Getting seed funding is not difficult for a startup in the country's growing entrepreneur ecosystem today. What is difficult is convincing investors for a second and larger round. Following are the mistakes startups commonly commit that reduce investor's interest in them.  Also listed are dos and don'ts for players which want to be in the game for long.

Why do startups in a sector occupied by three to four players find it difficult to raise capital?

Every startup dreams to be working in one of the hottest sectors in the country. The challenge lies in the size and timing of the company. Let’s take the example of the aggregation business—one of the hottest sectors today. Consolidation has already started happening in the sector; a few mergers and acquisitions have taken place; and the market has moved on to a few large players. In such a situation, if a third- or fourth-ranking company approaches investors for a fundraise, then despite the fact that it may be having decent traction and capital efficiency, it may not attract a lot of interest from investors. 

Then investor will ask: if I invest now, will these people be able to manage competition from companies which are well funded and have become very large or will they be able to get an exit? That is the biggest thing. So that is the reason why any company which is in a sector occupied by three to four players finds it very difficult to raise capital. 

What should entrepreneurs do?

Be strikingly different. Many a time entrepreneurs come and claim that their features are different than the companies which are already in the market. But they should be strikingly different. A whole new concept and idea is what excites an investor. Leadership is also important. Whatever a company is doing, it should have complete domain knowledge. 

Myntra was an exception but that was because we found an entrepreneur who had a fairly good team and clarity on how he will execute besides a very frugal mindset in terms of managing things efficiently. We met a lot of their competitors also at that point in time. Some of them now do not exist; some got consolidated with others. In terms of differentiation, Myntra was not the one but the biggest difference that came up was a highly capable execution team. 

How does one assess large market opportunity?

An immensely huge market opportunity is something that excites one and all. Investors at a Series A,B,C stage generally look for a long-term investment. The market opportunity is something that will shed their inhibitions with regards to their future in the company. 

What are the hot sectors? 

Whether it is internet, e-commerce or an aggregation play, startups need to focus on consumers. They should be creating disruption. 

How can a good startup team be defined? 

Typically a startup should have two or three co-founders who take care of business development, product management, technology and execution—a chief executive officer, chief operating officer and a chief technology officer.

How can entrepreneurs take a call on the right amount of funding vs stake in the company?

When we evaluate a company, we first try to understand how much money is required by the company to meet the next point. Many a time, it happens that a startup quotes a lesser amount and we tell that this is not sufficient. 

When it comes to the handling of shares, what excites us is the practicality of the entrepreneur to be able to reflect on input and then take what is right for the company and not just be dilution sensitive. 

What makes an entrepreneur?

Entrepreneurs are optimistic and there is nothing wrong about that. If they are not optimist they cannot be entrepreneurs. They are supposed to wear pink glasses, look at the world and say that it is a great place and I am going to achieve everything on the dot. But the reality of the world is different where an investor brings in those checks and balances such as what if something gets delayed, if something is not achieved and if a lot more money changes the rules of the game. That is what we look at.

(TC Meenakshisundaram is the founder and managing director of venture capital firm IDG Ventures India. As told to Priyanka Sahay.)

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