What do Venture Capitalists or investors look for in a startup?

Harish Bahl, Founder & CEO of Smile talks about the four risks that any investor tries to mitigate when they look for investing in a startup business.

  1. A business model is an important aspect to consider. One must check for its viability and soundness. There are various examples of good companies with good ideas that had to shut shop because of an unviable business model.
  2. The second risk any investor looks at is the market risk. This would involve considering the addressable size of the market, because if there is a startup opportunity in India and Sri Lanka, I would put money in India. Because, though the risk of failure may be present, but if it succeeds that startup would have the opportunity of addressing a billion people than just a few millions. Apart from this, I also look at the cultural and readiness part of a startup. For example, fifteen years back, match.com was popular globally but India at that time wasn’t ready for a match.com but it was ready was a bharatmatrimony or shaadi.com but today we are ready for Tinder as well. So, the addressable market size was about the same even then. So, although the demographics would strongly suggest a huge opportunity but culturally there was such a taboo attached to it that all the dating sites failed and all the matrimony websites succeeded. Because culturally dating wasn’t there and matrimony matches were. Thus, the cultural readiness, infrastructure all play an important role.
  3. Another important point to consider would be the team. I consider ‘management risk’ as a a very important aspect as everything is to be done by people. If there is a great entrepreneur, even if he has a bad business model, he can tweak it and make it successful. Of course a great team and a great business model will make a mega-business but a great entrepreneur also makes it work somehow. There are many case studies on this too, Snapdeal was a couponing company, but now it has become an online marketplace. There are also instances where a bad entrepreneur with a good business model would not only dilute the prospects of growth but he may totally mess it up too. So, the team and management of a startup plays a very important role in the decision making process. Because it finally falls down to the ability to choose and make a great team, be the darling of the media, ability to attract customers, be slick in execution and many other important skills because one does not invest in the present but in the future. There is also the involvement and dedication factor, where if someone is waiting for an investment to start and other who has started and needs investment to grow, I would obviously put money in the latter because he has skin in the gain. Even many other successful entrepreneurs like Mark Zuckerburg, Jack Dorsey, Brian Chesky were all young when they started working on their idea. So, the passion, the energy and ability to challenge the unknown is so important. So, this another important factor.
  4. And, finally the fourth is the Capital Risk. Because, everything may be great, the business model, customer base & idea but if I want to build another Amazon or Flipkart, I can’t. It’s all about the timing. So, today it may need a few billion dollars to beat Flipkart or Snapdeal. So, its a huge capital risk. That much capital cannot be just raised. So, the entry barrier is the capital itself. So, it needs to be kept in mind if a business will attract sufficient capital to make it all happen.

 

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