The author shares the three key aspects investors look at before funding startups; the right team, potential market opportunity and an investor’s ‘gut-call’

RAMA BETHMANGALKAR

Young entrepreneurs are blossoming everywhere, waiting to carve a niche for themselves in a globally competitive marketplace. A recent study by NASSCOM suggests that there are an average of 800 new start-ups set up every year and India alone is home to 3,100 startups, which is likely to treble to over 10,000 in another five years, employing 250,000 people. Media reports indicate that there were a total of 1,259 new ventures that were formed in 2014 alone – spread across diverse sectors such as mobile, technology, online services, food-tech, and offline-to-online services. Most ideas do have role model(s) either in the Indian context or more likely in the US or China. But what does it take for an investor to back an Indian startup with a truly disruptive product or idea, with no precedence? This strategy is the most risky but for investors it also holds the promise of super-normal returns.

Specifically at Ventureast, we look for three things:

A young entrepreneur who can attract and build a solid execution team

When venture capital firms have to choose from among the hundreds of start-ups, many of whom may be competing with each other, the number one criteria is the team. To build something without any precedence often requires the entrepreneur to question the status quo. Young and energetic teams have shown time and again that they can be counted upon when it comes to redefining the rules of their industry. Whether it was a young Dhirubai Ambani or the Bansals, they shared the same trait – the energy they breathed into their work and their ideas.  A passionate team that is hungry for success is important as startup ventures are too young to be judged by their balance-sheets. This is what drives a young startup to greater heights. This attribute is really tested when the chips are down, the pay-roll needs to be met and there is no visibility of funds. Pulling through such instances not just once but over extended periods of time requires more than just being passionate about the business idea.

For an investor, the “gut-call” is not a matter of attributing a decision to a feeling that is hard to back up with facts. It is born out of a deep understanding of how an idea will unfold and flourish and the relative maturity of everything that is needed to support it

Potential market opportunity

Secondly, we look for the potential for the market opportunity to grow large quickly. Entre-preneurs need to have a disruptive idea that solves an immediate market need or customer pain-point. What is equally important is picking a “limitless” market. For instance, look at Ola Cabs, the Indian taxi aggregator or Just Dial, the local search services company. For such companies, the key selling point is unmatched value to customers, which incumbents cannot offer. Having upended existing ways of doing business, and given the sizes of the in-dustry they are disrupting, it appears that only the sky is the limit when it comes to valua-tion.

A strong validation of the customer demand can get the startup off the blocks to strato-spheric valuations in no time. We live in an era where valuations seem to be reflective of what is yet to come and not so much of what has been accomplished by the business. Herein lies a pitfall. Valuations can fizzle out faster than it takes to reach such heights if a clear monetisation model is not in place before investors’ appetite wanes or competition gets bet-ter at making money. Sustaining growth & valuations requires hard work…real hard work.

The investor’s gut-call

Lastly, as the old adage goes, nothing can stop an idea whose time has come. For an inves-tor, the “gut-call” is not a matter of attributing a decision to a feeling that is hard to back up with facts. It is born out of a deep understanding of how an idea will unfold and flourish and the relative maturity of everything that is needed to support it. A product, service or tech-nology idea needs a powerful enabler – the key building blocks for the idea to succeed. The success of any disruptive idea rests on work that has already gone into building the infra-structure required. Take, for instance, the e-commerce boom-bust during the early 2000s. While the extraordinary ideas and hype escalated, the infrastructure to support electronic trade or the vast internet penetration required were clearly missing. Fast forward to 2007-08, broadband penetration was ready for explosive growth, since for a decade prior to that, Airtel, Reliance & BSNL had spent enormous resources in laying out the infrastructure. Lo-gistics costs were down thanks to better road/rail connectivity and more importantly the low cost of airfare. All supporting indicators pointed to one thing – that ecommerce was ready to take off.

Similarly, one can argue that the time is ripe to invest in businesses that take for granted, that in the near future, feature phones will be a history and mobile internet or broadband will be ubiquitous. Given such a soon-to-be real world, what products and services could one conceive of, that will have a large demand and solve an important pain-point for the cus-tomer?

Across the spectrum, Indian entrepreneurs are already building for the future, nay, building the future. There has never been a better time for Indian entrepreneurship. Not only will we see a few billion-dollar babies but many will also grow in stature and redefine what we know of as India Inc.

