What Do Investors Seek In a Startup? A brilliant concept and passion are not enough to thrive in this competitive landscape
By Nayan Gala
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From a distance, a startup can appear to be a dream come true opportunity. However, an entrepreneurial journey is a rollercoaster ride, full of ups and downs. Taking a business off the ground demands a significant amount of time and money. Everything from hiring people to procuring essential frameworks for your business requires financial support. And most businesses fail because of the inability to obtain funds at the right time.
Most of the startups face hiccups in their journey and come across a phase where many of them cannot raise funds beyond Series A. According to stats, though 79 per cent of startups successfully raise funds from the Seed to Series A stages, only 50 per cent of them survive and advance to the next round of funding. This drop-in percentage is primarily due to an absence of VC and/or family office investors in the ecosystem. Also, investors expect businesses to meet specific KPIs, in the early phases itself. Consequently, not many startups see the light of the day beyond Series A. However, growing awareness of the returns generated by VC investments is now attracting more investors into the ecosystem, which is believed to resolve this concern eventually. Investors' perception of VC investments also acts as a deterrent for startups to raise funds. Traditional investors who now dominate the Indian wealth market are warming up to VC investments only since the recent past. Since VC investments take a while to bear returns until tangible ROIs are visible, investors trod cautiously.
For an entrepreneur, it is critical to keep these points in mind to remain committed to the core proposition while being flexible in embracing elements that attract investors. In this context, here's a bucket list of things that an investor takes into consideration while investing into startups.
Clear understanding of the core offerings
An investor looks for startups that are clear on their single product or service offering proposition. This clarity is critical for all founders as it would speak volumes about how the business will be managed going forward.
The potential of the startup to generate returns
Investors look for returns in multiples of 3-5 times and not IRRs. Therefore, the growth potential of your business must be enormous. The more time and effort you put into refining your business and financial projections, the more confident investors will be in committing funds to you. As a result, it's necessary to explain how investing in your company would benefit them.
The ability of the startup to scale
Investors do not just help startups with capital; they also bring a wealth of market and business knowledge to help them scale in the right direction. Founders who are capable of modifying their company and shifting course as needed will appeal to investors more. Scalability is crucial to keep in mind while starting a business, as it ensures that the company can sustain the achieved growth. As the business grows, many aspects are bound to change. Specific factors will be less efficient due to people management and overheads, while others will be more efficient due to technology and economies of scale. Thus, it is essential to consider these growth implications as investors look for startups that are on the edge of expansion and can thrive in this highly competitive landscape.
The potential of the sector in which startup operates
Investors are particularly interested in putting their money in upcoming or hot sectors. For example, the post-pandemic atmosphere has led to an exponential surge in early-stage startups in healthtech, edtech, logistics, supply chain management, foodtech, and other areas. The sector in which startups operate is critical in attracting investors' attention and assuring the long-term viability of the business. As a result, entrepreneurs should examine whether the market can support the expected rapid growth before entering the sector.
A brilliant concept and passion are not enough to thrive in this competitive landscape. You will need capital to see your idea come to fruition. This is where an investor can help your startup and support your long-term vision. The aforementioned tips will help you make your startup investor-friendly and scale it to new heights.
