How does an investor decide to invest in a company?

Disclaimer: This is my perspective alone, one data point. YMMV.

I had a very interesting question that I was asked at the sidelines of the TIE Entrepreneur Summit last week. It was “What is your decision criteria for investing in any company”? It was not why I invest in companies, but more which ones do we decide to invest in?

The quick answer for me is I weigh these criteria in (approximate, not scientific) in parallel, not sequential:

1. Entrepreneur(s) – about 60-70%

a) hustle-ability – how badly do they want to be an entrepreneur, what all have you tried to get your idea off the ground. Included in this is your ability to persist and keep going when others give up.

b) education – I prefer an engineering background to an MBA (yes, I am biased), I am not sold on the IIT/IIM background, so I have funded mostly non IIT engineers so far. That does not mean I wont fund an someone who studied there, it just means I dont think you need an IIT degree to be an entrepreneur.

c) communication – can they express their passion clearly (unfortunately for me and you, if you are a bad communicator, but you have great ideas, you will be filtered out)

d) sense of humor: ridiculous you may say, but I have to like you. I like people with a good sense of humor and so if you are not into practical jokes, fun in general, and I dont enjoy hanging out with you, you will get filtered  out

e) experience (if relevant) what have you done so far? I have a positive bias towards certain companies because I believe their hiring, talent management, grooming entrepreneurs and culture fits startups more than others. Some examples are Cisco, DELL, Future Bazaar, InMobi, Google and Yahoo.

2. Market you are targeting – about 20 – 25%

a) I prefer small niches segments where possibility of acquisition is obvious or confluence of two large markets, which are immensely competitive

b) In terms of geography I prefer folks that target the US market or global and have been not very positive on B2B market in India. I have avoided companies that target SMB markets in India, but if you are targeting the US SMB market, I would take a look.

c) Segments: I prefer SaaS companies with software to help specific titles within large companies, eCommerce (Global, not just India) and Cloud infrastructure (solutions aimed at developers). I have avoided Education, Healthcare, Real Estate, Enterprise software, Generic CRM and Green technology (capital intensive).

3) Quality of your idea – about 10 – 15%

a) I think execution matters, but so does your idea. If you are doing something truly disruptive, I am more likely to take a look

b) Your willingness to juggle multiple ideas and discern between useful and useless feedback that will change you idea.

I know these 3 dont add up to 100% but that’s the art.


3 thoughts on “How does an investor decide to invest in a company?”

  1. Mukund, nice insights into the mind of the investor. You are almost giving the game away and I can bet investees would read this and try to align their behaviour with your model ! That could make fodder for a new reality show !

    These days most entrepreneurs are thinking of funding as end-game and work more towards designing their business to be fundable – that is now seen as the new barometer of success !

    1. Ha. I dont think it should be an “opaque” game. The more transparent, the better for all of us I think.

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