StartupTalky

Tag: Angel Investments

  • What Do Investors Look for in a Startup Business?

    Entrepreneur Steve Blank created one of the most well-known definitions of a startup. According to him, “a startup is a temporary organization searching for a repeatable and scalable business.” Such businesses operate with limited resources trying to fulfill a market gap with products that have an uncertain demand. Startup businesses rely on external funding for growth and expansion. These businesses operate at three different levels –

    • Operational Level – launching and testing a new product within a limited market
    • Tactical Level – fulfilling commitments made to investors and also raising new funds
    • Strategic Level – finding a suitable and scalable business model

    Types of Startups
    Features of Startups
    Investors in Startup Businesses
    Conclusion

    Types of Startups

    There are a few different types of startup businesses operating in different niches and market spaces.

    Scalable Startups

    Essentially, these are businesses that operate within the technology field with a high potential for growth and expansion that can span a global reach.

    Small Businesses

    With little outside and market pressure to grow and expand, such businesses operate at their own pace and have access to very few resources. These businesses are self-financed by an independent team and are also called self-starters.

    Lifestyle Startups

    Needless to mention, these businesses work in the lifestyle space, be they products or services. Such businesses are often created out of passion

    Buyable Startups

    The name itself categorizes such businesses as being created with the eventual aim to sell to bigger players within the industry

    Large Company Startups

    These startup businesses are sprung from large conglomerates and use limitless resources and technology available to them

    Social Startups

    Such businesses are more focused on the social aspect of business rather than on the bottom line

    Features of Startups

    As different as startup businesses can be, playing in different markets and niches, they share a few common features –

    Innovation

    Most startup businesses work with new products that answer an existing market need.

    Technology

    Startup businesses are usually looking for a competitive advantage. They use AI and other technological solutions to build innovative products or services.

    Scalability

    These businesses grow into scalable and repeatable business models.

    Expansion

    Startup businesses are expected to have quick and high growth and expansion.

    Higher Risk

    New businesses operate in uncertainty within all spheres and they are risk-takers. However, it is this risk-taking that eventually leads them to success.

    Startup Funding Explained

    Investors in Startup Businesses

    Investors that invest in startup businesses have one goal. That is to earn a strong profit. Whether investment happens through an angel investor, a venture capital firm, or equity crowdfunding platforms the final aim is for the business to succeed and earn a profit. This is the main reason that investors conduct a thorough check of the startup business before investing. There are a few important criteria that startup businesses need to meet for receiving funds through investments.

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    The Startup Team

    What makes a business operational is the team that works around the business idea. Hence, it becomes important to evaluate if the team has a competitive edge within the industry. Also, it is essential to validate the suitability of their skill set for the startup operation. The primary question is also to assess if the startup is built around a genuine problem that they have encountered.

    Target Audience Identification

    As with any business idea, it is important to clearly articulate the target market and the target customers. The startup must have clarity on the target audience who will become the early adopters of their products. Also, the founders of the business must address the worst-case scenario and the ways to handle it.

    Is the Business Offering a Genuine Solution

    This is probably the most important question for the startup business. Is there a genuine need for the product? How did the idea take shape? Will the business idea hold relevancy in the long term? Also, what is the benefit of the product that is offered in terms of quality, cost, convenience, and efficiency?

    Competitive Advantage in the Market

    Startup businesses must be constantly aware of their direct and indirect competitors within the market that they are operating. They must also question the position of the startup business in the future in comparison to their competition.

    Building an Effective Business Strategy

    A startup business must have an effective business strategy that details the ways in which it will acquire and build its customer base. This means that the business must strategize and create marketing initiatives that ensure a deep market reach. Secondly, the business must plan an effective strategy for future cost reduction that affects the company’s bottom line.

    Conclusion

    There are many startup businesses that build enormously successful enterprises and there is an almost equal number of startups that fail and fold within a short span of time. It remains upon the investor to conduct a thorough check to ascertain the health and future prospects of a startup business to ensure that the business grows to earn profits for itself and its investors.

    FAQs

    What are the levels at which startup businesses operate?

    The startup businesses operate at three different levels –

    • Operational Level
    • Tactical Level
    • Strategic Level

    What are the various types of startups?

    There are a few different types of startup businesses operating in different niches and market spaces.

    • Scalable Startups
    • Small Businesses
    • Lifestyle Startups
    • Buyable Startups
    • Large Company Startups
    • Social Startups

    What do investors look for before investing in a startup business?

