Every entrepreneurial idea is not a natural candidate for venture capital (VC) funding. Apart from a basic expectation of extraordinary growth, a fundable business for a VC sits inside a high-growth market or, better yet, it creates a market. It is clearly differentiated from competition and has a team with the right skills to execute the business plan. And, of course, the business must eventually offer VCs a way to cash out or exit, either through a public market listing or by selling out to a larger company.
Mint spoke to some of the frontline VCs investing in early-stage companies in the country today to come up with a check list that VCs use to flag off new business ideas and entrepreneurs as ‘fundable’.
Quit your existing job before you approach a VC for funding. You need to convince the VC that you can, and want, to make it through more than three and as many as 10 years of ups and downs. The commitment has to come through in the first meeting. Go against the grain
A VC-fundable business idea has to create a disruption in an existing market. Particularly in technology driven businesses, the idea should permanently change the way business is done in that market. A variation of an existing business model will only bring incremental returns to the investor. VCs have to make 10-15 times the money they invest.
VCs have a strong preference for teams that are armed with the hard, technical skills required to execute their idea. If that is not available, founders must at least be able to articulate the skills they need to hire.
VCs say that very often entrepreneurs shy away from mentioning competition. This, according to them, is not done. The VC will find out who the competitors are and what the associated risks could be. Teams that are realistic and upfront are most likely to rope in the greenbacks.
Investors don’t want ideas created in a vacuum but those that are shaped by the market. They are looking for outside-in thinking. The idea should solve a market problem that already exists and should not be a solution looking for a problem.
Most entrepreneur pitches to VCs fail—and that is about 90% of the business plans that turn up at VC tables—because the company is not able to differentiate its value proposition clearly from competition. “We’re better” or “smarter”, is something that VCs hear quite often, and it just doesn’t work.
Colourful presentations are nice but if the thinking process does not impress, it’s over. VCs are okay if you don’t bring a power-point along as long as you can effectively address the important aspects—the market, the opportunity, the differentiator and the financials.
And, do not make the VC exit route a part of your presentation. They will take care of that.
Accept it, VCs will not just take a board seat. They will give you inputs on the business. VCs look for partners and if they sense that the entrepreneur team is not open to them playing an active role as mentors they will not touch you.
If you cannot take and act on feedback from your investor, you will have a hard time taking it from customers. Flexible thinking and the willingness to tweak the business model at the right time, particularly in the nascent Internet and mobile spaces, will keep the funding coming in.
Get rid of hang-ups, for example, “VCs are a necessary evil”—before you go in for a pitch. VCs shy away from awkward meetings and will not waste time trying to convert or convince sceptics.
Footnote: This checklist was compiled after speaking to Avnish Bajaj of Matrix Partners India, Alok Mittal of Canaan Partners, Sandeep Singhal and Naren Gupta of Nexus India Capital Advisors, Sanjeev Aggarwal of Helion Venture Partners and Rahul Khanna of Clearstone Venture Advisors.