What investors consider before investing in a startup

One of the success stories of the Indian economy in the last two decades is the success of Indian startups. It is today home to the third-largest startup ecosystem in the world and despite the economic uncertainties of 2020, has still raised close to $17 million, second only to China in the Asia-Pacific region. And as the startup ecosystem becomes more robust in India, so does the investor landscape — creating an arena of skilled competitiveness and lucrative opportunities for entrepreneurs and investors alike.

However, while investors have become increasingly more active in the country they have also become much more selective. They are looking for ventures that can offer them tangible returns, assessing a startup’s credibility, viability and future long-term potential. For entrepreneurs, this can be a tricky balancing game.

You need a good idea, back it up with numbers, and communicate it effectively. No matter how great your plan is, you need a pitching strategy. Here are some of the key criteria that you must keep in mind.

Unique ideaA startup’s biggest selling point is its idea. It must be unique enough to stand out from the competition. It’s important here to understand that investors are not necessarily looking for a new product or an invention.

What they want is an idea that has a competitive advantage through a new product or by adding value to an existing product/service. In terms of complexity, investors often prefer simple, but powerful ideas. A complex idea may have brilliant potential, but often requires huge resources, such as time, money, a complex distribution channel, or a highly-skilled team.

With too many variables in the mix, execution can become tricky and more liable to failure. Hard data with a foolproof business planNothing can beat cold hard numbers when it comes to pitching a new idea. Every investor is looking for returns and you must prove that you can bring that to the table.

A good business plan shows the investor that you have done your due research and diligence. It shows an understanding of the market and where you see your product or service. Identify the target market, sales channels, and lay out the marketing plan.

Provide an in-depth analysis of the competition, growth opportunities, challenges, and how you intend to meet them. Total addressable market or TAMFor an investor, the total addressable market, or the potential reach of the product/service is the key in gauging its future growth. For instance, a great product that is tailored for a small segment of the population can only go so far.

Even if we manage to dominate the market, does it still retain profitability and can it grow further? An idea that is limited by its market may become unsustainable in the long run. An extension of the earlier points and a key component to your business plan, TAM will be the determining factor for growth projections that are realistic and backed by data analysis. An investment structureAnyone who’s investing in your business would want to see how you plan to use the funding.

You must be able to demonstrate why you need funding and how it will be utilised in a detailed plan. The funding amount must be clearly stated along with a timeline on when they can expect a return on their investment through detailed ROI calculations. One must be prepared with the three pro forma financials, namely, income statements.

balance sheets, and cash flow statements. Management or founder pedigree and ability to executeAn investor is not just betting on an idea but on the founders themselves, specifically on their ability to deliver or even surpass expectations. Educational qualifications, job records, or even family background are considered when making their decision.

A degree from a competitive university demonstrates that you have gone through the rigours of a highly competitive environment and know what it takes to win. A relevant job record can also be useful in this regard, proving your experience and knowledge in the field. Finally, a family background in business shows the investor that you understand the challenges of running your own venture, making it both profitable and sustainable over a long period.

Geographical boundaries and complianceThe scalability of an idea is one of the prime concerns for an investor, especially when gauging its potential. As an entrepreneur, aspirations to become the next Facebook, McDonald or Google will always linger, it’s necessary, therefore, to check the local as well as international expansion potential of your business from a regulatory and pure logistics perspective. An investor will assess critical areas like labour, finance, or compliance requirements when assessing a business’ potential to expand across other geographies.

The author is Founder & CEO, 1Silverbullet. Views are personal. Read all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here.

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