Recently, Venture Capital has become the favoured source of raising funds among entrepreneurs. Founders have begun benchmarking success to their ability to raise an institutional round of capital.
In this dynamic world, valuations have declined with a nearly 25% discount as compared to the 18 months ago figure. Early-stage investments have risen during the pandemic led lockdown, as VCs are out shopping at the ongoing discount season. To protect themselves, VCs have grown more cautious and have begun triple-checking their commitments, tranching-out their investments, tying investment timelines to performance milestones, and looking for the business’ mobility angle.
However, despite wanting to ride the wave of new trends in this ‘new normal’ world, there are still a set of desired investment parameters that need to get focused on to make successful investments in the ecosystem.
Hoping to hit a home run on a future billion-dollar company, VCs carefully study the business and the industry landscape before making this deliberate decision. These core factors continue to be appraised rigorously by VCs to make smart decisions. Here are five factors that we, at AIV, consider while evaluating a potential investment opportunity:
- Founders & Founding Team (What skillset do you bring to the table?):
I cannot stress enough on this point. It’s the founder and founding team that drives a start-up to success. Along with their background and past experiences, we look for passion, adaptability, business acumen, and of course, leadership qualities in the founders.
They are the sole executioners, and as Anirudh (aD) says, “Execution is key to success with the highest multiplier.” To aptly say, “We fall in love with people’s passion, (and) the way their eyes light up when they talk about the things they love.” We assess the founder’s passion through their contextual knowledge and excitement towards their product during pitches and conversations. - Innovative Idea (What problem are you solving?):
Even though VCs are early-stage investors with a high-risk appetite, the start-up’s idea needs to have significant potential. VCs are always on the lookout to fund innovative solutions to glaring problems of conventional industries. In this evolving landscape, the uniqueness lies in start-ups’ problem-solving ability in a sustainable and scalable way. As Steve Jobs rightly said, “Innovation is the ability to see change as an opportunity.” The value proposition of an idea helps us assess how relevant the idea is. - Market Size (How big is the market opportunity?):
It’s not always about the share of the pie but also the size of the pie — As rightly said, “Of course size matters, no one wants a small slice of pizza!”
For a company to scale, there must be a sizeable addressable market and enough forward momentum in that industry. As investors, it also helps us answer the infamous question of “how does this become a billion-dollar play.” Additionally, the evolving market opportunity helps in creating new avenues of revenue for a company.
Understanding the TAM (total addressable market) and SAM (serviceable addressable market) helps us evaluate the likelihood and rate of success of a business. - Staying afloat in a Competitive Landscape (What gives you a competitive edge?)
An innovative idea is the only positive indicator that becomes the USP for a business. Differentiation helps mitigate competition and builds brand identity. Even with unique ideas, it is only a matter of time before competition arises, and therefore, the need for a competitive edge helps companies stay ahead of the curve. Because “If you don’t distinguish yourself from the crowd, you will be the crowd.” - Business Model (What is the business plan?):
Ultimately if you want your unique idea to get backed by great founders, it will have to generate money! Beyond just highlighting a glaring problem in the conventional industry, the idea and business should be viable.
The business plan you present must highlight the various revenue streams and show the business’s ability to generate cash flow. A recommended strategy for any business to succeed is to generate enough revenue to grow and, eventually, sustain itself.
The traction received, the existing customer base, and the unit economics and operational highlights help us evaluate the business’s financial viability because “profitability is the sovereign criterion of an enterprise.”
I would advise founders to introspect on these factors and to carefully and intelligible answer all these questions in their elevator pitch, which will help you develop the venture’s vision and align your strategy.
With so many start-ups seeking investments, competition is fierce! You must be able to come in well-prepared to be able to score funding.
It is important to note that there is no right or wrong answer to these questions, and it all depends on your vision and future goals! These factors only help us analysts, refine our analysis to make final decisions; the risk versus reward concept is also considered, among other elements.
