while it dropped 33% to 489 deals overall in the first half compared to the same period last year, according to Tracxn data. Total capital inflow also fell to $4.2 billion from $5.7 billion.
The number of technology companies that have been incorporated up to June 15 stood at 449 compared to 3,638 in calendar year 2019, as a slowdown in economic activity due to the Covid-19 pandemic impacted founding of new firms.
Some early signs from venture funds point to a drop in deal flow. In March, Orios Venture Partners said there was a 30% decline in new deals compared to the last three-month average.
Investors and founders said a weakened economy, further hit by the Covid-19 pandemic, has pushed the startup ecosystem to stay cautious.
Investors have also been concerned about the wavering commitment of their own Limited Partners (LPs), which are backers of funds.
They fear LPs will push back drawdowns and restructure asset allocation plans, hurt by the pandemic as well as India’s standing in the larger geopolitical arena.
“Early-stage companies in sectors that have been more adversely impacted by Covid-19 are finding that investors want to wait and get a better sense on the impact and changes in customer behaviour. This includes sectors such as FinTech lending, Retail, Home Services, Travel, F&B, Mobility,” said Ashish Sharma, managing director at Temasek-backed venture debt firm InnoVen Capital.
Several top VCs concurred. The lower risk appetite of some angel investors — driven by the volatile market environment — also impacted the pace of angel funding this quarter.
“We are increasingly finding it hard to write $2-$5 million first cheques over virtual meetings, and with March-June being spent at home, some of that impact will be visible in the coming quarter,” said a top tier venture partner based in Bengaluru.
At least three investors told ET that the downward trend is likely to continue in the second half, hurt by weakness in late-stage investment, while early stage rounds may see some recovery.
“Though the early stage activity has been slow in the first half of the year, largely due to Covid-19 related uncertainty, ..we are seeing early signs of a considerable pick-up in the early stage activity led by a combination of high dry powder availability among the India-focused VC funds, broad acceptance of the new normal and the relatively higher quality of the founding teams of entrepreneurs,” said Anshu Prasher, Partner, Whiteboard Capital.
Sectors that have seen an uptick during Covid-19 including EdTech, HealthTech, Hyperlocal grocery delivery, Gaming, MediaTech, Essentials, and Software as a Service are poised to attract capital.
“Investors will continue to look for attractive propositions, albeit at Covid-19 adjusted valuations and factoring assumptions for the new normal,” Ankur Pahwa, partner at EY told ET.