Think of VCs and startups like animals in a jungle who are looking for the right partner to mate. Just because two lions of opposite sex are roaming in the same area and come across each other, it does not lead to mating. The process of attraction only starts if they give each other the right mating signals.
Similarly investors respond to certain signals and for the process of attraction to start startups need to give those signals out.
- Team: experience , domain expertise , passion, staying power, etc.
- Market: potential size should be very large , your products/service / business model should clearly indicate what problem you are solving and why will you get a significant share of the market.
- Return on investment (only thing that matters in the end to an investor): An investor needs to see strong possibility of a 10x plus exit. Which is a function of:
- A large market
- Capability of the team with its products / services to take the business to a scale , within 5-7 years. So that the investor can sell his shares @ 10 times the investment price
Apart from the signals investors are looking for, everything else is pretty much NOISE at this stage and should be minimized.
Once the investor sees the right signals, the process of attraction starts. He will come closer to you and your business. That’s when he will look for further details about products , domain, detailed financials etc. He will also spend efforts to learn more about the domain and may involve some domain experts.
He further validates the same thing:
- Whats are the odds of getting 10-20 X Return on Investment in 5-7 years
- Whats are the odds of getting 5-10 X Return on Investment in 5-7 years
Once he is reasonably convinced about the RoI. Next stage for him is to look for all reasons to say NO. He looks for things about the team / market / product / competition / legal issues – which may put the odds of RoI at a big risk.
- And if he finds anything which can seriously risk the RoI – he will back out
- If not, things move forward
Tags: business model, Fund raising, Investing, Rate of return, Startup investing, Venture capital
Techcrunch reports the news about 2 million investment in YC from Sequoia and prominent angel investors (Ron Conway, Paul Buchheit and Aydin Senku) . They also report that YC will now be doing 60 companies / year, up from 40 / year.
This is another big validation for the business accelerator model pioneered by YC and adopted by folks like techstars, seedforum and MVP. The premise of model is that the cost of doing business has gone down significantly. With the right support, guidance and capital of around 15-20K USD it is very much possible for team of Young, Talented , Focused and Passionate entrepreneurs to build a business with significant value. Which means businesses with good user traction, evolved products and business processes, revenues, break-even and more.
These initiatives are obviously good for the VC industry, and its good to see it officially recognized. The specialized and organized support for the super early startups is resulting in stronger startups, which means returns on the investments of the VC firms will be higher and more number of VC investments will lead to creation of successful companies.
Another important aspect of this model is the special focus and availability of active support from founders of companies working alongside in the same batch as well the alumni founders. All of these folks have experienced creating real companies and have unique capabilities, contacts and experience which proves useful for other folks part of the program at YC / Techstars / Seedforun / MVP.
Read my previous about “First time entrepreneurs (FTEs) – Building businesses in India“.
Tags: Angel investor, MVP, Paul Buchheit, Ron Conway, Seedforum, Techstars, Venture capital, Y combinator
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