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Before you approach a venture capitalist
Run
through this checklist before you ask an investor to put money in your
business venture.
One of
the first and most important requirements for setting up a business is the
seed capital needed for the venture. This can range from a few thousand
rupees to crores, depending on the type and size of the business.
Estimating the cost is not the main challenge here; arranging funds is.
This is where venture capitalists and angel investors come in. These
investors lend money to start-ups or take a stake in a venture if they see
potential, but they don’t give money to anybody and everybody. Be ready to
answer these questions before you head for a showdown with potential
investors.
1 DO YOU HAVE A SOLUTION?
It
doesn’t matter whether the idea is simple or complex, the business must
provide a clear solution. The investor must be clear what you are raising
the money for. “Almost everything that we build typically fall into two
buckets. One solves a very important problem. The second gives you more
than it takes away. The problem is critical because it gives me an insight
into what the person is trying to solve,” says Mukund Mohan, director at
Microsoft Ventures, a Bangalorebased venture capital fund. These two
factors define your target customer base and, hence, are crucial for any
business to become profitable and expand.
2 IS A PROTOTYPE READY?
You can approach investors with a business plan and get
them interested in the project even before it has started. The other, more
conventional, way is to start the business and look for investors once it
becomes functional.
It is usually very hard to raise funds on the basis
of idea alone. “We rarely fund a venture at the idea stage. So far, we have
funded only one business at that stage. We prefer and find it much easier
to fund working model prototypes,” says Mohan. Investors even accept a
rough prototype, but you should have some tangible work to show.
Therefore, before you approach an investor, you
need to have a viable product, or at least a prototype in place, with data
points to show that the model is economically feasible. Data points are
proof that show the business can turn profitable if you scale it up. This
can happen only when you have a model that has the potential to get new
business as well as repeat buyers. For a consumerdriven product, apart from
getting new customers every month, an important data point of profitability
is that you have users recommending it to their friends and families. This
means they have derived value from your product. In case of a B2B product,
you would have to get some direct consumer feedback. Typically, businesses
start with a trial run and distributing free samples. If the client is
ready to pay the second time, you can take the idea to a venture
capitalist.
Apart from profitability, investors also look at
scalability. Does the product or service have a potentially large market?
Is there a scope to expand the product line or services to a broader
market? The competence of the founding team also matters: who are
the people working on the project? Do they have the capacity to pull this
off?
3 DO YOU NEED GUIDANCE?
While you can expect guidance and insight from an angel
investor or venture capitalist, do not expect them to help you with
everything. Remember that a venture capitalist wants to invest in the
business, not the entrepreneur. Also, put at rest any delusions that there
is an altruistic intent behind the investment. At the end of the day, he is
looking for a return on his capital. “While we help entrepreneurs in
understanding and reacting to the market, it is a difficult proposition to
invest in entrepreneurs who need to be developed from scratch,” says Pankaj
Vermani, CEO, Incubations & Seed Investments, Mountain Apollo.
4 DO YOU HAVE RELEVANT
EXPERIENCE?
An investor would want to know the entrepreneur’s background and understand
whether the team has the ability to execute the plan. Also, people with
simple business models and relevant experience to start a venture are
likely to get preference over those with unique proposals but no
credentials. In such a case, it becomes even more important that you focus
on developing the basic idea and making it operational before you approach an investor.
5 ARE YOU READY FOR REJECTION?
While there is a lot of interest among venture capitalists and angel
investors, getting someone to invest their money is not easy. “For every
2-3 businesses that appear interesting to me, 3-4 are rejected,” says
Vermani. Rejection should not be equated with failure. It is more of a
feedback and most venture capitalists are open to candidates coming back to
them with a modified or different idea.
Bijaei Jayaraj, founder, Loylty Rewardz Management,
a company that manages customer loyalty programmes of debit and credit
cards, had pitched to around 10 venture capitalists after incorporating the
company in 2006. He finally got an affirmation from VentureEast, after two
years, in 2008, and began operations. Though he did not significantly
modify the business plan, he had to refine the presentation,
highlight certain aspects based on the investors’ focus area, and
implement the feedback he got from various investors. “Don’t ever make a
presentation to an investor straightaway. Have at least a few rounds of
meetings, where you talk about the plan and get some feedback before you
make one.
Based on these interactions and the background
information you already have, emphasise on their area of interest,” he
says.
This does not mean you can ignore the other core
aspects. Make sure you give a clear idea about the fundamentals, such as
profitability, scalability and exit strategy. Even if different investors
have different priorities, they all look at the big picture before taking
the final call.
As most entrepreneurs point out, one should not
waste too much energy looking for investors unless it is absolutely
imperative for the survival of the business. Chadha points out, “It is more
important to consolidate and strengthen the business in its first year and
then attract investments at a later stage. Also, if your business does well
in the initial days, investors are bound to show interest in your venture.”
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