The initial euphoria of launching your own start-up subsides (or even dies!) as soon as the practical realities of entrepreneurship ‘un’welcome you. Entrepreneurship looks glamorous, but it’s definitely not a cakewalk! The pressure of developing a unique product or service and carving a distinct identity in the start-up ecosystem is a continuous struggle, at least for the initial few years. Later, as your start-up begins to mature, balancing the investment and revenues, let alone tilting the scales in the favour of the later or earning profits becomes one of the biggest challenges.
For many, the lack of capital ends their dream run. For others, most likely a venture capitalist 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 start-ups 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 start-up could turn out to be in the long run on its own. Quick bucks, fast/exceptional growth and rapid scaling were mostly considered the pointers of a weak start-up. Hence, such ‘unrealistic’ start-ups 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 the funds in a start-up, VCs don’t merely look at the solid ‘numbers’. They are keen to invest in a start-up 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 start-up grow.
While this brings good news for budding entrepreneurs, there is a ‘small’ hitch. VCs seem to be withdrawing their bets on start-ups. 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 the same period one year ago. 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.
Getting a VC now interested in your start-up 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 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.
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Is the risk worth it?
Without sugar coating it, the fact is that for VCs, investing money in a start-up is equivalent to taking a risk. There should be an element that justifies this risk and makes it worth taking it. 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 start-up to fit in, succeed and survive? 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 start-up 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 start-up for funding.
Does the founder have the right spirit and attitude?
The start-up 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, 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 start-up?
In the first 2 – 3 years of launch, an entrepreneur practically runs the whole show. As the start-up begins to scale, it starts hiring talent. For VCs, it isn’t really important how many people a start-up 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 start-up.
For VCs, the holy grail of start-up investing lies in the ability of the start-up to pull off efficiencies of scale. Then only, it can demonstrate a good revenue growth and, thereby, eventually earn profits.