If anything that startups are, they are passionate experiments to prove viability of innovative business models. Two things are key here “experiment” and “business model”. Most business models have a shorter time window to find footing in rapidly changing market hence experiments have to be faster. And like every experiment they have to repeat the cycle of construction, measurement and destruction multiple times to get to just the right solution. This calls for resources that are sufficient to let startups perform without hitting the wall. In recent times, with cost of computing coming down and advent of modular dynamic programming languages the initial resource that is required to convert idea to a prototype and sometimes a alpha version of a product is sufficed by the founders commitment and past savings. The product takes shape and feedback is collected thereby giving an idea about viability of the product, the next stage is to build it to position in market for real usage. At this stage, startups need to put some structure in place, hire few key resources mostly technical, because marketing doesn’t make sense when the product is not ready for positioning in the market. This round of resources is often provisioned from seed investors. Talking of risk, the seed investors take a product risk, because they get the idea of what is being built but they cannot see it, something that seems interesting but is not ready yet. Startups are built around products and not the vice-versa, so the stage of product development is the most crucial stage in success and failure of a startup, and early seed investors will be boarding your bus in this phase. This calls for choosing seed investors with caution, wisdom and foresight. This is true in general for startups all over the world, but startups in India should be extra cautious because the seed investment scene in India is at its nascent stage and will take some time and lot of exits to settle down to best practice models. Parameters to choose a particular seed investor for your company could be many as it is both an emotional and cognitive decision. But, here are three kinds that startups should definitely avoid:1. What is your current revenue?
This kind of investor doesn’t want to take product risk. If you end up being funded from such a source you have a high chance of driving down the track where your product will be optimized for revenue and not of user experience. And, once your start making some revenue before you have nailed the product, your iterations will slow down as you spend more time supporting revenue channels than cranking kick ass features into your product to create disruption in the market. During the phase when you are building the product what you should have is a road map to revenue.
2. We have been successful entrepreneurs and hence will help you in product development
The ones who give this signal are often the sexy ones who attract entrepreneurs in hordes with their past aura and charisma. And they are the ones who create the startup pressure cooker. The very reason startups exist in the first place is “passion”. Passion of the founders who have been processing the product in their heads for quite sometime, trying things failing and learning valuable lessons on the way. And during this phase, if you get an investor who tinkers with your product, it will be road to nowhere, and with every iteration the product will become a new idea. Making occasional mistakes and learning from them is core part of your startup experiment. Too many cooks actually spoil the broth. Yes, there is a difference between the ones who give you product feedback and not idea. The once who give feedback are actually the good ones.
3. I don’t think you need so much money?
If your little startup gets to a stage worthy of seed round consideration, sure you are not stupid. And if someone believes you have a chance of screwing up by over spending, stay away or you will spend more time in useless explanation rather than execution. It is also an indication that the relationship lacks fundamental trust, and in the hard period between seed and series A you need someone on board who will be an ally and not an agent of friction.
The views expressed here are just those views, drawn from my personal experiences and peer knowledge. There could be contextual exceptions, which if anyone has any experience with, will love to discuss and comment.