Traversing the unfamiliar path...

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I was at this event when Raj approached me. He said that his son, Ronnie was in between jobs and has got an interesting proposal from one of his friends. “Ronnie’s friend runs a start-up and is keen that Ronnie joins him as a co-founder. He is interested but unsure of whether that would be a good move,” said Raj. He wanted me to have a chat with Ronnie and help him clarify doubts about his move. I agreed to meet Ronnie the next day.

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Ronnie is a software engineer and his friend’s start-up is into building a digital platform for the Expense management system. While Ronnie was confident of the technical aspect of the project, he had doubts about the commercial viability and he was particularly anxious about attracting the necessary funding for the project. He asked me “What do investors look for while considering an investment in a start-up?”

I said “Investors look for a variety of factors when deciding to invest in a startup. Here are some of the most important things they consider:

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1.?????Market Opportunity

2.?????The Founders and their team

3.?????Product/Service

4.?????Traction

5.?????Business Model

6.?????GTM strategy and scalability

7.?????The Moat

8.?????Unit economics

9.?????Financial Ratios

10. Exit

11. The ability to weave a narrative around numbers.”

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Ronnie “Please explain these terms. Remember I am not a businessman, don’t understand the jargon?”

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I said “Sure. I will try and explain in detail.

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Market opportunity: Investors look for startups that are addressing a large and growing market. What problem is the startup addressing? They want to see that there is a significant addressable market for the startup's product or service and that the market is likely to grow over time.”

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Ronnie “Got it! So, it is the size of the opportunity, to begin with “

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“Yes, and in terms of specifics. They are:

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1. High growth potential: Markets that are growing rapidly, as this can lead to a higher return on investment.

2. Under-served or unmet needs: Markets where there is a significant need for a new solution or where existing solutions are inadequate.

3. Emerging trends: Investors are often interested in startups that are tapping into emerging trends or technologies.

4. Competitive dynamics: Are there many big players jostling for space? Are there a lot of unorganized players in that domain?

Investors typically conduct extensive research on the market opportunity, including analyzing industry reports, speaking with experts in the field, and assessing market trends and forecasts. They will also evaluate the startup's market positioning and go-to-market strategy to determine whether it has the potential to capture a significant share of the market.

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Team: Investors invest in people as much as they invest in ideas. They want to see a strong and experienced team with a track record of success. They look for founders who are passionate, driven, and have a clear vision for their startup. They look for founders who are resilient and committed. “

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Ronnie “So it is the Horse racing analogy. Bet on the Horse or the Jockey or both “

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Product or service: They look for startups with unique and innovative product or service that solves real problem for their target market. They want to see that the startup has a clear competitive advantage and that its product or service is difficult to replicate.

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Here are some of the key elements of a strong startup product or service:

1. Uniqueness: A product or service is unique and differentiated from existing solutions in the market. They look for startups that have a clear competitive advantage, such as proprietary technology, a unique business model, or a strong brand.

2. Innovation: Investors are attracted to startups that are using new technologies or approaches to solve a problem. They look for companies that are at the forefront of innovation and are developing products or services that have the potential to disrupt existing industries.

3. Market fit: Investors also look for startups that have a clear understanding of their target market and have developed a product or service that meets a real need for that market. They want to see that the startup has done market research and has a clear go-to-market strategy.

4. Scalability: Investors want to invest in startups that have the potential to scale their products or service quickly and efficiently. They look for companies that have a business model that can support rapid growth and can expand to new markets or geographies.

5. Intellectual property: Finally, investors are attracted to startups that have intellectual property (IP) that can protect their products or service from competitors. They look for companies that have patents, trademarks, or other forms of IP that can create a barrier to entry for competitors.

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Ronnie “Clear! It is a measure of how effectively and uniquely our service solves the problem statement “

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“Traction:?They want to see that the startup has some level of traction in the market. This could include revenue, user growth, or other metrics that demonstrate that the startup is gaining traction and that its product or service is resonating with customers.”

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Ronnie “Clear! This effectively connotes the acceptance of our product or service “

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“Business model: They look for startups with a clear and scalable business model. They want to see that the startup has a plan for how it will generate revenue and that its business model is sustainable over the long term.

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Ronnie “Can you please elaborate on this? Not sure I understood “

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Investors pay close attention to a startup's business model when deciding to invest because it is an important factor in determining the startup's potential for long-term success and profitability.

Here are some of the key elements of a strong startup business model:

1. Revenue streams: Is there a clear plan for generating revenue, whether through product sales, subscription fees, transaction fees, or other means. They look for startups that have a diversified revenue stream that can support growth and profitability over the long term.

2. Cost structure: They will also evaluate the startup's cost structure to ensure that the startup has the plan to manage costs and achieve profitability over time. They want to see that the startup has a clear understanding of its costs, including both fixed and variable costs, and that it has the plan to manage those costs as the business grows.

3. Customer acquisition: Investors also consider the startup's customer acquisition strategy when evaluating the business model. They want to see that the startup has a clear understanding of its target market and has the plan to acquire customers efficiently and cost-effectively.

4. Scalability: They are attracted to startups that have a business model that can scale quickly and efficiently. They look for companies that can expand to new markets or geographies, add new products or services, or increase production without incurring significant costs.

5. Competitive advantage: Finally, VCs want to see that the startup has a clear competitive advantage that will allow it to capture market share and maintain profitability over the long term. This could be a proprietary technology, a unique business model, or a strong brand.

