If you are looking for an early stage investor, the value seen in your startup depends on the background of the investor. The same startup, when looked at by two different investors, may elicit different reactions.
Here are a few things that startups have to keep in mind while seeking early stage investment:
Find the right investor
The primary goal of an entrepreneur is to find an investor who, because of his/her experience, is predisposed to the basic idea of your startup. One way to do that is to look at his/her investment pieces at places like LetsVenture, which is an online deal making platform. Next is to ascertain the pieces by looking at the investment pattern. Third, look at his/her social media involvement, which will enable you to understand whether he/she might show interest in your startup. If you find the right investor, 50 per cent of the work is already done.
Communicate the idea in terms of technology and market inflection
An investor is always looking for startups that will grow very big. Even a 10 per cent chance of the startup turning into a billion dollar company will get him/her very excited. An entrepreneur should be able to communicate the fact that although the use case is very simple, the startup has the potential to make it big in the future; also enlist the reasons for the same.
A very good example is Stayzilla.com. Nobody had ever thought that people in small towns will become tourists and will go to religious places. The company identified that tourism of tier 2 towns to other tier 2 towns is underserved, and capitalised on that. The goal is to take a simple use case and convince the investor that there will be a large market in the future.
This is easier to do if the startup is focused on the Indian market. It is harder if you are focusing on the global market, as you may not even know who your competitors are. So, if you are aiming at the global market, make sure that you also talk about some kind of technology inflection in addition to a market inflection. The idea is to find a seed investor who is willing to invest 20 per cent of the total investment, because the remaining 80 per cent takes care of itself.
Build a unique product
There are two kinds of investors. The first are the ones who never invest in anything that is too mainstream, while the other kind gets excited about the same. My reason for not looking at stuff which has already gone mainstream is, ‘if you want your investment to make money, you have to be not only right but also contrarian’. From an investor’s perspective, in the stock market, all IT services stocks will go up and you buy that since everybody thinks it will go up. The price will reflect the sentiment, but you will not make a lot of money in that.
On the other hand, if you are one of the outliers who believe that they will go up while the general market is very bearish, then there are chances that you will make a lot of money as you have made a bet against the market. So the idea is not to be a contrarian, but also not to follow the herd—do something which is relatively unique.
Accel Partners made a lot of money on Flipkart as it had not become fashionable as yet to be in e-commerce. Everyone who came later and invested in e-commerce, none of them will make as much money as Accel Partners did. So as an entrepreneur, you should pick an area which has not gone mainstream and is yet to be discovered.
Know that you are empowered
Entrepreneurs are more empowered than they used to be earlier. Although the shift had taken place a few years back in the West, it has been recently observed in India as well.
The key element to that shift is the fact that entrepreneurs are helping entrepreneurs. If you want to know whether you should sign a particular kind of ‘term sheet’ or ‘liquidation preference’ for the first time, you have other entrepreneurs who have gone through the same journey and are willing to provide their help and insight. In iSpirt, there is a strong effort to create a culture where entrepreneurs help entrepreneurs.
The second reason is, entrepreneurs are ready to share the good, bad and the ugly; so there is a transparency movement that is underway. Companies are publicly sharing information such as valuation and break up among the founders, which is hard to extract even in a one-to-one meeting.
The third reason is things like Secret and Funded.com that are bringing reputations online. Previously, only the people who worked with that individual had an opinion about him/her. Today, that has changed and this forces people to be authentic. The same applies to entrepreneurs too.
All of these combined is a powerful shift from an asymmetrical relationship earlier to the parties having equal power in the relationship.
(Sharma is the co-founder and governing council member of iSPIRT Foundation, as well as a member of IAN. As told to Techcircle.in’s Hiral Trivedi)