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
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.
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.
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 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.
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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.
StartupTalkyinterviewed Kunal Chowdhry, Global Angel Investor to know about his investment mantras, investment methodology, and how he judges founders and startups to make an investment decision. Get insights into his journey of Investment in Startups.
Tell us about your background and how you got to where you are today. What keeps you motivated at whatever you do?
I was born in India and spent the formative years of my life in Singapore. I graduated from the University of Cambridge and returned to Singapore after completing my MBA at Harvard University. I have worked in both consulting and the financial services industries and now run Apollo Singapore Investments, a multi-asset-oriented family office. Apollo invests in a range of different asset classes including startups in India and South-East Asia, particularly SaaS companies in the areas of HR Technology and Blockchain.
I come from an entrepreneurial family, with my father being one of the founders of the HCL group so I have lived and breathed the ups and downs of an entrepreneurial journey since I was young with exposure to new technologies as they were being developed.
I am married with three kids – a girl and two boys. I love keeping abreast of new trends and enjoy interacting with young people because they generally have their pulse on the ground and are able to offer a fresh perspective. Keeping this in mind, I believe in a mentorship-based model of investment, whereby I make mentoring a key component of my investment methodology. I also mentor University kids from the perspective of both career and life advice and I have to say that I find them very inspiring. The desire to constantly learn and refresh myself intellectually is what truly motivates me. For example, I spent the first year of the pandemic educating myself about crypto, an area I knew nothing about previously. I am inspired by a number of entrepreneurs who started companies in areas of business they knew nothing about but were able to learn on the job and ended up creating products and services that changed the world. You don’t have to look beyond Elon Musk as an example of such a visionary.
I am passionate about travelling and collecting art. My wife and I have travelled to almost 45 countries and we usually pick up art pieces/souvenirs which are representative of the country. One of my favourite pieces is a small statue made of lapis lazuli, which is emblematic of the large statues on Easter Island, Chile. I also love tennis and you can usually find me at a Grand Slam tournament with my daughter as she is also a fan of the sport. Thanks to my kids, I am also a big fan of K-pop and have seen BTS, EXO and Blackpink in concert!
How did you start your professional journey and what do you do now?
I started my career as a consultant with Accenture in London and even spent a year in Spain which has been one of the highlights of my life thus far! I love Madrid and even learned Spanish during my time there as my entire team was Spanish and I had no choice!! After graduating from Harvard, I moved to Singapore to work directly for the CEO of DBS Bank on special projects in Singapore and around South-East Asia.
I now run my family office from Singapore. As a full-time investor, I am responsible for obtaining good returns from all our investments across a range of asset classes and geographies. This allows me to take a macro view. It feels great doing what I do because I simply love to join the dots between macro events, politics and their impact on investing.
Share any story on a tough day at work and how you pushed through.
A tough day for me would be waking up to see that my portfolio returns have dropped significantly due to a major market event. I am currently living through this as we speak, as the combination of war in Ukraine, high inflation globally and monetary tightening by central banks globally has made things really tenuous from the point of view of an investor.
The one and the only thing to do in such a situation is to stay calm. It’s important as an investor to plan for contingencies but you can’t always plan for ‘black swan’ events such as Covid. While it’s important to stick to a plan, it is also imperative to be able to pivot should the key assumptions underlying your strategy turns out to be invalid in a new market scenario.
If one day I wake up and be you, what are the things that I will do?
If you were to one day wake up and be me, you might have a bit of a shock as I am usually woken up by 3 large Labradors every morning who seem to know when my alarm is just about to go off! I generally wake up at 7 am to see my kids off the school. I spend the next several hours reviewing global news and responding to emails and reviewing business pitches and investor updates. I work out at least 3-4 times a week before lunch and generally schedule meetings post-lunch until early evening. I tend not to work between 7-9 PM as I eat dinner with my family and enjoy putting my kids down to bed. Post-dinner, I spend a couple of hours on calls with Europe/US before unwinding by watching Netflix before bed!
How and when did you start your Investing Journey?
I am passionate about startups, given my entrepreneurial upbringing and always knew that I would be part of the startup ecosystem. I have worked as an intern in start-ups while I was an undergrad in the UK and also during my MBA in the US but I always felt that my forte lay in investing. I have been an angel investor since my late 20s so almost 15 years now! When the Indian Angel network was first founded, I had the opportunity to join and it ended up becoming my first exposure to the world of startup investing. Since then, I have invested in close to 50 start-ups in India and South-East Asia. I am always on the lookout for new business opportunities and most recently invested in a coffee cart business in London.