    There are a few important criteria that startup businesses need to meet for receiving funds through investments.

    • The Startup Team
    • The Target Audience Identification
    • Is the Business Offering a Genuine Solution
    • Competitive Advantage in the Market
    • Building an Effective Business Strategy

  • Why Do Investors Invest in Loss-Making Startups?

    The number of startups grew by 8971% from FY 2016-17 to 2021-22 with 65,861 startups in 2022, mentioned Commerce and Industry Minister Piyush Goyal. But are all these profitable? Nearly 95% of these startups are loss-making and significantly burning a lot of cash. Yet, there is something surprising about them. Many of these loss-making startups were able to raise funds and become an IPO.

    Earlier SEBI didn’t allow loss-making companies to go public and raise funds to save investors. It traces back to companies that were making losses, raised funds, and ran away leaving investors dismal. However, this drove these companies to go public in other countries.

    The government did not want these startups with future potential to move out of the nation. So, they enabled unprofitable companies to raise funds limiting them to only 10% of share capital. However, why would investors invest in loss-making startups? They are neither generating any tangible or intangible assets nor do they have guaranteed future profits. What do investors bet on?

    In July 2021, Zomato became an IPO whilst it had losses of ₹63.2 crores. There are many other companies like Paytm and Flipkart that were able to raise money even though they had losses in crores.

    In fact, the well-known eCommerce platform Amazon was in losses for the longest time and sustained solely on investments and raised capital. It was only until the last two decades that it became profitable and is now one of the top 10 biggest companies in the world. The bigger concern is why so many startups fail before or after raising the investments? Let us look into that first.

    Why So Many Startups Fail and Incur Losses?
    How Do Investors Valuate Loss-Making Startups?
    What Attracts Investors to Invest in Loss-Making Startups?

    Unlock Your Startup’s Potential with Our Exclusive Investor Lists and Resources

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    Why So Many Startups Fail and Incur Losses?

    A startup tends to burn initially for any reason; but what keeps it flunking year after year? It could be any of the following reasons:

    Talent Acquisition Cost

    A startup needs people to build the product and run the business. Generally, it is difficult to attract and retain them due to competitive salary standards in the industry. As a result, businesses often burn their pockets while acquiring employees.

    Marketing Cost

    Startups invest a lot in marketing to build a customer base. Again this leads to negative cash flow and thus leads to losses. Zomato itself spends nearly 9 crores on advertising.

    Acquiring Technical Competent Tools

    Startups invest a lot to automate and streamline processes with tech stacks. Again it adds up to the recurring costs for the business. Oftentimes, businesses do not assess the usability of these products and end up wasting more money as well.

    Not Targeting Customer Needs

    Many startups are coming every day with the hope to make millions of dollars and exiting. Unfortunately, they do not cater to any specific need and end up creating a product with null demand. As a result, they have a hard time getting users.

    An issue in Business Model

    Many young entrepreneurs jump in to start a startup without assessing the environment and building the right business model. It leads to many issues and friction amongst the teams.

    There could be many other reasons for a startup to be in losses for a longer duration. Initially, every startup makes losses, which is normal, especially for SaaS or tech startups. But if they continue to incur losses repetitively then they need to look for the reason. But the question arises that when these startups are already in losses; how do investors evaluate the worthiness or their valuation?

    How Do Investors Valuate Loss-Making Startups?

    Investors need to assess the company’s valuation before investing. Generally, a company is evaluated based on profits generated. However, when the company is not making profits investors generally look for other key metrics while investing.

    Customer Base

    The first metric is “customer base”. Investors look into the current customer base and estimate the growth thereon. The user must be dependent on the product to generate consistent profits or monetize them. If the user is not mentally invested, it is hard for a business to become profitable.

    So, investors generally invest in the growth potential of the startup and not the profits per se. They look into customer retention rates and other criterions such as CAC and LTV of the business. This gives them clarity regarding business growth potential in the true sense.

    Marketing spend return

    The next important indicator is marketing spend return. Is the company able to generate back the marketing cost? Generally, business investors study the startup market, environment, future growth prospects, and other indicators to understand the true valuation of the company.

    Business management and Moat

    Lastly, investors look into business management and moat. Is business management efficient, suitable, and sustainable? Does the business have a moat to leverage? There are 100s of startups targeting similar problems with identical products.

