For many, the lack of capital ends their dream run. For others, it is most likely a venture capitalist who keeps their boat sailing. A Venture Capitalist (VC) can give your venture a solid foundation—the right push or bail out—as the case may be.
There was a time when VCs preferred to inject capital only in those startups that painted a rosy picture in terms of future revenues. What they looked for was not the current profits, but how strong and stable the startup could turn out to be on its own in the long run. Quick bucks, fast/exceptional growth and rapid scaling were mostly considered the pointers of a weak startup. Hence, such ‘unrealistic’ startups failed to garner the attention of VCs.
However, over the past few years, the VC funding scenario has changed in India. Though revenue generation still remains the bottom line for investing funds in a startup, VCs don’t merely look at the solid ‘numbers’. They are keen to invest in a startup which may be risk prone, yet has an immense potential to grow and has a strong motivation to survive through the bad times. They are ready to adopt the role of a mentor and pool resources in terms of finances, technology and talent to help the startup grow.
While this brings good news for budding entrepreneurs, there is a ‘small’ hitch. VCs seem to be withdrawing their bets on startups. According to data from risk capital data monitoring service VCCEdge, the number of venture capital deals fell by 35% during the first quarter of 2016 as compared to last year. VCs are terming this slowdown as the ‘new normal’, as it comes on the back of a frenzy of funding in the last two years.
Nowadays, getting a VC interested in your startup is like chasing an elusive woman – mysterious and unattainable. You never know which ‘X’ factor would work in your favour! Whether you love the thrill of the chase or not, a VC can infuse enough fuel to help you go the distance. So, before you pull your act together to get that much-needed investment, take a look at what VCs really want from you.
Is the risk worth it?
Without sugarcoating it, the fact is that, for VCs, investing money in a startup is equivalent to taking a risk. There should be an element that justifies this risk and makes it worth taking. This element has to be a promise of a unique, innovative or a disruptive business idea. It should be one that can be not replaced or replicated easily.
Is there a right product-market fit?
There has to be a difference between what you want to sell and what the customers want. Does your product or service address the pain points of the customers? Is it able to provide a solution to a must-have need? Even if there is a competition, is the market large enough for your startup to fit in, survive and succeed? Or else, is it revolutionary enough to create a new need or demand that perhaps didn’t exist or still remains untapped? The right product-market fit increases the chances of returns on the investment made by VCs.
Has the startup achieved some degree of market traction?
Market traction is the evidence of the demand of your product or service among customers. The higher the demand, the higher is the probability of sales and better returns on investment. If you can show even the slightest degree of market traction, either through pilot or beta testing, you can send the sparks flying in your direction when VCs value your startup for funding.
Does the founder have the right spirit and attitude?
The startup journey is full of hits and misses. What matters to VCs is whether the entrepreneur and his team have the guts, domain expertise and motivation to transform an idea into a commercially viable and real business? Also, VCs give a damn to a founder with an ‘all knowing’ attitude. Being open to accept changes, learning from mistakes and giving weight to others’ experiences are a few entrepreneurial qualities that set you apart in the eyes of VCs.
How structured is the startup?
In the first 2-3 years of launch, an entrepreneur practically runs the whole show. As the startup begins to scale, it starts hiring talent. For VCs, it isn’t really important how many people a startup has taken on board, as long as there is a management structure in place. They expect well-defined roles, clarity of thought, discipline and professionalism in the functioning of a startup.
For VCs, the holy grail of startup investing lies in the ability of the startup to pull off efficiencies of scale. Then only it can demonstrate a good revenue growth, and thereby, eventually earn profits.