What kind of startup do you invest in? Are you a sector or geographic agnostic? What is your typical investment horizon, return expectation, and timeline?
I am always on the lookout for that one idea than fulfils the need of any big community as a whole. An idea that can better the lives of many because of its practicality or its use. I primarily focus on HR tech and blockchain start-ups. However, that said, I also invest in other industries such as FinTech, Consumer retail, Internet, and deep-tech analytics. My typical investment horizon would be 5-7 years. My return expectation is to always aim for 3-4 times my initial investment but that’s easier said than done as an early-stage seed investor!
What is your investment mantra? Please share the metrics you track and why those are key according to you. What do you look for in a founder?
My investment mantra is simple – know the founders’ purpose and understand their motivations. Also, it matters to me whether the business philosophy can be easily explained to any layperson. As such, I don’t tend to invest in overly complicated businesses such as biotech as I don’t have a background in this industry. I would, however, not be opposed to investing in a biotech fund, run by experts who understand the space well.
I have five metrics that I usually go by:
customer growth
top-line revenue
core operating expenses/cash burn
runway
alignment with the founders’ strategic vision.
What and how do you judge the Founding team before writing a cheque? What are the key challenges you face as an investor before you sign the cheque?
I love founders who are confident, focused, clear, strategic, and yet versatile enough to turn things around or pivot when their ideas are not working. Not just the founders, but the founding team is also very important. I look at the entire team to examine the competencies of senior leadership. As such, I always insist on meeting not just the founder but also the entire team before making any investment decision.
What are a few signs which make you trust a founder and find him/her Competent? What are the signs? How much does a degree from Tier I college matter?
Education is not as important as vision. Education definitely opens the door, but at the end of the day, it’s the founder’ innate strengths and vision which carry the day.
I love founders who put their own money into their start-ups, no matter how small the amount is. This shows that the founders believe in themselves, which is a key criterion for success in my book!
What is a warning sign for you when investing in a startup?
Some red flags would be inflated expectations of performance without evidence to back it up. For example, a financial projection of $100M in revenue by Year 3 when the company is making $100,000 in Y1! And yes, I have seen many pitches with these numbers!
I believe in a mentorship-based model of investment, where I meet with the founding team on a monthly basis to review key metrics and discuss strategic decisions. I have often been asked to help vet potential candidates for senior leadership positions in some of my portfolio companies. Also, I have developed a strong network over my two decades of professional experience so I am able to make connections and warm introductions to other investors, potential customers or even potential partners in other markets.
Please share a couple of learnings which make your professional life easy and productive.
Learning from experience, I find things are easier if we just go directly to the top and not waste time with middle management. For example, earlier in my career, I would try and connect to someone at my level in a company so as to “not go over anyone’s head”. However, I have since found out that decisions are rarely taken by anyone in middle management and sometimes the message just gets lost in translation.
This is especially relevant in the Asian context, where words from senior management carry more weight and gain more attention. If you can get a message sent down by the CEO, you’d be amazed how quickly action is taken!
Another life hack which I learned a long time ago is to just ask because the worst that can happen is that you will be told “no”. But if you never ask, the answer will always be “no”. I learned this as a teenager whenever I would ask the check-in manager at the airport for an upgrade from economy to business class. Most of the time it wouldn’t work, but I did end up having a success ratio of almost 20% which is pretty good, especially as one of them was on a 17-hour flight from Santiago to London! This is equally valid in the business world. e.g. asking for more time to pay or asking for an additional discount.
When do you think it is the right time to raise investment for a startup?
In my experience, the fund-raising runway takes about 6 to 9 months. The best time to raise funds is when you have at least one year’s of runway left. In my opinion, if you leave it too close, you may end up securing financing at too high a cost – in terms of interest, equity or even loss of control of your company.
How can we support/ enable entrepreneurs in Tier II and Tier III cities?
We are seeing more and more startups from Tier II/III cities but they need the right platform to showcase their capabilities. We can tap into our collective networks and link them up to investors, customers and markets not just in India, but across the world.
Some specific actions that can be taken include:
Mentoring the founders thereby enabling them to better their businesses
What are the things that can help the founder retain maximum equity while negotiating with an investor?
