Top 5 things investors assess before making an investment in seed stage startups

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It is essential to acquire capital when startups strive to grow. If there isn’t any funding strategy in place to raise enough funds, founders will not be able to recruit the right kind of employees. Also, they will not be able to build the right product that will help the startup to scale. 

Now before seeking any funds from investors, the team needs to do some hard number crunching. Assess the situation in terms of cash burn, growth capital requirement, competition, CAC, working capital needs and contingency plan. This will give an estimate of the funding required. It is advisable to make optimistic, realistic and pessimistic plans. Often the funding is also dependent on market sentiment and other external factors.

In the Book A General Theory of Entrepreneurship: The Individual-Opportunity Nexus by Scott Shane, the author has emphasized on the core theory of nexus between an enterprising individual and a valuable opportunity. The startup becomes fundable from an investor’s point of view only when the enterprising founding team can discover the process of exploitation of valuable opportunities by acquisition of right resources, strategy and execution plan. In summary, the founders will have to build a killer startup that becomes fundable.  

In this article, I will discuss 5 investment criteria. These are commonly considered by seed stage investors before cutting that very first cheque.  I recommend the early stage founders to position their strategy keeping these points in mind in the next elevator pitch or investor presentation.

  • The team

The Key here is to demonstrate that this is the winning team that can build the company to make it a big success.

“When all founders think alike, no one thinks very much” – Walter Lippmann.

One of startup’s worst enemy is a non-diversified team. Investors are looking for passion and teamwork in the organization. In my experience, these days rarely any VCs are open to offering funds without seeing the execution capabilities of the team. They insist on seeing the performance with at least a minimum viable product.  When presenting to investors, it is advisable that the founding team should speak about commendable accomplishments along with the small ones.

VCs would evaluate teams based on the experience, talent, and the passion to drive forward even when the startup is in its lean phase.

  • Return on Investment

“The venture capital business is a 100% game of outliers- it’s extreme exceptions” – Marc Andreessen

All the Venture Investments are done by following what is called a Portfolio Approach. Meaning only those 15% of investments  will generate something in the order of 97% of all the returns for the VC investments in that year. Hence, while listening to the founder’s pitch, the investors should get a clear idea about how much and when can they expect returns on your startup investment. More importantly, can yours be one of those outliers in the VC Portfolio? Remember the quote “Be so good they can’t ignore you.” from Steve Martin’s Born Standing Up.

  • Competitive Advantage

Investors look at how the startup is playing in the market segment.  This refers to competitive advantage and how the startup addresses the needs of the consumers. To get an idea about the competitor landscape, it’s important to analyze all kinds of competitors and dive deep into the trends. Startups can later use these insights to set objectives and goals. A thorough understanding of the landscape can certainly help startups to deliver something different. Frequent innovation would also push the startup in fierce competition. It’s important to come up with innovation when the product is getting developed. If the team doesn’t create anything different, then other organizations would be way ahead in the competition.

  • Market Opportunity

Investors are always ready to help startups that create a buzz in the market. Investors are not interested in knowing the product’s worth, instead, they are seeking to know how the venture lures its prospective customers. So, during a pitch presentation, investors are curious to know about the performance, growth indicators and consistent growth in its customer base. In the Entrepreneurship lessons by Bret Waters, Stanford University lecturer on Innovation and Entrepreneurship “The number one reason why startups often fail is when their long-term value from customers is less than the cost of acquiring a customer”. Hence, it is extremely critical to demonstrate that there is a market for the startup’s product and the consumers are willing to pay for the product/services at a price that will give reasonable profit margins.  

In my view, VCs looks for organizations that grow at a faster rate. Hence, I would always like to demonstrate 30% – 40% monthly or quarterly growth of few KPIs that will help in generating investors’ confidence. 

  • Skin in the Game

VCs’ often are hesitant to fund a startup, especially at the early stage if founders don’t put their skin in the game.

It is a key indicator that generates investors’ confidence. Investors’ know that the founders are willing to take risk of losing their money by putting their own money. Skin in the game generally means financial contributions by the founders. It can sometimes also include things like foregone salaries, opportunity costs, and intellectual property rights.

Are you prepared to raise funds?

Remember to highlight the team’s qualifications, competitive advantage, market opportunity, and the mission. These things would enhance the chances of seeking funds from investors. With the right approach towards narrating answers that address concerns and the right pitch preparation, your startup can go through the seed round.

Z Nation Lab is a Startup Unicolyst. Early stage startups leverage on ZNL platform for getting access to mentorship, subject matter expertise, network and access to capital. ZNL has strong presence & network in India & Silicon Valley.

About Author

    Amit Jain

    Venture Partner, Z Nation Lab M&A specialist, impact investor, mentor & strategic advisor, Silicon Valley-India bridge. Professional Experience – Citibank (treasury), PwC, KPMG & Grant Thornton (M&A) Qualification – CA, Harvard Business School (PE & VC Executive education)

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