    Investors generally put their money on the ones that distinguish themselves. But what exactly drives investors to invest in unprofitable startups? Why do they spend millions on a startup that is in losses for years? Why do investors at times end up buying loss-making units? There could be several reasons. Let us dive right into them.

    What Attracts Investors to Invest in Loss-Making Startups?

    Startups today raise funding even with losses by selling their organization’s goal. They aim to scale the business instead of restricting themselves to minimal profits. Investors bet on the company’s vision and future growth possibilities when they are at their loss-making stage.

    Amazon is one of the biggest trendsetters to bring this revolution. Also, the fact that 70% of investors today are below the age of 30 justifies the risk appetite. Now quickly look into the scenarios and reasons why these investors invest in loss-generating businesses.

    Future Growth Promise

    Many investors don’t find other options such as mutual funds and savings accounts lucrative and move to other options with higher return opportunities. Generally, these startups offer the potential for the future even though they are in losses. Hence, they attract young or big investors to invest with the promise of future growth.

    Recovering Money

    Many big investors invest in loss-making startups because they can recover their money even if any one of the loss-making startups blows up. It is more like gambling intended to back the net investment gains.

    Vision and Mission

    Other sets of investors wish to invest in the business’s vision and mission instead of looking for profitability. In fact, many investors are driven to invest in tech startups to promote ‘Digital India’. Also, many startups, especially tech startups, are hopeful for success based on innovation. So, If they resonate with the business idea and see opportunities, they do not shy away from putting their money into the startup.

    Brand Value

    Often investors look for brands that are making losses but still raising money. They bet their money on the brand value instead of other metrics. One of the biggest examples of the same could be Paytm, Zomato. These loss-making companies raised funds only due to brand image.

    Exiting with Profit

    In some cases, instead of investing, investors directly purchase a startup even with the losses. Why? They speculate on opportunities such as mergers and acquisitions with a big player to exit with immense profits. Alternatively, oftentimes they purchase these units to create a profitable alliance.

    India’s best fintech entrepreneurs & a stock market expert, Mr. Vivek Bajaj once quoted that

    “Valuation is not a reflection of the earning, it is the reflection of future potential earning”.

    Investors run by this rule and focus on growth and scalability instead of immediate profits.

    FAQs

    Why do VCs invest in loss-making startups?

    VCs invest in loss-making startups in the hope of a profitable future, even though the startup is in loss but it might turn profitable in future.

    Should you invest in loss-making companies?

    Investing in loss-making companies is like gambling either you’ll lose all your money or will exit with huge profits.

  • How Can You Raise Seed Funds For Your Startups?

    India has witnessed a significant increase in the emergence of startups in the last few years. India is now the world’s second-largest startup hub, with over 94 unicorns in total. Indian entrepreneurs have evolved into powerful drivers of the country’s economic progress. This is undoubtedly the best time to start a successful company in India.

    With the Government encouraging people to form their startups, more and more people are indulging themselves in this journey. Currently, we have over 65000 startups in the country. The best part is every sector be it fintech, digital marketing or any other, is flourishing in the country.

    Graph showing the Top 5 most valued Indian Startups as of the end of 2021

    You got a Startup idea to build a product that could change lives. You have the Business Model and Product Development roadmap laid out. You might even have a small team to get started in your startup. And then comes the real problem that every Entrepreneur faces – funds to hatch the plan.

    We all know that timing plays a major role in the success of any startup. It’s not a simple task to transform the ideas into a profitable business. Founders might not always have the funds to launch the product at the right time in the market at the beginning. Since growth is the main goal in the initial stages, startup owners must understand how to raise the “seed” capital.

    What are Seed Funds?

    Startups raise seed funds essentially for operational costs like hiring the right people, purchasing tools, leasing offices and more. This crucial step forms the solid basis for launching a thriving business at the right time. When you start a business, the most important thing that is needed is funding. Seed funding means the funds by investors provided to your business in the initial stage. The investors pour their funds in return for an equity stake at the initial stage of business. It is at the early stage that the investment by the investors is done, which helps the business to grow and make its capital. Seed funding should not be confused with a loan. Investors get equity in the company for their investment.
    Now that we know what seed funds are and why they are crucial, let’s dive deeper into the different ways to raise seed capital for your startup.