I would suggest that in the early stages, particularly for seed rounds, founders should take investments in the form of convertible notes, rather than direct equity. This ensures that founders retain control for as long as possible, as usually in the later stages of funding, founders would have to give up a percentage of their equity stake.
What is one thing you wish Indian founders and VCs understand which will make the Indian startup ecosystem a much better place for startups?
I have seen inflated valuations in the ecosystem for some time, particularly in the last 5 years. Founders’ valuation expectations have become unrealistic. They are too eager to have a $ 20 million valuation based on 4 pages of a PowerPoint deck but there are insufficient revenue and customer numbers to back the valuation. I am of course referring to brand new startups which sometimes don’t even have an MVP (Minimal Viable Product) yet are asking for a $20 Million valuation!
One learning that you would like to share with founders who are looking to raise funds?
Raising funds in an economically volatile market is challenging. Investors are more cautious with where they put their funds and usually impose more stringent terms and conditions, compared to a bull market where financing is more readily available with fewer strings attached. Adverse economic conditions will have an impact on fund-raising initiatives. It not only takes longer but also entails several rounds of negotiations.
What are a few sectors you think would be hot in the upcoming year?
Web3 incorporating Metaverse, gaming and blockchain are some interesting sectors not only for the upcoming year but also for the next 3-5 years.
How do you keep track of what you have to do? What are you currently reading, or what do you recommend?
I like to stay abreast of current events because they provide crucial information for all my investment decisions. I read not only more traditional publications such as The Wall Street Journal, Financial Times and the Economist but also spend a lot of time on Twitter as it gives me access to information across a range of my areas of interest – from crypto analyst research to movie box office numbers, from macro data on the economy to the latest events in sports. I truly believe that the world of investing is very interconnected with lessons that can be drawn from a range of industries. And sometimes, it’s fascinating to realise that hype doesn’t always result in good business performance. Take a look at Netflix for example – just 8 months ago or so, everyone was talking about the TV show “Squid Game” and how it was proof that Netflix’s high-cost content acquisition strategy was working. But here we are a few months later and the share price is down 70%.
The article is contributed by Andesh Bhatti – Angel Investor & Founder of Collectcent.
Seed investors usually invest for one of three reasons – indulgent, humanitarian, and utilitarian. They invest either because they believe the idea will bring a transformation in the market, uplift the community, or the most evident and widespread – bring in a good ROI. Even though every seed investor has a specific reason for investment, they are all driven by market trends.
For instance, even though financial, industrial, and technology-related businesses are currently dominating India’s stock market, attracting both local and global investors, the historic highs of the MSCI India index which received twice the global index returns in the last year have been fuelled by demographic trends, government and fiscal policies and geopolitical shifts of the global economy post the pandemic.
This is the phenomenon that has resulted in a boom in the established networks and syndicates, as well as individual investors who can provide essential seed funding– and bootstrapped start-ups have especially caught their interest.
Why should bootstrapped start-ups matter for seed investors?
Bootstrapped businesses attract investors because they have already made it through the ‘valley of death’, found product-market fit, and most probably (although due diligence will reveal the specifics of it) generated enough revenue to keep the firm de-risked. Not to mention, that because they don’t have the buffer of investment capital to fall back on, bootstrapped start-ups are also more creative and confident. There are other advantages to funding a bootstrapped start-up as well.
Entrepreneurial self-confidence is fostered when people are pushed to think outside the box, come up with original solutions, and make essential trade-offs. This is significant for investors who are looking for innovative ideas to invest in.
Plus, bootstrapped start-ups usually exclusively look for and work with people who are willing to have a stake in the company’s success, and are dedicated to seeing it succeed. This fosters a sense of belonging and commitment within the team.
Building a firm without investment capital also forces you to be more resourceful and deliberate. You’re careful with hiring and outsourcing, wanting to accomplish more with fewer resources.
What happens when bootstrapped start-ups and seed investors align?
Start-up founders and investors both benefit from an investment. Right from the start, when the investment is made, deficit spending has the potential to significantly enhance growth if done correctly. Investment allows the bootstrapped start-up to expand faster than it would have been able to without. Founders are essentially giving up partial ownership in exchange for greater growth and ultimate value. Overall, it is a great prospect for investors and a great way for start-up founders to spend or share their equity- but first, both parties need to reach the optimum place for action.