Young entrepreneurs are blossoming everywhere, waiting to carve a niche for themselves in a globally competitive marketplace. A recent study by NASSCOM suggests that there are an average of 800 new start-ups set up every year and India alone is home to 3,100 startups, which is likely to treble to over 10,000 in another five years, employing 250,000 people. Media reports indicate that there were a total of 1,259 new ventures that were formed in 2014 alone – spread across diverse sectors such as mobile, technology, online services, food-tech, and offline-to-online services. Most ideas do have role model(s) either in the Indian context or more likely in the US or China. But what does it take for an investor to back an Indian startup with a truly disruptive product or idea, with no precedence? This strategy is the most risky but for investors it also holds the promise of super-normal returns.

Specifically at Ventureast, we look for three things:

A young entrepreneur who can attract and build a solid execution team

When venture capital firms have to choose from among the hundreds of start-ups, many of whom may be competing with each other, the number one criteria is the team. To build something without any precedence often requires the entrepreneur to question the status quo. Young and energetic teams have shown time and again that they can be counted upon when it comes to redefining the rules of their industry. Whether it was a young Dhirubai Ambani or the Bansals, they shared the same trait – the energy they breathed into their work and their ideas.  A passionate team that is hungry for success is important as startup ventures are too young to be judged by their balance-sheets. This is what drives a young startup to greater heights. This attribute is really tested when the chips are down, the pay-roll needs to be met and there is no visibility of funds. Pulling through such instances not just once but over extended periods of time requires more than just being passionate about the business idea.

Potential market opportunity

Secondly, we look for the potential for the market opportunity to grow large quickly. Entre-preneurs need to have a disruptive idea that solves an immediate market need or customer pain-point. What is equally important is picking a “limitless” market. For instance, look at Ola Cabs, the Indian taxi aggregator or Just Dial, the local search services company. For such companies, the key selling point is unmatched value to customers, which incumbents cannot offer. Having upended existing ways of doing business, and given the sizes of the in-dustry they are disrupting, it appears that only the sky is the limit when it comes to valua-tion.

A strong validation of the customer demand can get the startup off the blocks to strato-spheric valuations in no time. We live in an era where valuations seem to be reflective of what is yet to come and not so much of what has been accomplished by the business. Herein lies a pitfall. Valuations can fizzle out faster than it takes to reach such heights if a clear monetisation model is not in place before investors’ appetite wanes or competition gets bet-ter at making money. Sustaining growth & valuations requires hard work…real hard work.

The investor’s gut-call

Lastly, as the old adage goes, nothing can stop an idea whose time has come. For an inves-tor, the “gut-call” is not a matter of attributing a decision to a feeling that is hard to back up with facts. It is born out of a deep understanding of how an idea will unfold and flourish and the relative maturity of everything that is needed to support it. A product, service or tech-nology idea needs a powerful enabler – the key building blocks for the idea to succeed. The success of any disruptive idea rests on work that has already gone into building the infra-structure required. Take, for instance, the e-commerce boom-bust during the early 2000s. While the extraordinary ideas and hype escalated, the infrastructure to support electronic trade or the vast internet penetration required were clearly missing. Fast forward to 2007-08, broadband penetration was ready for explosive growth, since for a decade prior to that, Airtel, Reliance & BSNL had spent enormous resources in laying out the infrastructure. Lo-gistics costs were down thanks to better road/rail connectivity and more importantly the low cost of airfare. All supporting indicators pointed to one thing – that ecommerce was ready to take off.

Similarly, one can argue that the time is ripe to invest in businesses that take for granted, that in the near future, feature phones will be a history and mobile internet or broadband will be ubiquitous. Given such a soon-to-be real world, what products and services could one conceive of, that will have a large demand and solve an important pain-point for the cus-tomer?

Across the spectrum, Indian entrepreneurs are already building for the future, nay, building the future. There has never been a better time for Indian entrepreneurship. Not only will we see a few billion-dollar babies but many will also grow in stature and redefine what we know of as India Inc.

About the author: Rama Bethmangalkar, Principal, Ventureast is a part of the Proactive Fund team. He works with companies in the technology, telecommunications, outsourcing, financial ser-vices, and alternative energy sectors.  Rama brings rich experience in working with entre-preneurs and CEOs as they deal with a myriad of operational, people and strategic is-sues. His experience and professional network have been of immense value to the compa-nies he works with.