The average ticket size in Q3 2022 reached the 2020 level of $11 Mn, down 54% YoY
Seed-stage average ticket size is at an all-time high, reaching $3.25 Mn in Q2 2022 and $3 Mn in Q3 2022
The average ticket size for late-stage startups has declined in 2022, while the growth-stage ticket size has fluctuated
The year 2022 has been a dispirited one for the Indian startup ecosystem in terms of funding, and the ‘funding winter’ is well and truly here.
According to Inc42’s ‘Indian Tech Startup Funding Report, Q3 2022’, the average ticket size in Q3 2022 fell to $11 Mn, returning to the pandemic era level of 2020. This builds the case for a large-scale correction within the Indian startup ecosystem.
It also indicates that investors’ focus is now more on profitability and unit economics, and they have questions about the viability of the businesses in the long term.
“With a decreasing premium for rapid growth, investors have turned up the due diligence. Investors are more cautious as they want to see how the macroeconomic environment shapes up. You will see relatively more activity in the early and growth stages,” said Apoorva Sharma, partner at Stride Ventures.
Download The ReportAverage Ticket Size Q3 2022: Stage-Wise Trends
Seed Stage: The average ticket size in seed-stage startups has been on a rise since the onset of the pandemic in 2020. On a year-on-year (YoY) basis, the average ticket size in Q3 2022 increased 33% to $3 Mn from $2.26 Mn in Q3 2021.
The average ticket size in seed-stage startups reached its peak in the last quarter with $3.25 Mn. In Q3 2022, the same fell by around 8%. However, the average ticket size is still at its highest over the last few quarters.
Growth Stage: According to Inc42 data, the average ticket size in growth-stage startups has shown a fluctuating trend since the onset of the pandemic. The average ticket size stood at $21 Mn in Q3 2022, up 6% from the corresponding quarter last year.
Compared with the peak ticket size of $30.11 Mn in Q1 2022, the average ticket size in Q3 2022 decreased by 32%.
Late Stage: The late-stage average ticket size rose rapidly from the onset of the pandemic till the end of 2021. However, it has been on a downward trend since the start of 2022. In Q3 2022, the late-stage average ticket size decreased 64% YoY to reach $34 Mn.
Reasons For The Dwindling Average Ticket Size
Gloomy Market Conditions: The year 2021 was a historical one for the Indian startup ecosystem, with startups raising over $42 Bn in funding. However, 2022 has been all about a decline in funding and valuations and a slowdown.
The increasing interest rates globally, the strengthening US dollar, and the ongoing Russian invasion of Ukraine, among others, have increased the discounting factor and reduced the net present value in any kind of discounted cash flow method.
“VC investors are more cautious as they want to see how the macro-economic environment shapes up,” Sharma said, adding that this has led to a correction in valuation multiples and resulted in a decline in activity in private equity markets.
Overall Fall In Funding Amount: Indian startups raised approximately $3 Bn across 334 deals in Q3 2022, almost the same as the $2.9 Bn raised in Q3 2020. This also signalled a YoY drop of 82% as compared to $17.1 Bn raised in Q3 2021, as well as a 56% quarter-on-quarter (QoQ) drop in comparison to $6.8 Bn raised in Q2 2022.
Many founders are trying to defer raising funds as they are not getting the desirable valuations. Further, the investor sentiment at the moment is not strong, which has caused due diligence to consume a lot more time. Also, investors are looking at the margin profile, apart from growth figures.
Download The ReportFall In The Number of Mega Deals: Mega deals tend to drive the average ticket size up, albeit momentarily. However, mega deals have taken a significant hit in Q3 2022, as the quarter witnessed only four such deals in the three months. By contrast, Q3 2021 recorded 39 mega deals, almost 10X that of the quarter gone by.
More Inclination Towards Early-Stage Startup Deals: In terms of funding stages, late-stage funding has taken the biggest hit overall as adverse global macroeconomic conditions have discouraged investors from signing big cheques. As a result, growth- and early-stage startups are witnessing more funding activity.
Late-stage companies are facing issues because of the round size requirements (since they need over $100 Mn primary capital round sizes), which is rare in the last 6 months and even if access to capital is not a problem, the valuation multiples are not desirable.
While 2021 valued late-stage startups richly, the same is not the case this year. As a result, late-stage funding activity has reduced and so has the average ticket size. Compared to last year, late-stage funding has decreased dramatically. Q2 2022 and Q3 2022 recorded at least a 90% fall in late-stage funding as compared to the corresponding quarters of the previous year.
The Road Ahead
After the watershed of 2021, the funding winter in 2022 has shifted investors’ attention to early-stage startups in the country, with more viable business models and scaling opportunities. Hence, the average ticket size has gone down in the past few quarters.
In terms of overall average ticket size, there is a near-perfect parabola visible, starting in Q2 2020 and possibly ending in Q4 2022. It can be expected that the average ticket size might as well rebound starting Q1 2023.
“My opinion is that funding activity should increase in the calendar year of 2023 as people have taken cognisance that India is faring much better in comparison to some of the leading economies of the world,” said Sharma, echoing the long-term trend.
The consumption patterns look strong for most sectors and with a correction in valuations, the Indian startup ecosystem might well be on the path to seeing a rise in funding going ahead.
Download The Report[With inputs from Meha Agarwal]
