Tag Archives: venture investors

Size and speed – the two most important aspects of your market, to get #venturefunding for #startups

I spoke to an entrepreneur yesterday who is focused on the health and HR markets – two of the toughest markets to target. Health has so many regulations to work with and HR has so little budget. So, take both of them together and unless you have a “head on fire” situation – aka compliance problem, they are very difficult to sell to.

Most, but not all venture investors care deeply about the market you startup is targeting. Here’s a rule of thumb – larger the market, more likely a VC is going to care about your company and to be willing to invest. Billion dollar markets are important to VC’s, and preferably large billion dollar markets. You need to do both a top-down and a bottom-up market analysis to show them that it is a large market. If it is less than a significant size, then I’d advice you not to go pitch VC’s.

In many cases, you wont know the size of the market. It could be small ($100 Million or less) or you just dont know how to position it as a big thing. Most venture investors will take a meeting, but end up not telling you that the market is too small, but tell them to “keep updated”, or “you are too early for us” or “we need to see more traction”.

When you dont know the size of the market or you know that the market is small, then I’d advice you not to go to venture investors. It does not serve your cause and wastes their time.

The second most important reason to get a venture investor on board is if the market is expected to become large “quickly”. While size of market is rather objective, the speed of the market is largely subjective. Which is why venture investors will rely on other “experts”, who understand and know the market well to help them “do due diligence”. If the market is expected to rapidly grow, it makes sense to invest as a VC. Else, your company wont grow quickly and things get difficult.

Many venture investors will also tell you that they invest in entrepreneurs. They tend to focus less on themes and more on the expertise, background, success, knowledge and execution potential of the entrepreneur teams.

Taking a risk on the team is normal for a venture investor, but taking a market risk is rather dumb. If they dont (that’s the problem to a large extent, which is “their” view of the market, not yours) view the market as large or moving quickly then be prepared to have a lot of “meetings with VC’s” resulting in zero follow on meetings or investment.

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What 4 Indian investors with $2 billion under management are looking to fund now

This post will be a random stream of thoughts, rather than a well constructed thoughtful essay. Apologies.

4 technology venture investors were at the accelerator today to listen to 7 corporate development and M&A teams on what they were looking for in an acquisition. The 4 investors together have over $2 Billion invested in India in the technology companies alone.

Exits are critically important to their (and hence entrepreneur’s) success. Exits with good premiums are even more important to them, but I am getting ahead of myself.

There are many reasons why a company acquires another company, but the 2 most important we talked about were a) Access to markets – in our case, India and b) Access to Intellectual capital.

Local acquisitions (Indian companies buying Indian startups) are fairly rare since many of the larger technology companies in India (services companies) dont believe they need IP based offerings and have the access to the market already.

Thanks to the FDI issues, eCommerce companies, which would have been a acquisition target for many companies are not longer on the shopping list of many acquirers.

So if you are looking to get investment from these venture investors, you will have to really follow the money trail, which starts at where companies are getting bought (since IPO’s are fairly rare).

For many of the larger technology companies, access to Indian markets is not a huge issue, (there are exceptions, IFlex and Oracle being one) and a few others might still happen, but the large source of exits will still be companies who need Intellectual property and those that need access to markets.

While many Indian entrepreneurs still hate the word “exit” and believe it is an unnatural act, they still do need to provide returns for their investors.

So to raise money now, you better have a clear idea about how you can plug a “white space” that exists among the larger companies from an Intellectual Property standpoint.

Some areas that we discussed were a) Payments b) Indic language technology c) On boarding SMB on the Internet d) cloud infrastructure and e) Software defined networking (SDN).

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.