Three pillars Investors look for in a StartUp

This is a gist of the conversation between yours truly with Mr Sanjay Jesrani, Founder and CEO of Go North Ventures, an angel investment & advisory firm, based out of Hyderabad. Audio of the original can be listened to on First Generation Entrepreneurs podcast, right on your smart phones.

We are witnessing startup revolution around us, like never before. Every day, more people are ditching even their fat pay checks, to pursue the road less traveled.

While it’s grand development, a hard fact is that the most have not been prepared enough, and businesses won’t survive without thorough preparation, let alone excelling or thriving.

Here some essentials every startup founders must know.

How to start a business?

The saying “Well started is half done” is never more important.

Number one reason for high failure rate is : the most entrepreneurs start on impulse, instead of first doing thorough homework.

Many are driven by passion, or swayed by (an overnight) success story.

One must try to know a lot about failures as well, that are often behind the so called successes. There’s no sure recipe, nor tunnel view to the goal.

It helps to work in startup for a year or two, before jumping the ship, to understand the dynamics of running a business.

Fortunately, in recent years, there have been many start up support systems : trying to educate wannabes, as well as support startup entrepreneurs, in the form of incubators, as well as accelerators.

And podcasts such as First Generation Entrepreneurs immensely help entrepreneurs in building successful businesses.

Purpose driven, passion may come later

You don’t start with a solution, instead you must first search for a problem.

Be passionate about real problem, with addressable market, and to know enough about customers’ profiles for whom solving the problem is valuable enough to part away their money.

  1. Start with a problem,
  2. build an elegant solution (lean approach, growth hacking).
  3. The solution need not be unique, but it should be repeatable & scalable as the case may be.
  4. Must meet customer satisfaction.
  5. Pricing is another crucial component, and is the function of the value you are adding to customer.

The initial funding must be raised from FFF (Family, Friends & Fools ).

Why co-founders are mandatory?

It’s ideal for a start up to have 2–3 co founders…for simple reason that, burdens can be shared among them, especially between complementary skills.

Entrepreneurs may have to be doing 20 things in parallel, and no one has too many hands.

A myth breaker: co founder does not mean giving away 50% stake…it can be as little as 5%, with salary, etc

Entrepreneurship is not a solo act, and it’s more of a leadership, and leading a team to build a value provider, aka revenue generating machine.

3 pillars investors look for in a startup

Investors expect returns on every penny they invest in you.

Almost always, they try to assess your & your venture with cold heart, and hence can notice what it is what, without prejudice.

They look for a startup on some key parameters as below:

  • What problem a startup is addressing ?
  • Is it large enough market to meet their interest levels?
  • Is the solution elegant enough?
  • Is it possible to get decent market share?
  • Over 3 to 5 year period…can the start up hit at least 10% market share …say in southern India?

The most important criteria any seasoned investor looks for in a start up is : whole DNA of founders!

  • Are they go-getters?
  • Are they having fun while building business?
  • How convinced they are, when they are not actively convincing others?
  • Is their passion, is justified by purpose ?

The target market size need not be in billions, though a lot of people carried away by these BIG numbers and rhetoric that comes with it.

But with investment of Rs 5–10 crores if founders can potentially build an enterprise of value ₹100–200 Cr, in next 10 years, that’s awesome enough to consider further.

Typical parameters investors look for is

how serious is the founding team about ..the three pillars:

  1. economics of operations
  2. customer acquisition
  3. technology pillar

Many startup founders are from technology background, and they are the best perhaps, as technology play, but with blind spots in other key areas, that’s where complementary co-founders come in handy.

While technology is an enabler, all other aspects eg., operations, acquisition, retention etc constitute 50–80% importance.

Requirement is mentor capital or financial capital?

Mr Sanjay Jesrani

Startups founders must have clarity about whether they need mentor capital (biz plan, strategy, financial structuring, goto market, HR practices , vertical/horizontal ) or just financial capital, or both ?

This is key, as if they don’t need funding, they better not to go for funding.

Mentors play significant role, in helping startup founders to do better wherever it matters. They come in all shapes and sizes. Some mentors expect some stake, in return for their time and advisory services.

It’s founders to decide what’s best for them.

On the other hand, financial investors also play key role in board level decisions, most can be really helpful throughout.

When to go for funding?

Many entrepreneurs think they need money for everything, which is not true.

A lot of startups approach investors: they need investors’ money to get started and to being the first set of users.

Entrepreneurs must do a lot of thinking, and studying, to be able to make a sound business plan, and forward projections.

Ideal team consists of 2–3 co-founders who complement each other.

One must understand that leadership, and entrepreneurship are lonely professions, and must build something with long term view.

A lot of startups look for funding at idea stage, where nothing is proven or justified, and that’s totally wrong. They are so consumed with process of raising funding that, they leave aside building product to any level, and overlook other key responsibilities of building business.

As earlier indicated, startups must adopt bootstrapping until the concept is proven, and they can show tangible evidence of business potential.

Till reaching that level, they must depend on FFF, for their funding.

Do they have the ability to bootstrap their way through — investors look for founders’ resourcefulness.

They must look for funding only to increase velocity.

Before that, they must try to get to a level where the concept is proven, with a few clients.

It’s not good to part with founders’ equity unless it really necessary.

Must raise initial funding ( say Rs 50 lac to 1cr ) initially from known sources & use it sensibly, then to go for seed or angel for a decent valuation.

Ideally, at that stage….not more than 30% of founders’ stake to be diluted… that means…at least 70% of company to be still with founders.

On the other hand, if founders’ give up their share too early, they may not have incentive to build with passion and enthusiasm, aftrewards.

What to expect from investor, apart from capital?

One should look for investors who can help in bunch of things apart from money…..

  • whether they come with huge network
  • should be able to help with structuring, hiring senior talent, and be the devil’s advocate whenever required.

Some entrepreneurs think they know everything, that can be sure recipe for disaster.

It’s imperative to learn from Ratan Tata’s example, who takes help of domain specialists, and also keeps learning regularly, for simple reason that he can’t afford to take risk, by assuming that he knows everything.

As an entrepreneur if you think Your startup has no competition…may be you have not researched enough :)

Many start up founders will not spend enough time, to do any research, thinking that they know everything. There might be a dozens of companies working in the same domain, certainly being ignorant never helps.

How to grow further?

Generally if a startup survives the first 3 years…it can be reasonably assumed that it has built enough resilience to last long time, and more importantly escaped the failure traps most startups unceremoniously succumb to.

At any level, or age of the organization, it surely helps to have a periodical monitoring of progress: in some key parameters eg., revenue, customers, cost customer acquisition etc

Investors keep monitoring these key metrics to get a pulse of where their investments, in the respective startups, are headed.

It’s a good idea to talk to customers from diverse set of people, and take their feedback, and use it constructively for growth.

Israel’s concept of devil’s advocate is being followed by many organizations, around the globe. and it’s never too early to leverage on some good ideas.

Israel is contributing to the highest number of innovations, across various disciplines ! One common denominator found to be that there’s no policy of hierarchy in Israeli army, and every citizen must work in army for 3–4 years!

Any one can take stand of devil’s advocate and punch the earlier agreed standards with holes, with right justifications.

This kind of sufficient creative disagreement, within the team is healthy sign of any progressive organization, for which, the example predicates truth startups can leverage upon!