Building a team, testing the concept, establishing an online presence, garnering attention, finding consumers, and filing for intellectual property protection are all examples of major steps in the start-up development process. Once these are achieved, bootstrapped start-ups begin to look to raise capital to meet a new set of milestones.
In the end, it all essentially comes down to important milestones and pivotal junctures called inflection points. An inflection point occurs when the value of a firm rises suddenly because of factors that include reduced risks, sanctioned standards, and verified predictions. It is when investors see that these key milestones have been met and the company’s valuation gets a boost, that the investors are ready to take a closer look at it.
Early-stage Funding Activities are getting busier
Indian investors’ profiles are evolving rapidly, as when more money flows in, more start-ups take-off, and exits get even more attractive and innovative. It is no longer only senior executives and affluent firm owners who are flocking to investment networks and writing checks to get in on the action; it is also mid-level employees, well-paid tech aficionados, and traditional stock market investors. They are the main drivers of the frenzied activity taking place in the early-stage funding market. In the past year, for instance, 455 start-ups received seed and Series A funding.
The biggest complaint in the investment landscape in India has always been that while there are many ideas and people with potential, access to capital is still not as easy as it is in other developed economies. However, now as things appear to be changing, a large number of previously rejected proposals are likely to be funded, provided of course that they have value to offer.
This implies that an entirely new chapter is about to begin and bootstrapped companies, already well-adjusted to market risks and possessing proven potential for growth (and responsible growth at that) will see great opportunities.
The article is contributed by Mitesh Shah, Co-Founder, Inflection Point Ventures.
Start-up investing is an emerging and rewarding asset class. While many people are now starting to consider investing in startups, the initial journey can seem daunting and hard to navigate.
If you are someone who is looking to kickstart your angel investing journey, here are some tips that could help:
Tips for First-Time Investors
Develop a personal investment thesis
As an angel investor, you should work with a personal investment thesis. This thesis will help you identify the sectors and the kind of startups you would want to invest in. In this thesis, try to cover the following topics:
A range on how much you are willing to invest in startups.
What is your focus – impact generation or seeking substantial returns.
Identify sectors you are not comfortable investing in. For example, many angel investors who don’t support tobacco or alcohol consumption, do not invest in start-ups in those sectors.
Do your research and think about it from the perspective of building a portfolio
Once you have made up your mind about start-up investing, the first thing is to do is identify the right startups. Like most investments, it is imperative to do thorough research before investing in a startup. You can begin with identifying certain sectors that interest you or you can choose to be sector agnostic, but what is imperative is that you develop an understanding of the business, team and market before investing.
Target opportunities that are scalable
When looking for successful ideas to invest in, scalability becomes an important parameter to look at. Understand how large a problem they are solving; how many people will be able to adapt and benefit from the solution, what is their total addressable market size, how is the larger industry growing, etc.
Deep dive into the team
A startup idea is only as strong as the team that is going to execute it. So, when you come across an idea that excites you, gather confidence in not the founder/s but also the team at large. And how the founders plan to expand this team and hire good resources. At times people consider good pedigree – an IIT/IIM degree to be a good enough indicator of the founder’s abilities; this although might not be the best parameter at times so you may avoid following that convention.
If it’s a tech-driven business do your tech research and validation rigorously. If needed, seek advice from experts. Pay close attention to how they aim to build that tech and the timelines they are working with.
Don’t judge founders by their past failures
Don’t go in with biases. Failed entrepreneurs come with a great degree for experience and understating of “what not to do”. Research suggests the learning process of opening and closing a business increases the chances of success.
To begin your angel investing journey, it may be beneficial to start with industries and sectors that you are already familiar with or have some experience in. It positions you to better evaluate the start-ups when you are just starting out.
Invest your time, knowledge and connects
It ties into the previous point about investing in sectors you are familiar with because angel investing is about a lot more than just investing money. As an angel you can bring to the table your experience and expertise that’ll help the start-up grow. At early stages, guidance and connects are as important to a start-up as money is.
Invest with others/ Seek advice from others
Start-up investing is a risky asset class, and when you are just starting out, it might be difficult to get everything right on your own. Try investing with other investors, either through privately formed niche groups or through angel investing platforms. Other like-minded angel investors will not only help you evaluate your investment decisions but also help you learn more about the ecosystem and further identify potential investment opportunities.
