The average seed funding amount has grown over the past few years, increasing the pressure on founders to deliver revenue metrics and raise another round, showed a survey of around 500 founders by pre-stage venture fund Eximius Ventures.
According to Pearl Agarwal, founder and managing director at Eximius Ventures, the average seed round in 2014-2015, or even 2017-2018, was under $1 million. Now, she said, the average seed round is anywhere between $1.8 million and $2.1 million. “A large part of why this is happening is that a lot of homegrown funds have come up and consistently increased their fund size. Some large, well-performing homegrown funds have breached $200 million. And once somebody breaches that mark, it becomes difficult to write smaller checks,” she said.
Agarwal added that founders want to break larger seed rounds into two, with dedicated pre-seed rounds in which drip capital of $700,000 to $1 million is raised at valuations of $3 million to $5 million. “The minimum cheque size has become around $2 million to $2.5 million, which means that these companies have to raise at a valuation of $8 to $10 million, keeping in mind that they cannot dilute more than 25%. This creates more pressure on founders to raise the next round in 18 to 20 months at a $25 million to $30 million valuation.”
About 70% of founders at the pre-seed stage feel the biggest challenge is knowing the right investor, according to the survey. “If you take today’s benchmarks, tech-enabled companies are trading at a 10x revenue multiple, which means that in 18 to 24 months, from a seed round to a Series A round, these companies have to build, test and market the product to get initial customer feedback, and then scale it to anywhere between $2.5 million and $3 million, which is a Herculean task,” Agarwal said.
“That happens because today we classify a lot of them as early-stage investors so the founders don’t necessarily know who would be writing a check of $300k to $500k or $500k to $700k and whether they would be the right fit for their stage,” said Agarwal.
Agarwal explained that a pre-seed round takes place at the pre-product, early-traction stage, while seed rounds start to happen when a startup has some traction there are early signs of a product-market fit. There is a need for seed rounds to be split into two parts in India, she added. “In the US, these two rounds are typically clubbed together. But in India, these two rounds need to be split into two.”
One large round puts pressure on founders to go out and deliver revenue metrics within 18 months to be able to raise the next round, she said, adding that drip capital in the form of a pre-seed round is required to reduce risk and provide the right risk-reward ratio to investors.
The survey also indicated that sectors such as fintech, edtech and healthtech can generally attract seed funding above $2 million. Creating a compelling pitch, managing rejections and overcoming objections, building a strong network, managing limited resources, and legal and regulatory compliance are some of the other challenges that startups face, according to the survey.
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Published: 03 Mar 2024, 12:13 PM IST
