Fundraising is as important to investors as it is to entrepreneurs. Probably even more. After all, investors are betting big on relatively new companies. According to Crunchbase News, venture capital has grown up to 4% year on year to $300 Billion, from 2011 to 2020. Just as an entrepreneur looks at fundraising as a means to boost his growth, similarly, investors look at startups as a means to amplify their initial invested amount. There are several variables to be considered when looking at fundraising from an investor’s perspective.
The founding team is an important factor that investors look at. One can have a great idea, but if the team is not able to execute it properly, it’s all in waste. More importantly, it is the founder and their vision that can take the startup to new heights.
Yamika Mehra, who leads the 1stCheque platform to help angel investors says, “The founder market fit is one of the most important variables in a startup, especially in the Pre-Seed stage. Ideas can be pivoted and the go-to-market strategy can be changed, but there is one persistent factor that attracts all investors – the founder’s resilience and experience. It also helps if the founder is a second-time entrepreneur or is building their product in public. For instance, Rahul Mathur from BimaPe and the founders at Sleepy Owl are building their new products out in the open, which allows investors to trust in them more.”
In later stages of fundraising, it is much easier to raise funds and trust the startup because someone else has already most of the work. However, in pre-seed and seed stages, it is difficult to judge a startup besides two factors – the product-market fit and the founder market fit. One should also look at founders whom they feel are conditioned to succeed and are more about the execution than the ideas. The idea may be unique or a copied one, but as long as it is executed well, investors will fund it.
The product-market fit refers to how well a product satisfies the market demand. It also means the untaken positioning in the market that the founder can identify. Once they have identified it, it is important to execute it well. With frugal capital, it can be challenging to create substantial traction.
First Mover Advantage
However, young startups can definitely build their products or services in untaken positioning. This gives them the first-mover advantage – if their idea is unique and has not been tried by anyone else. If it is a copied idea, like the 1 to n as mentioned in the ‘Zero to One’ book, it becomes a bit more difficult for investors to fund as multiple players already exist in the market. It will take more capital to shift them from the other company to theirs.
Tushar Anand, an entrepreneur turned angel investor says, “Fear of missing out (FOMO) may be one of the big factors that help more investors to invest in a particular industry. There’s a herd mentality, even in the VC community that once a big investor is bullish on a particular trend, others should follow too. All of them want skin in the game and better do it early on when you get sweeter deals. Moreover, this herd mentality is like the stock market – the more people invest, the more the market’s bound to rise.” Anand is the founder of Cheferd Foods and also serves as an LP in Point One Capital.
If popular VCs fund one’s startup, it is easier for other similar investors to fund it too. This also amplifies its chances of success since it is a new opportunity and people are more educated about the market with much more money flowing in. As for the execution, there have been several instances where companies have played on decade-old trends with new strategies.
For instance, the equated monthly instalment (EMI) has existed for a long period. However, Pine Labs created a story around the Buy Now Pay Later strategy, which is now extremely popular. Another example is early salaries i.e. taking salaries before pay dates, as with the bills of exchange.
Other factors that investors look at are the monthly income statement (MIS), scalability factor, and history. It is also important to be cognizant of the timing of the startup when launching it.
In the end, a fundraiser boils down to two important variables – the founding team and the startup idea. If one can execute their ideas well, investors will naturally invest in the company!