When a group of investors creates a fund to invest in various businesses that are too risky for a bank to provide any loan, they are called a venture capital (VC) firm.
VCs normally invest in high growth potential companies/businesses.
Venture capitalists in India are an essential part of the startup spectrum to raise capital. In order to scale up, every startup requires continuous funding from reliable investors.
The investment strategy of major VCs and some of the notable Indian start-ups are discussed below.
Seed Stage Companies:
- Entrepreneur’s high drive, desire to succeed, and track record: The never give up attitude, the ability to cross the bridges with an undeterred frame of mind to make it work.
- Product and large market fit: The Product is rightly targeted in the market.
- The solution to an unmet need: There is a unique problem and pain point that is being solved.
- Product or technology shall have a moat that can give the company an edge over new entrants
- Has the momentum to keep going through further rounds of funding: As entrepreneurship is a journey and capital is needed to fuel growth, funding and investors become an integral part of the journey.
Series Stage Funding
- Normally after the family round of funding is done: A CVP is established by this time.
- Scalability: Now the company is looking forward to scaling operations and start gaining market share in place of operation
- Core team performance: A team is set for the above growth objectives and clarity in roles and responsibilities.
- Fundraising is much more towards growth than stabilization. Existing Investors’ dry powder is sought for.
- Competition: Few new companies enter space, execution and growth shall be expected by investors
- Valuation inching towards multi-million dollars: The investors help with network and scale to create valuation
- Innovation: As the market gets competitive and investors look for entrepreneurs’ ability to continuously innovate and stay ahead in the market.
- Team: Yes at all stages the team needs to evolve. Heterogeneous and agile to be able to perform with endurance
- Sustain: To amass the market share, and sustain will require process and flexibility. Operational efficiency is essential along with growth needs.
- Capital structure: Investors aggressively work on capital structure with both debt and equity.
- Size and scale: Operations across the geographical market, sometimes both at supply and demand size. Hence public at large is aware of its existence.
- Customer retention capability and performance: Repetition of use and loyalty to brand a prerequisite for an IPO
- Profitability, cash flow & metrics are clearly defined and predictable to a large extent.
- Sustainable EPS and shareholder value.
Some prominent Startups in India and related VC Criteria
|Startup||Industry||VC Selection Criteria|
|Flipkart||E-Commerce||Founding Entrepreneur Team. |
Continually added new product categories, Constant price revisions.
Expanded its delivery reach.
Business doubled every three to six months.
|Byju’s||Ed-Tech||Young and Agile Founder. |
A vision towards success with clear execution plan.
Idea filling a need.
The delivery model with scalability, a golden combination.
|Paytm||Fintech||Visionary Founder |
Disruptive product with a large market fit.
VCs are measured risk-takers. While selecting any business for investments, they acknowledge the risks inherent in the ideas/business. However, by following some standard criteria, VCs support the entrepreneurs’ ecosystem to manage the risks and accomplish the business objectives. Hence as entrepreneurs, we need to understand their investment philosophy, their timelines, Valuation and stake details, and the network support they tend to bring in. VCs provide the fuel that organizations require for growth and it is the entrepreneurs’ responsibility to ensure that the venture is profitable and cash flow generating creating value for all stakeholders.
1. What does a VC expect in your business with respect to scalability?
Scalability refers to the act of growing larger while keeping intact the ease with which business is done and the business’s profitability. VCs always look for long term sustainability of business with the potential to grow large. Regarding scalability, they want to see three things: that the business was designed to grow large, that the owners want the business to grow large, and that the owners have the capability to make it happen. VCs expect large scale businesses with the potential to reach multiple Crores in the near future.
2. What is the frequency of funding that a company should ideally follow?
There is no hard and fast rule to follow for the frequency of funding. Raising too much or too early can be a big mistake you make. Before raising, analyze your need for funds. It may be to manage competition, grow market share, maintain investment flow for a fixed cost, etc.
3. What is an important check VCs make before investing?
We all know “Cash is King”. If we have to put the business in a sentence, ‘Revenue is vanity, Profit is sanity but Cash is King. VCs always ask if your company exhibits signs of growth and cash flow turning positive. Although Cash burns and negative operating cash flow is evident in start-ups’, a business model with visibility of Cash flow drivers in the near future is requisite in raising venture capital.
4. Why do disruptive start-ups get less VC funding investment?
Disruptive innovation is an idea that creates a new market and disrupts an existing market. A disruptive vision is a double-edged sword. It has more likelihood to win funding because the promise of being a ‘game-changer’ fosters VC’s expectations of extraordinary returns on their money, as well as the fear of missing out on the next big change in the market. On the other hand, you are likely to get less money. Investors are less likely to make large speculative investments into a company with an uncertain future. Though this scenario is changing in India it does not have a pace as good as Silicon Valley.
5. Why start-ups’ fail? And an important factor to exist and succeed?
Funded Start-ups fail mainly due to the inability to show the right traction to the VCs. The experiment of the right business model failed. VCs do not come forward to invest because of the absence of Product/market fit. Product development is creating tangible reality-based solutions from intangible market needs. Continuous review and alterations to products from the customer’s viewpoint help you to be competitive and stay ahead in the race. However, the commercials of the venture need to be implemented to show the likely growth to the VCs
6. Pivoting of business model. When should you go for it?
Pivot is a business change. Pivoting is absolutely necessary for a start-up when it encounters a roadblock and can go no further. You should go for it when
- There’s a limited response from your customers
- There is too much competition
- The market opportunity lies in a different segment