    Proven Ways to Raise Seed Funds for Startups

    Crowdfunding
    Friends and Family
    Accelerators
    Incubators
    Corporate Seed Funds
    Bootstrapping
    Venture Capital Funds
    Angel Investments
    Debt Funding
    Government Grants and Schemes

    Crowdfunding

    Crowdfunding is becoming increasingly popular in recent years. Many startups have successfully raised seed money through crowdfunding platforms like Kickstarter, Indiegogo and Wefunder. The process involves creating a campaign to convince and persuade thousands of people to invest and buy your product before its developed. This method is a great strategy for founders who do not want to give up equity and dilute the company at the seed rounds. The idea is to build the product from the money made from pre-sales and ship it when ready. Startup founders also utilize crowdfunding websites to understand the market and assess the demand for their products. The idea is to build the product from the money made from pre-sales and ship it when ready.

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    Friends and Family

    Friends and Family are mostly the first places every entrepreneur reaches out to for investment when getting started. Some founders offer equity in the company but many consider this investment as a loan. This method provides a little breathing room in terms of loan repayment.

    Accelerators

    Accelerators typically exist for startups that need assistance with launching and growing the company. Accelerators like Y Combinator runs programs to choose startups for investing. The selected startups get a pre-decided amount in return for a specific percentage of equity. They also support startups with Mentorship and Networking events where the founder gets exposure.

    Incubators

    Incubators are specifically created for startups that are at an early stage. They facilitate the development of ideas and the validation of market fit. The investments are usually small as most founders get this funding to nurture the idea and introduce innovations. Incubators also offer Workspace and Mentorship Support and Networking Opportunities for founders.

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    Corporate Seed Funds

    Many established corporations consider startups as a major source of fresh talents and innovative ideas. Megacorporations are always on the lookout for new ways to invest in emerging technological innovations. Again, this type of financial help gives the startup much-needed exposure and is frequently a precursor to a potential acquisition.

    Bootstrapping

    Let’s not forget that not every startup needs to raise money at the seed stage. Bootstrapping is the process of funding the startup with your savings and reinvesting the profits from the business. Many startup founders use their own money to get their businesses off the ground to eliminate giving away equity at the initial stages. Bootstrapping, on the other hand, might put entrepreneurs under further financial strain.

    Venture Capital Funds

    Venture capital firms offer seed funding for startups with high growth potential. Venture capitalists provide both professional experience and money to entrepreneurs. This type of investment calls for the exchange of a company’s equity for financial assistance. VCs review a lot of projects but only invest in a small percentage of them, so you’ll have to stick out from the pack.

    Angel Investments

    Angel investors are affluent people who invest their own money as seed capital in businesses in return for equity of the company’s ownership. This process is relatively quicker than a VC investment. Many angels are known to use convertible debt as it has the advantage of deferring the company’s value until the next funding round. Angel investors also get discounts for investing early in the startups.

    Debt Funding

    Debt funding is often provided by the bank, an investor or any financial institution to the startup founder. Here, the founder is borrowing the money for a fixed rate of interest instead of giving away any equity in the company. The capital must be repaid with the interest at the agreed timeline. It’s important to note that the only advantage for the investor here is the interest amount.

    Government Grants and Schemes

    The Indian government has stepped up to support young entrepreneurs who need help with growing their startups. The government has taken initiatives like The Startup India Seed Fund Scheme (SISFS) which intends to support startups with the conceptualizing of new ideas, developing prototypes, determining the demand in the market and monetization.

    Conclusion

    There is no doubt that raising the seed funding is difficult. Gaining the right understanding of the options available for you is the key and we hope that our information has helped you.
    You must also know and understand how the different kinds of investors operate, how they make financial decisions to help your startup and how their seed fund can help you grow.
    It’s also worth noting that seed financing isn’t just for the early stages but it’s also for the years ahead. Also, keep in mind that timely capital is critical for companies to stay up in a challenging market like India. A startup that sets growth initiatives should be able to use the seed capital to raise further investments.

    FAQs

    What is Seed Funding?

    Seed funding means the funds by investors provided to your business in the initial stage.

    What are some of the effective ways of raising seed funds?

    Some common and effective ways of raising seed funds are Crowdfunding, Friends and Families, Accelerators, Incubators, Bootstrapping, etc.

    How many Startups are there in our Country?

    There are currently over 65900 startups in the country. But the number is expected to rise shortly.

    What is The Startup India Seed Fund Scheme?

    The government has taken initiatives like The Startup India Seed Fund Scheme (SISFS) which intends to support startups with the conceptualizing of new ideas, developing prototypes, determining the demand in the market and monetization.