“Investment Criteria for Early Stage Ventures” - Straight from the Horse’s Mouth

Early stage ventures are the one which usually have limited revenues and earnings or no earnings. However the prospectus of hockey stick growth and substantial profits in a few years makes them attractive investments for angel investors or early stage VCs. While each venture during early days seems promising but very few becomes home run for investors, especially in angel investment the success rate on investment is very low, traditionally 20% of the investment would succeed provided portfolio is well diversified. There is no specific data point to show which investment would be home run, since substantial number of companies would fail to make it big hence investors do follow certain criteria for evaluating investment opportunity before signing the dotted line. The investment criteria may differ from investor to investors but below points would help understanding few broader points

1) Team

Team, especially founding team is very important for any venture. It is very little to evaluate at the beginning of the venture but a team. The factors which are considered important for investors to evaluate are:-

  • How well team is prepared to execute
  • What diversity they bring on table
  • Relevant experience to execute
  • Are they prepared to face risk and uncertainty
  • How well team is geared up to change to course if needed
  • Promoters understanding of accounting and finance
  • How logical they are on their assumptions
  • How well team is focused on their concept

In early stage investments the single most important factor is team and hence most important investment criteria which investors use to grade the potential opportunity. Normally investors look at both depth and the quality of the team and their preparedness to meet the challenges with given skill sets.

2) How big is the opportunity / Market potential

Investors prefer to invest in high growth market so that they can exit their investments at higher valuation. There should be strong market for company’s product / services for investors to get excited about the opportunity else investors may choose to explore something else as risk matrix won’t justify investment. There are few things which investors normally evaluate:-

  • How big is the overall market both domestic and international
  • How fast market can grow and does company have relevant skillsets or resources to serve the growing market
  • Is there any competition, if not how soon competition can catch up
  • What kind of substitutes available and can it be threat for company
  • What distribution mechanics works in the market and how well company is prepared for it
  • Access to the market

3) Technology / IPR

If tech company then investors will certainly evaluate technology very closely and will stress on following:-

  • Is there any IPR
  • Are you infringing anybody else IP
  • What kind of team working on the project
  • How disruptive is the technology
  • What pain points are being addressed
  • Will big time changes will be required for adoption of technology or it can integrate seamlessly.
  • What stage is product development, is company ready to go to market or need to work on some missing links and whether the company is capable of completing the work at large or not.

4) Business plan

Once investors have evaluated team / market opportunity / IPR, they would like to see how team will execute and how robust is business plan, this helps in understanding how venture will make money. Investors would like to understand that how team is able to create differentiation and protect the same and how fast they can scale.

  • There should be clear differentiation in offering
  • How disruptive is your strategy to offer undue advantage
  • What’s the strategy to lock-in customer to create entry barriers
  • How fast you are able to scale
  • How to generate more revenue without much increase in expenses

5) Finances

One of the most import pillars of the venture is finance and investors would like to evaluate following:-

  • Use of fund: - how fund will be used like how much on development, on team, market development, working capital etc. paying debt will be a bad idea as investors want to see money being used for business growth and not for paying debts.
  • Financial Risk: - does company run a risk of raising money too fast or will current funding will last long enough enabling company to start generating revenues before next round of funding or will change in market dynamic risk your investment etc
  • Financing term: very important point and may vary from investor to investors and also on country rules and regulations. Hence should be dealt in best interest of company and investors
  • ROI – again this will depend on investors to investors, however end game is to make money and investment should have potential to be a multi bagger

6) Exit

This is equally important for investors to evaluate while making investment. The entrepreneur should have some visibility on potential exit to investors whether it is thru IPO or M&A. Well the option of IPO or M&A will depend on company’s growth plans and its ability to exploit the same.

The above points are not exhaustive however will help start-ups to prepare for fund raising for their start-up. More to follow...

Anil Joshi, Mumbai Angels :

Anil heads operations at MA. Anil’s professional experience includes involvement in corporate management functions in medium and large organizations, Investment in startups, Project management, Joint Ventures & business development and sits on board of 4 portfolio companies. He has worked with B.K. Birla group of companies (Textile div), Business Access India (Scandinavian Consultancy), Transasia Biomedica (leading Diagnostic co) and Artheon Group (diversified group). While at Mumbai Angels, Anil was instrumental in closing over 15 deals in Mumbai Angels Anil has bachelors degree of Engineering, PG in Management (Marketing) & PGDBM in Strategic Finance and Control .


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