Tag Archives: angel investors

The maturity of startups and why the bar has been raised for seed funding

In the 1990’s if you had an idea, a great team (two engineers, one sales person) and 2-3 prospective customers (I know this because I got a term sheet from a large VC firm with this set of requirements) you would get funded (either by an angel investor or a VC).

In the 2000’s the bar was raised to a working prototype and customers actually using product, with a great founding team, not just idea – even for angel investors. You needed to have a great idea, prototype product, some customer usage and a great team.

In this decade (2010 – 2019) the funding bar has been raised even further. With incubators putting in seed money, angel and venture investors are coming much later than 2 guys and a prototype (product-market fit). There are exceptions of course, but they are rare.

E.g. When YCombinator puts $20-30k you get to prototype and maybe some traction. Then you get another $150K from Ron Conway and Yuri Milner that could last you one more year to 18 months to not only build product, but show some momentum (Customers, repeat usage, maybe even some revenue, etc).

So when entrepreneurs hear that there’s a startup frenzy in the bay area, with very high valuations and insane amounts of funding, they think its for idea and prototype. Many complain to me that they have a prototype (not just idea) and have been building their company with the Steve Blank’s customer development methodology, and are still not getting funded.

Most have even their profile put together on Angel List, but are still not getting any interest.

The bar has been raised and its possibly forever.

The other issue many have is they believe they are past the “YCombinator threshold”. “I have a prototype already and we have been working on this for 1 year”, is what I hear.

There’s no threshold for “Ycombinator” that you have possibly crossed.

I believe even if you have been funded (Interview street was funded before they were accepted by YC) there’s a good reason to apply to an incubator.

How hard can it be? Underestimating the problems your startup really solves

I had a good friend who was deploring the state of payment gateways in India. As someone that has dealt with Times of Money (DirecPay), EBS, CCAvenue, HDFC Bank, ICICI, Citibank and Axis Bank, I can attest to that pain. Its amazing that the state of payment processing is so arcane and filled with issues.

The issue is not just one of payments BTW. I constantly hear people complain about lack of a very good “X” in India. X could be a angel investors, incubators, bloggers, engineers, <fill-the-blanks>.

Problem is most people actually underestimate the effort required to build quality and consistency. What you see in the payment gateway is a simple set of forms that accept a number, check if its valid, authorize it and return an accept / reject status message.

The “behind the scenes” is painful. The multiple layers of the onion that you have to peel are the ones that really ¬†are painful. So most superficial jingoism that starts at the front-end of the startup fades when the real pains come to the front. Which happens in the first few months.

Which is the main reason most startups fail within the first year.