Be prepared to invest for a long term
As an angel investor you will most likely invest in a start-up at a very early stage. At times startups can take some time to reach a scale wherein you get substantial returns on your investment. So be prepared to have the money invested into the startup for a long time and be patient till the start-up reaches its full potential.
Consider your exit opportunities at the time of investing
While making a decision to invest, it is also important to consider what your potential exit options will be. There are multiple ways to get an exit – follow-on rounds by VCs, M&As, IPOs etc. Undeniably, at the end of the day, your success as an angel investor is defined by the returns you are able to generate and the experience you have gathered.
Paperwork and legalities
A term-sheet defines the framework of your investment agreement with the startup. While it is a non-binding document, it is still important to make sure you have carefully considered all the terms mentioned in it. You need to know that you have the right to negotiate the terms if they don’t suit you. In the beginning, it is advised to take inputs from more seasoned investors or SMEs (Subject Matter Experts) when negotiating the terms. The important points to consider in the term-sheet are:
Valuation of a company & ownership percentages
Investor Rights
Payment of Dividend
Liquidation Preference
Types of Shares offered
Dilution/Anti-Dilution
Then comes the SHA – Share Holder’s Agreement. SHA is a legally binding document upon the investor and the company, and a precisely drawn term-sheet would help ensure that there are no sudden disturbances due to miscommunication while signing the SHA.
Conclusion
Overall, while navigating start-up investing can seem difficult in the beginning, access to right information and a like-minded community of investors can definitely make it an enriching journey. Joining an angel investment platform can help you get access to good startups, diverse network of experienced investors and help with legal documentation. This will enable you focus your time and attention towards finding the right startups for your portfolio, where you can contribute not only dry powder, but your time and professional experience as well.
Indian Startup Ecosystem is growing hugely with 60,000 startups creating opportunities of employment as well as investment opportunities for investors. StartupTalky got an opportunity to get an opinion of Milan Ganatra, founder of 1SilverBullet as an investor.
1SilverBullet is a fully digitalized, cutting-edge investment and insurance B2B gateway that serves three financial services verticals: investments, insurance, and lending. Leveraging the power of technology such as Blockchain, the platform acts as a single point of contact for investors and financial institutions, linking them in one place via a secure API.
Here is excerpt of the interview with Mr. Milan Ganatra, Founder & CEO of 1SilverBullet about Indian startup ecosystem.
How was the year 2021 for you as an investor?
As an investor, 2021 was highly promising, with massive investment opportunities in IT and technology-driven businesses, as a result of the COVID-19 pandemic. With new models developing in the market, firms and young entrepreneurs can address problems in a timely and cost-effective manner.
What is a warning sign for you when investing in a startup?
Startups are young businesses, and it is critical that the vision be clear from the beginning, as this is the foundation of a successful enterprise. One of the red flags I would look for is a loss of vision—key employees or workers who have lost confidence in the company’s vision. The second sign would be a lack of messaging – nothing, or very little to talk about new product segments/ services, which leads to lower consumer satisfaction.
We are seeing many startups exiting with IPO, what’s your opinion on that? How is it going to change the ecosystem?
The IPO market had an outstanding year in the face of uncertainty, with government stimulus programs/regulations playing a big part in its amplification. Regulators and IPOs have played a critical role in attracting private investors and piqueing the attention of retail investors in the funding ecosystem. Previously, IPOs were only possible for companies that had made a profit in the previous three years, but when the regulations were altered to allow even loss-making companies to participate in the IPO pool, it completely changed the game for startups. So, where there were previously no exit options for some of the larger investors, this new move has fueled greater investment because a timely exit is now possible.
High valuations and market liquidity will keep the IPO window open in 2022. Internet-based startups who have served their shareholder base well over the years, have shown growth in scale, and rewarded their investors, will continue to do well as a result of robust market demand.
More than 42 unicorns in 2021. What do you think caused this wave? Is the valuation justified according to you?
Unicorns are defined as disruptive, technology-driven, and innovative firms with the potential to be listed among the next Fortune 500 companies. In this tech-focused era, new-age company models are upending traditional ways of doing business, leveraging digital modes. So far, their valuation has been reasonably justified, and given the amount of areas they have covered thus far, most of them would expect to rise rapidly.
