Early-stage startups pique investor interest amid funding slowdown

EARLY-STAGE startups have seen continued interest from investors even as their later-stage counterparts encounter tighter cheque books and financial scrutiny.

Valuations that are more in touch with reality have helped to drive investor interest into seed and Series A and B fundraising startups. Founders are also seeing venture capital firms that typically don’t invest in early-stage startups showing interest and even term sheets.

“There is this shift that everyone is coming in early, my seed round with Vertex Ventures, it was considered one of the rare ones that they came in at that stage,” said Daphne Ng, chief executive officer and co-founder of document infrastructure startup, Dedoco.

Dedoco recently raised US$3 million in May led by True Global Ventures in an ongoing round and a S$3.3 million seed round in July 2021 led by Vertex Ventures. Another early-stage startup that has raised a round recently is NextBillion.ai, an enterprise mapping platform that snagged a US$21 million Series B led by Mirae Asset Venture Investments.

For NextBillion.ai’s recent funding round, there was more scrutiny on financials, something Dedoco’s Ng notes as well. For some the due diligence at this stage might be more than what they have done before.

“We saw a lot more due diligence than ever in our life. It’s going to become more of a norm, because in the last decade people were funding anyone and anything,” said Ajay Bulusu, co-founder, NextBillion.ai.

Besides financials, investors seem to be more concerned over financial projections, with more conversations around those topics according to the fundraising experience by Kevin Quah, co-founder of data annotation platform, Tictag. This was unlike his previous experience fundraising as an employee of another startup.

“There was quite a bit of scrutiny on financial projections, with investors asking if we can make profitability by a certain date, or when we would be raising another round of funding,” said Quah. The startup has raised an undisclosed amount in a recent fundraising round.

Investors seem less likely to take a punt on an idea, instead focusing on fundamentals of what makes a good business. This is in contrast to the same time last year when almost every idea was seeing term sheets being offered and cheques signed.

“If you are fundamentally a good business and your revenue is good, all cheque books are open. People are no longer taking a chance on a deal, that’s the difference I’m seeing from last year,” said NextBillion’s Bulusu.

Still, even as these startups raise money, investor conversations around extending the cash runway and optimising costs for at least 18 to 24 months of runway are common. The topic of cutting burn has been around for a while, according to Bulusu, with investors raising it as early as at the end of Q3 2021.

“Our investors are asking us to have at least 24 months burn at least, anything below 24 months you’re looking at a down round or having to do a fire sale if you don’t have enough money to last,” he said.

For Tictag, the conversations were about whether the startup could have an 18-month runway with the idea of raising another round at the 12-month mark.

But currently, TicTag’s Quah sees the situation requiring the startup to be more prudent of spending, with the need for a 24 months runway rather than the 18 months previously. It also seemed that founders were raising without actually needing the capital, instead building a buffer for their operations.

A quote by the late Ayrton Senna, a Formula One driver, has been circulating in the startup ecosystem: “You can’t overtake 15 cars in sunny weather, but you can when it’s raining.”

The current funding slowdown is providing opportunities for those who can seize it. “It is an opportunity for us to continue what we’re doing. As long as we have a clear direction for the next 3 years and it makes sense for potential investors, the interest in us will be high,” said Dedoco’s Ng.