How Abating Valuations Can Impact Investments For Startups
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Venkat Raju, CEO, Kyron Global talks about diminishing valuations and the meticulous research an entrepreneur needs to do before approaching an investor. Kyron Global designs, manages and operates startup engagement programs for global corporations.
Investors deserve a lot of blame for the entire ecosystem that exists today. The last 15-18 months they pumped a lot of money, valuations were crazy in my opinion and they built a bubble. There was this easy money opportunity and people jumped into the ecosystem, not necessarily with the right passion and got carried away by what was trending.
Even late-stage investors came in without any consideration for business models and unit economics which led to spiked valuations. Hence a correction has happened in terms of valuations and investors have now become stricter.
If you are a startup without any differentiation and are a me-too model of something that already exists, then it’s going to be very difficult to raise funds. However, even in the toughest climate if you are a legitimate company with solid business model, solving real problems and there is a path to profitability – you should be able to raise money!
What you need to do before approaching an investor?
If you are a startup you need to do a lot of research about the investor. Target only those investors who fit into your product. Even if you are approaching a VC firm, just because you hit Sequoia, doesn’t mean it’s going to come through.
You have to identify the partner who focuses on your area. This means you need to do a lot of upfront research. Founders spend a lot of time chasing the wrong investors and opportunities where they might not get what they seek.
One has to go back and check the investors’ previous investments and background. This theory also implies in the angel space.
Find out the right investor within that network or the fund that suits your product.
I’ve seen very large cheques being written on the basis of track record, trust and team. There is something about the chemistry – if the investor and the founder hit it off in the first five minutes, then the chances of getting a deal done is very much possible.
However, you cannot plan your research. Before you meet an investor try and understand every aspect of his profile and do a thorough research on him. Find out about their hobbies – does he like fishing or is he a trekking person or does he like Hollywood movies.
Investors make most decisions at a gut level. We all like to think it’s rational but there are so many triggers and there are a lot of instances where major investment decisions aren’t made rationally.
2016 – A year of market correction
If 2016 is the year of market correction, it’s going to impact everybody. It’s not only going to impact the bad sectors or companies, but even good companies are going to find it difficult to raise capital. The single message I give to entrepreneurs right now is, if you’ve raised money learn to conserve it.
Having money in the bank is very critical to ride through this critical time. If you want to raise money, do it as soon as possible. Be more flexible on valuations but the money into the bank right now.
As an investor I tend to put more money in a downturn. When the market is doing well, a lot of people put their money and the results are seen typically within two to three years. Hence when you invest during good times, by the time the product is ready the market could see a downturn. During the downturn it gets difficult to sell the product.
The opposite happens when you invest during a downturn; the product is ready when the market recovers. But investors follow a herd mentality. I am a contrarian in that way! I tend to pick good companies during downturns as they come with good valuations. Also from the timing stand point, if it’s an early stage company put your money during that time, their product will be ready when there is an upswing.
Ditch the template format of the pitch
Ideal pitch should contain enough about the founders themselves. Very often I have seen that investor pitches have been quite standardized. Startups are generally given about 20 minutes of time where they have to talk about the product, IP, market reach among other standard things. What generally go unanswered are details about the team; things like why did they started the company, the passion behind the startup and the reason why the team thinks they would succeed.
Venkat, who also happens to be an angel investor, said the single deciding factor for him is the team. He makes sure the team has the perseverance and tenacity to adjust with varying market conditions.