The investor community has played a vital part in supporting compatible growth in the startup ecosystem and the company’s success in a relatively short period of time. New age entrepreneurs are planning for the future and embracing the post-pandemic digital wave. It is reasonable to expect a systemic shift in entrepreneur and consumer behaviour as a result of the rapid thinking that these unicorns have embraced.
How can we support/ enable entrepreneurs in tier 2 and tier 3 cities?
What do you look forward to as an investor in the year 2022?
For the year 2022, I hope to see a 50 percent increase in the ecosystem with 60+ unicorns. More worldwide inventions and solutions are projected as a result of the rise of new-age entrepreneurs and the emergence of unicorns. Investors are seeking business concepts that can demonstrate both long-term promise and dependable business procedures.
What are a few sectors you think would be hot in the upcoming year?
India presently has the world’s third-largest startup ecosystem. We should expect a lot of M&As in the fintech area this year alone, with major players performing fantastic work and complementing larger companies on multiple fronts. Fintech companies that have already covered the market are expected to develop further. They have the capacity to overcome obstacles and become tomorrow’s unicorns.
Indian Startup Ecosystem is growing hugely. India stands third in global start-up ecosystem. With the changing trends in the Indian startup ecosystem, investors are getting attracted towards investing in startups. We founder Circle is a startup that provides investment service to help early stage startups.
Here is excerpt of the interview with Mr. Neeraj Tyagi, CEO & Co-founder of We Founder Circle (WFC) about Indian startup ecosystem.
Tell us briefly about yourself?
We Founder Circle (WFC), a founders-led early stage startup investment platform born in the midst of the pandemic, plans to invest in 70 start-ups in FY 2023. Since the launch in 2020, WFC has become one of the fastest-growing angel networks with 33+ startup investments in a span of 12 months. WFC has already facilitated funds worth $150 million across 33+ startups by the end of December 2021 and became the 2nd largest Angel Investor of the Country. Platform’s key investment includes Zypp, ObenEV, Lissun, Healthysure, Hesa, Glamyo Health, Geekster, YPay Card, EsportsXo and Settl.
In its first year of operation, We Founder Circle (WFC), a founder-led early-stage start-up investment platform, has successfully invested in 33+ start-ups spanning across 10 industries. Our community is strong by 2000 members that combines the extensive experience from angel investors, corporate leaders and unicorn founders. Our efforts were also recognized by the industry as we became #2 active Angel Investor Network in India. Our portfolio expanded to cover 10 sectors including EV, Agritech, Fintech, Edtech and D2C.
How often do you bet on the entrepreneurs and not on the ideas? And when/if you do that, what quality of the entrepreneur usually makes you do that?
An entrepreneur should be a high-energy, high-motivated individual. He or she should be on the move all of the time. At the same time, great degrees of commitment is required. A person can only do justice to his/her line of work if he/she is driven. Entrepreneurs are defined by their passion, resourcefulness, readiness to improvise and listen to others, and a strong desire to succeed.
What is a warning sign for you when investing in a startup?
1. Low quality products. Distinguishing oneself from the competition is a regular difficulty for any startup company. A company that is unable to deliver a high-quality or specialty product will most certainly be steamrolled by competitors that are already well-established.
2. Loss of vision. A good business plan detailing the targeted markets, as well as a vision statement stating how the market will be penetrated, are required for a company to survive.
3. A lack of progression. To thrive, a young firm needs rapid, yet scalable, growth. The reason is straightforward. There’s no guarantee that their loyal consumers will return the next day. It’s critical to seek out new ones as frequently as possible.
What are some common biases you find in the Indian Startup ecosystem?
Despite certain programmes aimed at promoting the growth of female entrepreneurs, there are still gender prejudices in the startup environment. Traditionally, India has shied away from professional risk and entrepreneurship. Though there has been a recent movement in young people’s attitudes, society still has a hard time accepting entrepreneurs. Instead of solving a consumer need with a fantastic product, the current generation is motivated to make money.
Failure is also looked down upon in today’s society. Being an entrepreneur is like sleeping on a bed of thorns in a country that despises hard work and failure. The majority of parents compel their children to work hard in order to acquire a stable career, and they view entrepreneurial efforts with suspicion. It is difficult to build a vibrant startup ecosystem in any country when the youth are not inspired to pursue their own companies.
What are your views on the SharkTankIndia Episodes until now?
