No doubt, today’s start-up scene is exciting. But, does funding scene have the same level of excitement?
Sources say that, the number of deals closed from January 2017 till June 1st week 2017 totals to 349, while 474 deals were closed during January 2016 till June 1st week 2016.
1018 deals were closed in the year 2016 as against 936 deals closed during 2015. Though the number of ventures funded increased from 2015 to 2016, the amount of funds flown had come down when compared to 2015.
We also see that the start-up market has undergone a valuation correction.
Investors are smart, sceptical and diligent. Every investor has their own set of criteria, like sectorial preferences, market trends, risk appetite and their current portfolio.
The American Venture Capital Firm Sequoia quotes “Our team partners both with young companies finding their stride and established ones looking for the next level of growth. We help ventures and ideas become enduring businesses”.
Being said that, each of them has a basic checklist which they would like to check even before considering. Let’s take a look at what the talk is all about and what entrepreneurs can take note of.
Is your Product disruptive and market defining and solves a really important pain point?
Investors know that customers tend to pay for products that solve their top problems. You should be able to show a clear differentiation from the existing product/model.
Over the past years we have seen that the number of start-ups founded and funded operate in B2C, serving day to day needs of predominantly urban population. The disruption we are talking about here is about how the e-business disrupted traditional business. The big-ticket ones are either in to e-commerce, travel, property/ home rentals or food; a few names are Flipkart, Makemy trip, Nestaway, Swiggy. The others are in to the logistics that support the earlier mentioned verticals, like Delhivery.
What’s the disrupting business model today which deserves a big cheque? This is yet to be seen.
Team
Is your idea mind-blowing? Very well, but do you have a well-rounded team.
Having a great business idea is important. But showing the investor that you are not all talk but have started taking action to act upon the idea is equally important.
Investors place greater emphasis on the capabilities of the team like visionary leadership, drive, extraordinary ability, and integrity to pursue leadership. They look for a management team with complimentary skill sets with a combination of Technology and Management.
We know that a good number of businesses failed due to lack of that combination.
How big you can scale your business/how big is the addressable market that your company is looking to serve?
The new generation investors are looking at Multi-fold growth in terms of market coverage.
If we observe the trend, the companies that attracted the later rounds of funding in spite of accumulating losses, are the ones which have scaled up dramatically and potential to scale up even further. According to the SourcesPaytm, Flipkart and Ola received fund amounting to 1.6 billion USD, 1.4 billion USD and 694.5 million USD respectively in 2017.
It is even more important to sustain that growth. We have seen companies like Snapdeal collapse fasters than it took to scale to that level.
Scalability and Sustainability goes hand in hand.
High ROI
The investor fishes for the businesses which can grow the top line to deliver a high ROI and free cash flows. They look for the best risk-adjusted returns across markets prioritizing capital preservation and downside protection, while structuring for upside.
Competitive
Whether your business offering is differentiated?
Are you capable of consistently building and nurturing the offering to create a high entry barrier?
Is your offering difficult for the competition to replicate?
You get an additional point if there is a competitive advantage with intellectual property.
We see how Indian unicorns are bleeding themselves when foreign owned rivals turned their heat on the Indian competitors making their existence questionable.
Is your business model capital efficient? Is it capable of generating significant growth and become self-sustaining with as little cash as possible and build significant value over time?
You should be able to demonstrate your ability to scale your business without constant need for additional capital.
A good example of capital efficiency is Amazon’s entry in to India. It took only a fraction of the value asked by Flipkart for its acquisition and took only one-third of time to build a bigger market in India. Same can be said in case of Ola and Uber.
Sector
The more closely your business aligns with a potential investor’s investment history, the more likely your pitch will be met with positive reception. It is a waste of time pitching to random investors in completely wrong sphere.
By:
Konda Shravya.
Financial Analyst – Investment Banking
