Shape Your Startup to Attract Investors: Essential Areas of Evaluation

What Do Investors Look For In A Startup?

For any startup founder, raising investment is crucial yet challenging. Beyond a great idea and product, investors look for certain key qualities before putting in their money. Understanding what investors want can help founders shape their business appropriately to attract funding.

So what exactly do investors seek in a promising startup?

Here are the main factors:

Strong Team

The founders and core team are the biggest asset for any startup. Investors look for a capable, well-balanced founding team with complementary skill sets and a strong leadership ability. Relevant experience in the startup’s domain provides added credibility. The passion and commitment of the founders gives confidence to investors about the viability of the venture. A startup with an inadequately skilled team will struggle to get financial backing.

Market Opportunity

Investors seek out ideas and businesses that target a large addressable market with growth potential. The total available market size, target segment, and competitive landscape are assessed. A scalable business model that fulfills an unmet market need has the most investment appeal. Investors also want to see that the startup has a strategy to acquire and retain customers in a cost-effective manner.

Traction

Pre-seed or seed stage startups may not have an established traction record. But in later funding rounds, investors do look for startups that demonstrate organic growth, have a solid existing customer base, repeat business, and positive feedback from users. Usage metrics and other traction indicators should align with the startup's stage. Startups that fail to achieve initial milestones struggle to raise follow-on investment.

Product-Market Fit

A product that precisely matches target customer needs has the highest chances of adoption. Investors look for evidence that the startup’s product solves real problems for customers and delights users. Indicators like customer engagement rates, retention, and net promoter scores help establish product-market fit. Startups need to prove their solutions are valued by customers, even if pivots from the original product vision are required.

Economics

Investors assess the startup’s financials to estimate the potential return on investment. Key economics like customer acquisition costs, lifetime value of customers, churn rates, revenue and pricing models, gross margins, cash burn rate, and projected profitability are evaluated. Startups need consistent growth and a path to profitability. Capital efficient startups with higher gross margins and lower overhead costs have greater appeal.

Scalability

Investors look for startups with business models that are highly scalable at low incremental costs. Technology and data driven solutions often enable easier scalability. The ability to expand quickly across customer segments and geographic markets is desirable. Startups leveraging partnerships or platforms for scaling have an advantage. Capital intensive business models face more challenges in fundraising.

Sustainable Competitive Advantage

A strong barrier to entry for competitors is necessary for longevity and robust growth. Network effects, proprietary technology or algorithms, exclusive partnerships, patents, and understanding of niche segments can confer unique competitive advantages to startups. Easy to imitate or duplicate ideas get much less funding interest. Investors want built-in defensibility against rivals.

Vision and Mission

The strategic vision, growth targets, and guiding mission of the startup founders play a role in investment decisions. Founders who can clearly articulate short-term execution plans and long-term ambitious goals signal clairvoyance and lead to confidence in the startup. The vision should align with the target market needs. Startups with ambiguous, unrealistic or wavering vision struggle on this aspect.

Governance and Compliance

Investors look at the legal structure, shareholding pattern, board composition, policies, and controls of a startup. Robust corporate governance, risk management practices, high ethical standards, legal compliance, and financial discipline are essential. Any past issues or ongoing litigation are analyzed. Startups with lax governance or compliance issues, unethical culture or “bro” culture are considered red flags.

Startup Funding Environment in India

India has the third largest startup ecosystem globally, with over 84,000 recognized startups as of January 2023 according to the Ministry of Commerce and Industry. Several factors make India an attractive destination for startup investments:

- Large addressable market - India's huge population, rising incomes and smartphone penetration enable scale.

- Government support - Initiatives like Startup India, investor-friendly policies and fintech regulations spur growth.

- Access to talent - India's youth population, engineering talent and IITs/IIMs allow startups to hire quality teams.

- Emerging technologies - Indian startups are leveraging AI/ML, IoT, big data and other technologies for innovative solutions.

- Global exposure - Indian founders have experience studying or working overseas, and adopt global best practices.

- Funding availability - Increased venture capital, angel networks, accelerator programs provide funding access.

- Unicorns - High valuations and successful startups like Flipkart, Paytm, Oyo, etc. create demonstration effects.

- Low costs - Affordable infrastructure, operational costs and talent costs compared to western ecosystems.

According to Venture Intelligence, $42 billion was invested in Indian startups in 2021, up from $11 billion in 2020. Leading sectors by funding were edtech, fintech, foodtech, logistics, healthtech and D2C startups.

Investor Profile and Interests

Angel Investors: Focus on early stage startups, invest own capital, driven by return potential and passion for mentoring new founders.

Venture Capital Funds: Professionally managed funds with capital pooled from LPs, invest in high risk high reward startups across sectors and stages.

Corporate VCs: Investment arms of corporates looking for synergistic startups to fuel innovation and gain strategic advantage.

Family Offices: Investment vehicles of ultra high net worth families, provide patient long-term capital.

