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5 Things Startup Investors Are Asking Founders Today Before Signing a Cheque Investors are today looking at the scope for profitability, and unit economics, among other things prior to investments

By S Shanthi

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The funding winter has rewired the way both entrepreneurs and investors think and function. In this new normal, the things that investors look at before making an investment have also changed.

And, that is why we asked some prominent investors to share the top 5 things that they are asking startup founders before making an investment.

Sonal Saldanha, VP, Investments, 3one4 Capital on the top 5 things she asks and why:

  • Why is this team the right one to tackle the problem? Understanding the founding team's motivation, expertise, track record and compatibility is essential. But assessing the founding team goes beyond their qualifications and expertise. Investing in teams that share our values and with whom we can form a cohesive relationship enhances the likelihood of success.
  • How does the startup's solution address a pain point, what are the unit economics of this business and how does that feed into a large addressable market? At the seed stage, we expect startup founders to have conducted thorough primary research to ensure the existence of a genuine pain point and market opportunity. Evaluating the viability of the unit economics, including customer acquisition costs and lifetime value, helps us assess the startup's profitability potential. Additionally, determining the market size and growth potential confirms whether the opportunity is compelling for both founders and investors - is there potential for this to be a large one-of-a-kind business?
  • Why is now the right time for this startup? Timing and market tailwinds are crucial factors that determine startup outcomes. We'd like to know what makes this the best time to build this specific company since the opportunity cost is high for both the founders and the investors.
  • What is the startup's go-to-market insight, the path to scale, and the required capital to achieve it? This is a related point to unit economics and timing, but one that we've seen a lot of companies think about too late in their lifecycle. A clear go-to-market strategy is fundamental for successful customer acquisition and sustainable growth. Understanding how the startup plans to reach customers, the channels they will leverage, the messaging they will use and so on provides insight into their execution capabilities. This question also helps us think through the challenges this company might face at scale where growth can become more challenging. We are also looking for one of the founders to be capable of driving the initial go-to-market independently.
  • What are the startup's shorter-term milestones, expected round size and spending plan? Understanding the startup's shorter-term goals is crucial for evaluating the team's ability to distill their larger vision into a series of executable milestones that derisk the business over time. This plan needs to be aggressive enough for the 12-18 month progress to be compelling to the next round of investors.

Ankur Bansal, co-founder and director, BlackSoil Capital on things he looks at before investing

  • Founder and her or his team: The most important factor continues to be the people. Investing in a founder and an execution team with deep knowledge and passion for the business can be instrumental in determining the performance of the company in turbulent times like we are going through now.
  • Scope for profitability: While investors continue to seek innovation, disruption, and traction, an important change has been the shift in focus from hyper-growth to profitability. Startups can now be expected to leave behind the "growth at all costs" attitude.
  • Compliance practices: This profitable growth further needs to be supported with impeccable compliance practices. The recent slew of frauds unearthed in the Indian start-up ecosystem has made compliance and proper financial reporting paramount.
  • Firm ESG principles: Prioritizing ESG principles is becoming increasingly important. Demonstrating a commitment to social responsibility and ethical practices not only aligns with modern values but also attracts investors who prioritize ESG considerations. It signifies the company's efforts to operate responsibly and contribute positively to the society and environment.

Tarun Sharma, Managing Partner, MegaDelta Capital on what his firm asks founders prior to investments and why.

  • What are the unit economics of the business?: We are always keen on backing plays that demonstrate profitable unit economics at a meaningful scale. In a capital-scarce environment, it becomes critical to establish that each new customer acquired, geography entered or store opened is delivering profitability not creating losses.
  • What is the path to overall healthy profitability?: Being in the late venture / early growth segment, the companies we target are usually profitable or break even. The key question is to understand the drivers to get to a healthy level of profitability while achieving robust growth and maintaining capital efficiency. This requires the entrepreneur to understand the levers of profitability as well as efficient cash management.
  • Competitive differentiation: India now has a vibrant entrepreneurial ecosystem, with many startups (both massively funded and unfunded) targeting similar broad categories or geographies. How does the company in question plan to compete efficiently with such competition – both new and legacy? The answer has to go beyond capital / superior marketing / better team / sharper execution.
  • How are they creating a disruption? Covid and now Artificial General Intelligence has forever changed the expectations of consumers from technology. How is the company creating a data moat on which (say) verticalized LLMs can be trained to create a superior customer experience or drive impactful decision-making?
  • Clarity on exit planning: It is critical for us to build scenarios and analyze possible outcomes for the various paths to exit, prior to committing any capital. Our approach is to maximize the likelihood of exit by keeping as many options open for exit, especially in a challenging market. In this exercise, it is important that the founder is aligned with us at the outset on which exit paths are probable, possible and impossible. Hence, we would like the founder to outline her future plans for the company and to assess if it fits with our exit thesis.

Rohit Sood, partner, Bertelsmann India Investments on the 5 things his firm looks at:

  • Founders' approach and conviction: Regardless of the funding environment, our evaluation framework remains unchanged as we aim to identify and support exceptional founders and markets, recognizing that while the execution approach may need adaptation, the essence of successful entrepreneurship is not dictated by capital market fluctuations.
  • Why this team?: We deeply explore the concept of the 'Right to Exist.' We carefully consider why a particular founding team is ideally positioned to tackle the problem at hand and what unique insights they bring to the table. Moreover, we delve into the value proposition for all key stakeholders, examining how the new business sets itself apart from existing alternatives.
  • Right to win: Further, it is important to focus on the 'Right to Win,' as it is easier to create value than to capture and defend it. We emphasize the defensibility of a business, looking for long-term moats such as network effects, economies of scale, and brand integration within the fabric of the business model.
  • Right to Earn: Evaluating the 'Right to Earn,' we assess the startup's ability to create economic value and sustain a viable cost structure as it scales and matures.
  • Quality of traction: Additionally, we place more importance on the quality of traction, favoring sustainable growth driven by factors like order quantity increases, high customer retention rates, and organic expansion within the same city or store.
S Shanthi

Former Senior Assistant Editor

Shanthi specializes in writing sector-specific trends, interviews and startup profiles. She has worked as a feature writer for over a decade in several print and digital media companies. 

 

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