4 Points Startups Should Remember Before Approaching A VC
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The VC universe with the onset of 2016 has largely dried up, with money now only flowing into quality startups and tested models; this to a large extent can be attributed towards many of the big, heavily funded startups in India grossly underperforming over the last few quarters.
In circumstances like these how a startup approaches investment has become a lot more significant, bear in mind two of the most common factors VC’s look for are how large is the market in focus, thus gauging the scope and the quality of management team which for me takes precedence over all other factors, with this in mind let's look at some of the most common traits required to get someone to buy into one’s business.
1) Is the problem actually worth solving?
The most important factor to look at before sourcing funding has to be if your solution is actually required and if a large enough populous requires the problem to be solved. This especially for startups in India with the numerous inefficiencies across domains is not hard to find, to detail the problem and the proposed solution as artlessly as possible is the first pre requisite for pitching your startup.
2) How far along is your Prototype
I have seen various startups which have approached us for funding without as much as having the architecture of the prototype in mind, coming up with an idea is the smallest, simplest part of building a startup. Execution on the other hand is the differentiating factor. It is usually very hard to raise funds on the basis of an idea alone, VC’s rarely fund a startup at the idea stage, most prefer to fund working model prototypes. So it would in most cases, to make sense to have some form of a working prototype or model in place with data points to show how the model could be economically scalable.
3) Management team expertise
How relevant the founding team expertise is to build the proposed model constitutes a large part to which startups successfully raise funding. For example, a doctor’s experience in building say a cab hailing service would be extremely bootless. Ensure the founding team to a large part is aggregated by members who have some sort of expertise in the underlying sector. An investor would want to know the entrepreneur's background and understand whether the team has the ability to execute the plan, so it becomes even more important that you focus on developing the basic idea and making it operational before you approach an investor.
4) Are your valuation expectations legitimate?
Last but not the least; startup needs to look at the value of the company is planning to raise capital, as it need to convince an outsider to buy into the idea. The burn rate has to be as low as possible; the founding team really can't expect to draw salaries comparable to what the market has to offer on the money raised to build a startup. Time and again we have seen startups raise money only to squander the funds raised in ways they would never expect to spend their own funds. It also helps to have the founding team put their own funds into the business in whatever capacity is possible, most VC’s agnate well with entrepreneurs who come with the all or nothing mindset and who are personally all in behind their ideas.
These are some of the broad points one could look into while raising money to go behind executing their ideas, this being said some of the best startups out there have been bootstrapped. A business model which has a positive cash flow from the get go and does not require any external funding is something to strive for.