The start-up culture in India is an exploding space with great potential. The past five years have had unprecedented growth. According to a recent report by Nasscom, India harbours 4750 + start-ups, 140 + incubators/accelerators and is expected to witness 80+ M&A’s in this period. The current start-up culture in India is like two sides of the same coin. While we have seen some degree of correction in the start-up investments happening in the latter half of 2016, the outlook is positive. On one hand we have startups who are genuinely creating an enterprise and the other are just disillusioned with valuations. Making money is a consequence of running a commercially viable business. Model and plans have to be out of reach, but definitely not out of sight. The current environment is excellent for the start-up culture to thrive.
There is a fundamental difference between an entrepreneur and an investor. While, as an entrepreneur you are ready to take huge risks and keep things going, fueled by passion and an idea, as an investor, you have a responsibility. There are usually large sums of money involved, and there needs to be direction in your investment strategy.
The Idea and the People Behind it:
Most start-ups are based on brilliant ideas, which sometimes do not translate to brilliant business. Simply put, a start-up may have great solutions to problems, or be able to see a need gap in the market. But, it may be unable to create a solid business plan that will ensure a break-even strategy. A well connected world means that a product and service can reach every corner of the world. Instead of simply providing “improved” versions of existing products, ventures need to focus on addressing unmet customer needs.
I give utmost priority to the founder behind the startup. Even if you have a champion race horse, it’s the jockey which plays a vital role in making it win. If there are multiple founders, I gauge their chemistry. The best of businesses can falter due to internal issues.
Talk to the Customer:
While business plans can look fabulous on paper, it needs to have roots in reality. The greatest feedback you will receive about any business is not fancy research, data and projections, but how the customer feels about it. Try and spend time with potential customers of the business and you will know all its strengths and weaknesses, as well as potentials for growth. Pay attention to the kind of customers a company has. Are they loyal and endorse the brand? Or do they criticize it actively? Or are they just there because this is the cheapest service or product they will get in the category.
Unlike an entrepreneur, who looks at only the forward thrust, an investor needs to have different metrics in line when looking at a start-up. Some of the main points to be noted are the trajectory of growth of the company. Has it been sudden spurts or is it steady growth? Most times you meet entrepreneurs when they are looking for funds, but the smart thing to do is to also meet them in between-and see how the business strategy and growth is happening. This will allow you to measure success better.
Understand the business:
There is no point placing your money in a business you do not understand. In case your sectoral experience is different from the business you are investing in, then spend time and effort to get to know the market dynamics of the business. Whom does it cater to? What kind of competition does it have? What can go wrong? What are the governmental policies that affect it? The better you understand the business, the more confident you will be to invest in it.
Understand the Money Game:
There are some fundamental mistakes you can make as an entrepreneur turned investor, because ultimately, an investment in a company boils down to profitability and not passion. Does the company make money on per unit cost? In how many years will it break even? Do you have the patience to wait it out for the 3-5 years that it may take it to break even? These are questions you need to ask yourself before you invest. In case, you are not in it for the long haul, consider giving out a loan instead of offering funding.
To conclude, there is a great advantage in being an entrepreneur turned investor, as you will understand the dynamics of a start-up better. Keep your ear to the ground as well as an open mind, and this is surely a transition you will enjoy. Also as an investor you have a responsibility towards the start-up in terms of guidance and mentorship apart from just investment. Capital comes not just in the form of money, but knowledge. As I invest mainly in my domain, I provide intricate nuances of it. An efficient workflow allows them to focus on the marketing and brand building. Most ventures are bogged down with routine issues. I do guide them in clearing those cobwebs so they can focus on what they should be. I also prevent them from pressing the accelerator too hard because if one is headed in the wrong direction, speed will only get them to the wrong place sooner.