[Matrix Moments] These key factors determine if your startup is VC fundable or not
The coronavirus pandemic has raised several questions on the business and revenue models of startups, forcing us to wonder if a venture is investor fundable or not. Rajinder Balaraman, Director, Matrix Partners, India, and Avnish Bajaj, Founder and Managing Director, Matrix Partners, get together to discuss the elements to know if your business is VC-fundable.
Answering Rajinder on what makes a business VC-fundable, Avnish says, “was started thinking they will be a taxi replacement and it has been a personal car replacement. I think Bill Gurley was arguing for that and why it's worth a hundred billion and vice versa. Facebook debunked the myth that social media didn’t have reach. I wouldn't say there was no search engine before Google, but how much it would be monetised was unclear — Google did create a market.”
The key factors
He adds that a business is not VC fundable if you can't paint a picture of a very large market, and there are different concepts tied to this.
The concept TAM - This is the total available market or target addressable market, however people want to look at it.
The concept of a SAM, a serviceable addressable market - Here, you need to define if your business is addressing a large or a small market.
Avnish explains, “You need to be able to explain to your VC why it will just capture or create a new market or capture share with people.” It is ultimately capturing something – either it has to create new spends, new behaviour, or it has to capture from someone. So, one has to clearly explain that if their market is not an obvious one.
“I think what happens sometimes is people still fall into the trap where they think they have a very large market. But when they go to a VC, they get multiple rejections. What is happening here is the way VC’s think is that there is a target addressable market for you, but then there is a serviceable addressable market,” he adds.
For example, a business, which is targeting India, may have a hundred cities as part of their target market.
“But when I look at it, I may say a lot of those pincodes are not going to be serviceable for whatever reason, and therefore only eight cities are serviceable, and hence that's my serviceable addressable market,” explains Avnish.
“Minimum Viable Slice” of that serviceable market, and it goes hand in hand with MVP — “Minimum Viable Products”.
“You have to actually think when a VCs is putting in money, is there going to be enough of a viable slice where I can prove my business? If I need to be in those eight cities for it to be proven, it's over. Which is why VC’s will often say can you prove it in some minimal form. I have started thinking a lot more about minimum viable slice of the market, which can help prove a model. I would say that that's something the founder should think about — how they can prove their model through MVS, assuming that they want to be VC-funded and are working towards a very large market,” says Avnish.
Watch the podcast here.