14
Apr

VC’s and startups: Looking for the right mating call

   Posted by: sameer   in Venture capital, angel investment, startup, startup essentials

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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.

Important signals:

  • 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
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This entry was posted on Tuesday, April 14th, 2009 at 3:01 pm and is filed under Venture capital, angel investment, startup, startup essentials. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

6 comments so far

Mayank Dhingra
 1 

Wondering what sort of signals do startups sends to attract potential investors ?

April 14th, 2009 at 3:36 pm
sameer
 2 

@mayank

Some signals that work:

– Right team with the required skill set, passion, amazing problem solving skills and a never say die attitude
– A large market (2000 Crore and above). Market that is not overtly crowded
– A product / service which solves a real problem and also that people will pay you for solving the problem
– A business running for a year without external capital in a bootstrapped manner having a live product with real users, PR visibility and revenues
– Cash flow positive business, which needs money only to grow not to sustain

April 14th, 2009 at 4:02 pm
Ravi
 3 

Good one Sam !

Signals to send to the Potential Investors :
-Confidence
-Have other investors who are also keen
-Don’t show any desperation (basically even if a VC doesn’t commit I will be able to sustain with the cash flow generated )

April 14th, 2009 at 10:07 pm
Rizwan
 4 

Bang on the point….I really like the article – tells you precisely what is required in a short and sweet way.

PS: Love the picture (could go the other way where the VC on top is doing something to the company ;) )

April 15th, 2009 at 1:31 am
Riputapan Singh
 5 

Sameer,

Nice compilation. I’d like to add one more thing that serves as an initial signal (in certain industries like Healthcare and Technology): Proprietary / Patented technology.

Extending the same idea, anything that gives the startup a competitive edge is valued.

Regards,
Ripu

April 16th, 2009 at 6:09 am
sunder
 6 

Sameer, you have simplified V.C theory for current market requirements….thank you.

April 18th, 2009 at 2:17 pm

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