Government VCs: Back startups in priority sectors like technology, life sciences and sustainability. Provide access to resources and ecosystem.

Here are some of the most active VC funds in India currently:

- Sequoia Capital - Fintech, edtech, D2C brands, SaaS, healthcare

- Accel Partners - Fintech, edtech, healthtech, SaaS, consumer internet

- Tiger Global - Fintech, edtech, ecommerce, D2C brands, SaaS

- Blume Ventures - Consumer internet, D2C, fintech, edtech, healthtech

- Chiratae Ventures - Consumer tech, deep tech, SaaS, artificial intelligence

- Matrix Partners - Fintech, edtech, healthtech, deep tech, ecommerce

Northeast India Startup Ecosystem

The northeast region comprising 8 states has an emerging startup ecosystem driven by growth in tech infrastructure, government incentives and availability of STEM talent.

Some notable Northeast India based startups that have attracted investment include:

### Notable Startups Based in Northeast India Attracting Investment:

1. Zerund’s Eco-Friendly Bricks (Assam):

- Description: A startup from Assam focusing on eco-friendly bricks. The state has been proactive in building a startup ecosystem, offering incentives, financial assistance, and advisory support[5].

2. Fueler (Tripura):

- Description: A proof of work platform startup based in Tripura's capital city, Agartala. It allows freelancers and creators to showcase their work efficiently, building trust in the freelance marketplace[5].

3. NE Origins (Sikkim):

- Description: NE Origins, a marketplace aggregator of talent, microentrepreneurship, and unique northeastern products in Sikkim. The startup serves over 350 Small and Medium-sized enterprises, contributing significantly to the local economy[5].

4. Vantage Circle (Assam):

- Description: A SaaS company based in Assam that focuses on employee happiness. Despite being located away from traditional startup hubs, Vantage Circle has attracted clients like Infosys and Deloitte, generating substantial revenue annually[5].

5. Hill Wild (Manipur):

- Description: A D2C chocolate brand based in Ukhrul, Manipur, producing a wide range of products using wild flora from the hills of Ukhrul. Manipur has become a thriving startup hub with initiatives like government incubation centers for entrepreneurship and skill development[5].

6. COLKS (Meghalaya):

- Description: COLKS (Centre of Learning, Knowledge & Services) in Meghalaya encompasses subsidiary brands like BEENatural, MADessentials, and IN A BOX. It works with over 50,000 farmers and has achieved profitability while positively impacting local communities[5].

7. MizRun (Mizoram):

- Description: MizRun started as a food delivery service but evolved into a comprehensive business solution for local MSMEs in Mizoram. With over 500 clients, it is expanding into various domains including poultry and eggs[5].

8. NagaEd (Nagaland):

- Description: NagaEd from Nagaland offers a B2B platform focusing on education technology. It became the first Naga startup to secure foreign direct investment and plays a significant role in transitioning schools to digital learning[5].

These startups exemplify the diverse entrepreneurial landscape in Northeast India and highlight the region's potential for innovation and growth through various funding sources and support initiatives.

The key advantages of the Northeast region for startups and investors include:

- Strong local knowledge - Insights into unique cultures, tastes and practices.

- Talent availability - Quality engineering and management colleges.

- Government subsidies - Special incentives under Startup Northeast policy.

- Untapped opportunities - Sectors like organic farming, crafts, tourism have scope for tech disruption.

- Gateway to South East Asia - Proximity to markets in Thailand, Myanmar etc.

However, some challenges exist such as lack of access to funding, inadequate incubation support, infrastructure constraints, business unawareness and regulatory issues. Dedicated venture funds like North East Venture Fund (NEVF) backed by Ministry of DoNER are addressing the capital shortage. Mentorship organizations like Assam Startup - The Nest, IIM Kolkata Innovation Park, Research Park - IIT Guwahati etc are enabling handholding.

Conclusion

India offers an excellent environment for startup growth owing to the large market opportunity, policy initiatives, funds availability and entrepreneurial talent. Investors seek startups that fulfill an important consumer need through an innovative product created by passionate founders with a scalable business model. Different investor types focus on specific spaces based on their appetite for risk, return expectations and sector thesis. With improving infrastructure and ecosystem support, Northeast India holds strong potential particularly in agritech, crafts, tourism and allied startup domains. Understanding investor expectations and aligning the business model appropriately can help founders better position their ventures to access financing.

Citations:

[1] https://www.sikkimexpress.com/news-details/startups-north-east-india-connect-untapped-potential

[2] https://skillclubindia.com/north-east-startup-unlock-kickstart-3-0/

[3] https://timesofindia.indiatimes.com/readersblog/humblyspeaking/growth-of-startups-in-northeast-region-1205/

[4] https://www.startupindia.gov.in/content/sih/en/bloglist/blogs/the-evolution-of-north-eastsentrepreneurial-ecosystem.html

[5] https://mountainecho.in/top-10-northeast-startups/