We definitely think Shark Tank India is taking entrepreneurship to every Indian household and is making conversations around startups the new normal. The business reality show is giving a much needed boost to the burgeoning Indian startup ecosystem and comes across as a platform to transform dreams into reality for all the budding entrepreneurs.
We are seeing many startups exiting with IPO, what’s your opinion on that? How is it going to change the ecosystem?
Because of lockdowns and other safeguards, the Covid-19 epidemic has aided the technology startup sector by driving more transactions online.
Other factors include India having some of the world’s lowest data prices and an increase in smartphone ownership, which has allowed technological start-ups – many of which were created less than a decade ago – to reach a considerably broader audience. With a young population and internet penetration that is still well below its full potential, these businesses have a lot of room to develop.
Companies aim to use the capital from new proceeds to expand as demand in the post-pandemic world is predicted to increase by a factor of ten. Overall, this is a very encouraging indicator for the Indian economy’s future prospects.
More than 42 unicorns in 2021. What do you think caused this wave? Is the valuation justified according to you?
This year was a wonderful year for Indian businesses, with 42 achieving unicorn status. In 2021, more startups joined the club than in the previous five years combined. The record fundraising boom is projected to continue in the coming year, thanks to India’s increasing embrace of technology and new startup products. With only nine days left in the year, there’s a good chance we’ll see a few more surprises. It’s true that financing for 2021 is at an all-time high. The enormous number of unicorns, as well as a succession of successful IPOs, has piqued the curiosity of investors from all over the world.” I also credit India’s huge talent pool, quick technological adoption, and COVID-generated tailwinds for the increasing number of Indian enterprises making an impact on the global economy.
How can we support/ enable entrepreneurs in tier2 and tier 3 cities?
Close to 30% of our portfolio startups come from Tier 2-3 cities. We are big believers of ideas that are thought locally and aim to reach markets globally. In order to support these local entrepreneurs all we need is to build a strong startup ecosystem that offers co-working spaces, right mentors and angel investor networks, startup weekends and some business partnerships for these startups to grow.
What are a few sectors you think would be hot in the upcoming year?
For 2022, EV, Health Tech, D2C, Automobile Tech, Fintech, EdTech, Food Tech are going to be the hottest sectors. Keeping the same in mind, WFC is focused on start-ups in such sectors to help them grow.
One learning that you would like to share with founders who are looking to raise funds?
Always focus on your pitch and business model. Before approaching any investor, you should be thorough with the scope of your industry and start-up. The clearer your vision is, the better the impact on your investors.
With the popularisation of FIFA world cup, Premier League, LaLiga and a plethora of other entertaining events, football has ceased to be a sport alone. Today, football is the most popular sport with footballers enjoying celebrity status. The huge sums of money that they get for their talent, handwork and perseverance is known to everyone. These days, they invest them in various startups, not only because they are profitable but also because of the larger good will it brings.
Here are some of the popular football players who sportingly invested in startups.
Cristiano Ronaldo
Investment in Startup: Mobito, CR7, Thing Pinks, and More
Cristiano Ronaldo investment in Mobitto | Football player investment in startup
The Juventus Forward and the legend of football has taken the initiative to invest in a startup named Mobitto.
Mobitto is a Portuguese app which can be one of the reasons why he invested there. The app helps to make teams that can be used to interact with local businesses. It also gives awards for such interactions. Points are collected by inviting friends and relatives to use the app.
The CEO, Jose Simmons has made it clear that they don’t want to overuse Ronaldo and do not want people to download the app because of him. Well, that is an ethical stand.
David Beckham investment in Guild Esports | Football player investment in Startup
Another legendary footballer in football history has used his excellent vision and calculation when it comes to investing as well. In June 2020, he invested $319,000 in Guild Esports. It is an esports business that is established globally in 2020. Beckham is the 4th largest investor by owning 4.78% of the stakes.
As the name says it aims to build an excellent team of professional athletes. He made the deal right with the same precision as his free kicks. He will be paid 15% of the merchandising revenues over the coming years.
Sir Alex Ferguson
Investment in Startup: Pockit
Sir Alex Ferguson – Football player investment in startup
Apart from being a football player, he is widely known for managing Manchester United from 1986-2013. During this time, the team won over 38 trophies across different tournaments.
In 2015, he invested €1.5 million as an angel investor for a startup named Pockit. It was a London based startup that issued prepaid cards for people who cannot otherwise avail banking services. However, this was not as successful as his football career. The company couldn’t continue as a business beyond a few years. Ferguson helped the firm to complete a $15m series B fundraising campaign in 2020.
