Tag: Convincing Investors

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?

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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.

July 3, 2022
What Does an Investor Look Out for in a SaaS Product?
With dramatic tailwinds and accelerated digital transformation, the SaaS market has grown exponentially in the last decade. The industry has managed to amass a revenue of $104 billion in 2020. By 2022, the market is expected to reach $140 billion, according to Gartner.

Whether you’ve created a SaaS product to solve a problem or make extra income, it is a valuable asset. However, when it comes to scaling the product, you need investment. But what’s the final checkpoint that the investor looks out for in a SaaS product? It’s vital to understand how valuations and metrics work in businesses.

Investors think a lot about characteristics that are representative of an early-stage startup. Before they invest in your company, they want to see specific metrics. And so, to help you prepare these, we’ve compiled an overview of the most crucial SaaS metrics. If you adhere to these, your valuation is bound to improve.

1. Clear Ideal Customer Profile (ICP)
2. AI-powered SaaS Applications
3. Product-led Growth Strategies
4. MRR
5. Customer Acquisition Cost (CAC)
6. Churn Rate
7. EBITDA

1. Clear Ideal Customer Profile (ICP)

When it comes to product building and efficient selling, it’s fundamental to know your target audience. Companies that have an apparent understanding of their target customers have improved chances of success.

Investors look for a well-defined ICP before investing in the business. Therefore, entrepreneurs should establish their ICP through apparent insights and extensive “Voice of Customer” Research. It’s also essential to build the customer base from a combination of past experiences.

Some of the most substantial benefits of a clear ICP are:
- An efficiently targeted go-to-market (GTM).
- Highly focused product roadmap.
- Shorter sales cycles and value propositions.
2. AI-powered SaaS Applications

Artificial intelligence plays a significant role in advancing modern software to automate work for consumers. At its core, AI-powered SaaS applications can be trained on increasingly larger datasets and be further augmented with customer-specific data. Thus, allowing users to automate tasks and make better-informed business decisions. Consequently, it will propose a unique standpoint to the investors.

Some SaaS companies developing AI-powered applications comprise:
- Yalochat – It is a conversational AI-powered platform that allows businesses to efficiently communicate with customers.
- Zeni – It is an AI application that provides bookkeeping, financial reporting, and invoicing services.
3. Product-led Growth Strategies

The product-led growth (PLG) strategy is crucial when it comes to building SaaS companies. It allows the consumers to test the product for themselves. Without the restraint of features, users can effortlessly explore the product and infer its value.

This not only helps businesses develop consumer-like products but also furnishes lucrative returns. The PLG strategy has become business-critical across all enterprises functioning. Companies adhering to product-led growth have increased chances of being approved by investors.

The PLG strategy has capitalised on a few trends, including:
- Reduced sales cycle and buying decisions.
- Fast employment (due to the cloud-based feature).
- Easier purchasing (swipe a card and go).
- Intuitive onboarding and adoption.
4. MRR

Monthly Recurring Revenue or MRR is a leading indicator of revenue growth. Hence, it’s a well-received way to appraise SaaS businesses. Investors are more likely to consider the MRR rather than the ARR (Annual Recurring Revenue). Simply because the ARR doesn’t furnish much proof of churn.

Big SaaS companies with high MRR can raise a sizable amount of money during seed funding rounds. If small businesses or brands are experiencing rapid growth and meet the criteria of investment, they could be valued using MRR. Below mentioned are the criteria:
- More than $2M ARR
- 50% growth year after year
- Founder involvement isn’t important for the business’s survival.
5. Customer Acquisition Cost (CAC)

Customer acquisition cost or CAC is a significant metric to assess marketing and sales cost. It helps measure the effectiveness of your SaaS business’ customer acquisition strategy.

Furthermore, it analyses the expense incurred (on average) to attain new consumers. CAC also represents the return on investments in sales and marketing. Thus, it is a meaningful metric for potential investors.

An efficient customer acquisition cost allows the investors to gauge the scalability of your SaaS product or business.

6. Churn Rate

The churn rate is the long-term trajectory of any SaaS business. A low churn rate improves the recurring revenue, and growth rate – and curtails the risk of long-term value loss.

Smaller companies have a higher churn rate because of less sophisticated needs and low demands. Investors would not invest in a SaaS company that experiences a high churn rate. That’s because it signifies you’re losing potential customers – and your company’s retention rate isn’t up to the mark. Hence, the churn rate is a fundamental metric that SaaS business owners need to cater to.

Ideally, lost customers equal lost revenue. Besides, it’s far more expensive to attain new consumers than it is to retain the old ones. Therefore, businesses should focus on customer retention to improve scalability and performance.

7. EBITDA

EBITDA stands for earnings before interests, taxes, depreciation, and amortisation. SaaS businesses that make annual revenue of $5 million will likely use EBITDA.

It is a substantial measure of core profit trends. This metric furnishes an accurate comparison between companies with different capital investments, tax profiles, and debt.

Besides, it eliminates extraneous factors, boosting returns. This allows a fleshed-out infrastructure and accelerated growth in your SaaS business. Thus, making it investable.

Conclusion

The COVID-19 pandemic has bestowed heavy growth to the SaaS industry. With companies compelled to take their business operations online, the SaaS market has grown fierce – yet competitive.

Seeking venture capital funding is of paramount importance in any SaaS business. Investors would only plough their money into your business when you can convince them of your company’s commercial viability and growth potential.

