Setting the tone
Funding is a hot cake in Indian startup ecosystem today and every startup wants a bite of it. But before a startup goes in for pitching the business before the investors, it should very well understand that an investor shall not put his money in a startup until and unless he finds it rewarding. A regulated equity market by SEBI can be a better bet for them to invest rather than investing in a startup. Despite there being regulated bourses where an investor can invest, they still invest in startups only to make higher return compared to the regulated equity market, however, having said that, raising funds from the investors come at a cost; cost in the sense that there are various factors which an investor considers before investing in a startup.
7 important things investors consider before investing
1. Business Plan
The business plan of the startup is one of the deciding factors behind investment in a startup. No investor shall invest in a startup unless the plan is a good one. A good business plan sets the ground for better pitching before the investors thereby increasing the chances of getting funded. Thus it is very important for a startup to prepare a business plan and keep it handy all the time and also make necessary changes regularly as the scenario in a startup company face-lifts itself every day, unlike a company who has been in the system for last 10 or 15 years.
2. Market Opportunity
The second biggest influence in the case of an investors’ interest is the market dynamics. How good you pitch your startup to the investors, the investors are still going to do a thorough study of the segment and industry that the startup has been working on. Thus, apart from the business plan, the investors shall make sure that the startup has a market in near future which might give them a well-desired return. A good business plan might not have a good market potential at a particular point of time, at such instances, the probability is that the investor shall not invest in the startup.
3. Co-Founder and the Team
The co-founder and the experience of the team plays a vital role in determining whether a startup shall be able to raise funds from investors or not. The capability of co-founder and the team in a startup goes in parallel to the business plan and the market opportunity. Any startup which has differences in opinion among the co-founders is bound to fail and investors are well experienced to sense that. Any startup which is potentially going to fail shall be avoided by an investor.
However, this situation can be well handled by defining the roles and responsibilities of the co-founders and other team members. It is highly advisable that Founders’ Agreement is executed to avoid any miscommunication between the founders and also to provide a better clarity to the investors while pitching the startup for investment. It is also recommended that proper employees agreement and non-disclosure agreement along with non-compete agreement be drafted to make the things more structured in an organization.
These simple steps will go a long way in paving the building blocks for a startup in raising investment and approaching the right investors.
4. Visibility and Traction
The investors before investing in a startup will check the visibility and traction of the startup. While pitching the startup in front of the investors, it is important to show that the founders are walking the talk. Highlighting some real data about the customers acquired till date and the time it took to acquire the customers will stimulate the investors’ mindset. This shall also bring some trust and faith among the investors about the startup and they shall feel encouraged to invest in the startup. It helps in proving that the market is already ready to use the product or service. It also proves that the founders and startup have already put up the effort and is committed to making the business work.
5. Investors’ Pie
This is one factor which is not really dependent on the startup, rather an external force. However, it depends on the startup when, how, and whom to approach for raising funds. An investor shall invest in the startup which fits his interest or relevance. An investor who is more interested and experienced in Artificial Intelligence (AI) or Internet of Things (IoT) is likely to invest in a startup which is into food sector, that is to say, an investor shall only eat the pie he likes and not all he gets. Thus, it is also important for the startups to get a research done and understand whom to approach while raising funds, as approaching the wrong person can bring down the credibility of the co-founders and also waste the time of the startup as well as the investors.
This goes without saying that any person with a good network or networking skills has a much higher potential in succeeding the race of raising funds from the investors. There is always a moment when the founders with good networking skills strike a chord with the investors and impress them, not ignoring the fact that the investors should have a shared interest in the same industry in which the startup is working. Networking skills of a founder help a startup in a great way to move a step ahead and fix up a meeting with the investors and pitch the business before them.
7. The “C” component
One of the most important factors in deciding the startup investment is the “C” component what we call the “Compliance” component. A startup which is not compliant with legal regulations and rules falls under a strict ‘No-No’ list of the investors. Numerous startups have failed to raise investment only due to non-compliant activities being followed in the startup at one point of time or the other.
With Govt. getting more tougher on non-compliant companies, it has become very important for the startups to make sure that proper documentation is maintained and day-to-day activities are done complying with the Company Law, Tax Laws, and other allied laws. A startup which is not compliant with the applicable laws might be struck-off by the Ministry and the investor shall lose their money due to this.
Go Get Funded
The ultimate goal of a startup when going for pitching business is to raise funds. But, unfortunately, very few startups are able to reach that place where they can impress the investors and get funded.
But why so?
In most of the cases, it has been seen that a startup got so busy in expanding its business that the basic compliances have not been met, and in the run, it has become non-compliant to various laws, rules, and regulations.
The best way to avoid this outcome or scenario is to get the startup a due-diligence check and forensic audit done which will help the founders to gauge and extract the non-compliances made by the startup and take necessary steps to rectify them before pitching to the investors.