Michael Owen – Football player investment in startup
The versatile striker who played for Liverpool, Real Madrid, Manchester United, Newcastle United and Stoke city might have wanted to support sports in innovative ways.
His money was invested in Sportlobster which is a sports social media platform. It is a startup that is exclusively for sports fans which features the details of upcoming events, blogs along with facilities to chat. It was launched in 2013 and amassed 1.4 million users by 2014. It aims at providing a single stop for all sports related news.
Mats Hummels
Investment in Startup: StreetPro
Mats Hummels – Football player investment in startup
Mats Hummels was the member of the German team during the 2014 world cup. He later joined Bundesliga coach Florian Kohfeldt to create a digital football academy. He made an angel investment in an app called StreetPro that trains you to be a professional like Bundesliga pro. The app provides both free basic training and paid pro training. The startup was launched in 2018 and Hummels invested an undisclosed amount of money in 2019.
Gary Lineker
Investment in Startup: Neos, Ingenie
Gary Lineker – Football player investment in startup
A startup named Neos which is an online insurance provider is where this Golden Boot winner decided to invest. The startup was founded in 2016 and aims at providing home security and insurance to various homeowners. Apart from Neos, Gary Lineker also invested in a startup named Ingenie, in which he invested €500000. It is reported that in 2014, it was sold for €3 million. The margin of profit he earned was tremendous.
Chris Smalling
Investment in Startup: This.co
Chris Smalling – Football player investment in startup
Chris Smalling investment in startup has a huge environmental cause as well. This vegan English professional footballer invested in a plant based startup called “This”. The carbon footprint of the animal meat industry is well known.
It is in such a time of worry that “This” is selling alternatives for Bacon and Chicken. After years of scientific experiments they claim to have found the best and the most realistic alternative for meat in the world. If marketed properly, there is no doubt that this startup will rewrite the food habits of the world.
Robert Lewandowski – Footballer investment in Startup
The prolific, record holding forward from Poland, playing for Bayern Munich, Robert Lewandowski has invested in various startups apart from being a shareholder in Protos Venture Capital. Their main area of focus is in Poland and CEE. The other startups that he has invested in are Sporticos and Positionly. The former is a sports website and the latter is a Marketing Software Company.
Jens Lehhman
Investment in Startup: Combionic
Jens Lehhman – Footballer investment in Startup
He holds respect in the field for continuing his studies while being a sports star. The German goalkeeper who has capped 61 goals for his country has an economics degree which he earned while he was a professional footballer.
He invested in a software startup named Combionic which designs applications for various enterprises. It integrates processes and information that goes across multiple applications. It offers various services like analytics, reporting, content management etc. The company continues to thrive in the industry.
Andrés Iniesta
Investment in Startup: FirstVision
Andrés Iniesta – Footballer investment in Startup
The Spanish central midfielder is also among the footballers who have tried their luck with investments. He invested in a very innovative startup named FirstVision which is a Spanish company which is invested in developing a wearable broadcast system.
They help in recording the velocity and biometric data of the athlete that can be broadcasted closely to the fans. It is also for the athlete to have an idea about their performance. It is currently out of business but was definitely an innovative idea.
Conclusion
It is not a recent trend to see footballers investing in startups or even starting their own business. However, one cannot deny the extent to which such investments are helpful for entrepreneurs. As mentioned in the beginning, the goodwill it brings is highly appreciable. It is an action which is beneficial for all and it is very promising to see footballers extending their support for others to come up in the society as well.
FAQs
Who is the highest paid footballer?
Cristiano Ronaldo is the highest paid footballer.
Who is richest footballer in the world?
Cristiano Ronaldo is the richest footballer. He has a net worth of $500 Million.
Who is the richest retired footballer?
David Beckham is one of the richest retired footballer with a net worth of $450 Million.
Which footballers invest in Startups?
Some of the top footballers who invest in startups are:
Cristiano Ronaldo
David Beckham
Sir Alex Ferguson
Michael Owen
Mats Hummels
Gary Lineker
Chris Smalling
Robert Lewandowski
Jens Lehhman
Andrés Iniesta
Which are the startups funded by Cristiano Ronaldo?
Cristiano Ronaldo has made investments in sevral startups. These are:
Parnas Ghosh