To fight competition, survive, and thrive, you need to stand out from the rest. Thus, there are a few business metrics that you need to take care of. Essential metrics, such as the CAC, MRR, and Churn rate define your company’s scalability and future. Once you cater to these metrics, your SaaS business is ready to successfully attract investment.

FAQs

What do investors look for in a SaaS company?

Low churn rate, Product-led growth, AI-powered SaaS applications, and EBIDTA.

What is one of the most important metrics in a SaaS model?

Customer lifetime value is one of the most important metrics in a SaaS model.

What are SaaS metrics?

SaaS metrics are different KPIs that companies measure to track their success and customer growth.
June 20, 2022
10 Characteristics That Attract Investors to Invest in Your Startups
The article is contributed by Mr. Saarthak Bakshi, Chief Executive Officer (CEO) of the International Fertility Centre.

Mr. Saarthak Bakshi is recognized as Forbes 30 under 30 ASIA, 2017 for HealthCare and Science. He is known for his persona as an engineer, an entrepreneur and a social worker. He flourished his career by working with reputed companies – Infosys and Ernst & Young – as a Software Engineer and IT Risk and Assurance Analyst respectively. He soon realized that he has an inborn passion for entrepreneurship and went on to launch a slew of ventures including IFC.

As we know that starting a business can be expensive. We may have less cash in hand to get started without some outside help but sometimes, it is important and beneficial to have investors in your business. It gives you a sort of security. Investors in your business are different from lenders. Instead of monthly repayment like lenders, investors give you money in exchange for ownership of part of your business. Apart from money they can also be an important source of business-related advice and strong business networks, which you can utilize for your own business. Therefore, it is important to draw the attention of the investors to make their decision firm to invest in your business. Most important thing is that investors want to see a return on their investment. They make money by putting their money into the growing business. Therefore, how to woo them plays a crucial role in the success of any startup. It is not necessary that every investor looks for the same things but still there are chances of commonality.

So, here are ten points to make the investors interested in your startup.
A passionate business proposal

Having a passion for their startup is easy to be found in new business founders. But how your business will help the investors to gain profit is a deciding factor for their interest. They want your confidence justifying that it is an improvement over existing products or is a new way to address an old problem. You should demonstrate your firm belief and confidence in your business.

A market-oriented deal

It is one of the important points that to pitch potential investors, familiarity with the market is generally the safest option. Startup investors look for opportunities in sectors that fit their interests and expertise. They already have an idea of how businesses become profitable in this industry and what it will take for your business to yield a return on its investment. Thereafter reviewing and organizing your proposal, go for the market research to pitch in a suitable investor.

Demonstrate your success rate

A track record of previous success is critical to attracting the interest of investors who can take your venture into your business. Most of the time successful startups are a rarity, therefore it becomes difficult for inexperienced entrepreneurs to convince the investors to lend their capital. But, if your business can captivate the market and the customers and if your track records give a guarantee of success, then you have a fair chance.

Competitive advantages

Most of the time investors look for satisfactory answers to the following question: What makes your product/service unique? There must be something about your product that sets it apart. If your product and you’re the first to the market, then it’s the best thing. However, most startups are entering existing marketplaces. What then makes you different? And how affordable it is in comparison to the already existing quality?

Have an emotional approach with logic

Whenever you are pitching with your investor, you must hit them on both emotional and business fronts. Include a story with your plan. Make it appeal to real-life scenarios and how your idea will solve the problem. At the end of the day, investors look for founders who have passion, motive, and experience to create a profitable as well as a sustainable business. It is not a matter of only ideas or concepts, the investors look to invest in you and your team and their ability to successfully execute your business plan.

A strong team

If you have a competent team, you have the attention of the investors. Show them that your team is intelligent, strategic, successful and follows strong financial discipline. Show them the qualifications of each member and what they bring to the business. Having a team that is knowledgeable, willing to learn and can handle multi-responsibilities are all positive traits that will impress your investors.

Experience

Experience can play a convincing role in winning over investors. If your team members have prior experience in their respective fields or have been involved with a startup in the past, it shows that you and your team have knowledge of your market and are tenacious enough to complete goals.

The investment structures

You should have a clear business structure in place that allows the investors to consider it and buy it. You should also plan for how the investment will work. In that plan, you must include, a clear valuation for your business and a stockholder’s agreement that clearly sets out the rights of all the owners.

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A scalable model

Build your business with scalability in mind. Most investors expect a return on what they are investing. Therefore, scalability is a major factor for successful startups and a great attraction to investors. Basically, scaling is known as adding revenue at a rapid rate while adding resources incrementally. The amount of resources required doesn’t change as your customer base increases, driving consistent growth and improving profit margins. Therefore, the plan of your faster revenue, makes the investor consider your startup dearly.

Future vision and planning

Give your investors a picture of your potential startup, that is where your company will be in the future and make them optimistic that you have the credibility to achieve your goals. Plan along the lines of where is your startup going? How do you see your startup in the coming years? Do you plan for the worldwide market? Etc.

Conclusion

Attracting startup investors to your company is necessary for your business. Therefore, you must put all the pieces in place to show that partnering with your business would be a smart move for them. Highlight the best parts of your startup and discuss your challenges with them openly. Investors will get on board when you demonstrate your best.
June 13, 2022