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The GTM (Go-To-Market) strategy: It is a crucial part of any startup's overall business strategy. A GTM strategy outlines the specific actions a startup will take to bring its product or service to market and achieve its business objectives. The goal of a GTM strategy is to create a comprehensive plan that addresses key factors such as target audience, messaging, channels, pricing, and positioning.”

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Ronnie “What are the key components of a good GTM Strategy? “

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“Here are some key components of a GTM strategy:

1. Target audience: The first step in developing a GTM strategy is to identify the target audience for the product or service. This involves defining the specific customer segments that the startup is trying to reach and understanding their needs and preferences.

2. Messaging: Once the target audience has been identified, the startup needs to develop messaging that will resonate with these customers. This messaging should highlight the unique value proposition of the product or service and address the pain points of the target audience.

3. Channels: The next step is to determine the best channels for reaching the target audience. This can include online channels such as social media and email marketing, as well as offline channels such as events and trade shows.

4. Pricing: The pricing strategy is an important part of the GTM strategy, as it will impact the perception of the product or service in the market. The startup needs to determine the optimal price point that will maximize revenue while remaining competitive.

5. Positioning: The final step in the GTM strategy is to determine the best positioning for the product or service. This involves identifying the key differentiators of the product or service and positioning it in a way that emphasizes these strengths.

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Ronnie “Got it!”

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Moat:?A "moat" is a term used in the business world to describe a competitive advantage that a company has that is difficult for others to replicate. Startups can create a moat by developing unique and valuable assets, capabilities, or business models that are difficult for competitors to imitate.

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Ronnie “How exactly does this work? “

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Here are some strategies that startups can use to create a moat:

1. Proprietary technology: One way to create a moat is to develop a proprietary technology that is difficult for competitors to replicate. This can include patented software or hardware that provides a unique advantage in the market.

2. Brand recognition: Startups can create a moat by building a strong brand that is easily recognizable by customers. This can be achieved through marketing efforts, customer service, and product quality.

3. Network effects: Network effects occur when a product or service becomes more valuable as more people use it. Startups can create a moat by developing products or services with strong network effects, which make it difficult for competitors to enter the market.

4. Economies of scale: Startups can create a moat by achieving economies of scale, which allow them to produce products or services more efficiently and cost-effectively than competitors. This can be achieved by investing in infrastructure or production processes that are difficult for competitors to replicate.

5. Switching costs: Startups can create a moat by developing products or services that are difficult for customers to switch away from. This can be achieved by offering unique features or benefits that are not available from competitors.

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Unit economics: This is?a framework for analyzing the financial performance of a business on a per-unit basis. It involves analyzing the revenue and cost associated with selling one unit of a product or service to a customer. By understanding the unit economics of a business, a startup can determine whether its business model is sustainable and profitable over the long term.

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Ronnie “Understood the framework, but need some specifics here “

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The key components of unit economics are:

1. Revenue per unit: This is the amount of revenue generated by selling one unit of a product or service to a customer.

2. Cost per unit: This is the total cost associated with producing and delivering one unit of a product or service to a customer.

3. Gross margin per unit: This is the difference between revenue per unit and cost per unit, and represents the profit generated by selling one unit of a product or service.

4. Contribution margin per unit: This is the gross margin per unit minus any variable costs that are directly associated with producing and delivering the product or service, such as marketing or distribution costs. Contribution margin per unit is a more accurate measure of profitability than gross margin per unit, as it considers the variable costs associated with selling the product or service.

5. Customer acquisition cost (CAC): This is the cost associated with acquiring one customer. It includes all costs related to marketing, sales, and customer acquisition, and is typically calculated over a given period, such as a quarter or a year.

6. Customer lifetime value (LTV): This is the amount of revenue that a customer is expected to generate throughout their relationship with the business. It takes into account the revenue generated by repeat purchases and the length of time that the customer remains a customer.

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Financial and Non-financial Metrics:??a list of key financial and non-financial metrics that startups should track to measure their performance and financial health are:

1. Monthly Recurring Revenue (MRR): The predictable revenue that a startup expects to earn each month.

2. Gross Margin: The percentage of revenue that remains after deducting the cost of goods sold (COGS).

3. Customer Acquisition Cost (CAC): The cost that a startup incurs to acquire a new customer.

4. Burn Rate: The rate at which a startup is spending its cash reserves.

5. Lifetime Value (LTV): The amount of revenue that a startup expects to earn from a single customer over their lifetime.

6. Runway: The length of time that a startup can continue to operate based on its current cash reserves and burn rate.

7. Customer Retention Rate: The percentage of customers that continue to use a startup's product or service over time.

8. Customer Satisfaction Score (CSAT): A measure of how satisfied customers are with a startup's product or service.

9. Net Promoter Score (NPS): A measure of how likely customers are to recommend a startup's product or service to others.

10. Cash Burn: The amount of cash that a startup spends each month to cover its operating expenses.

11. Churn Rate: The percentage of customers that stop using a startup's product or service over a given period.

12. Customer Lifetime Value to Customer Acquisition Cost (LTV/CAC) Ratio: A measure of the relationship between the lifetime value of a customer and the cost of acquiring that customer.

Tracking these metrics helps startups to understand their performance, make informed decisions, and drive sustainable growth over the long term.

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Exit potential: Investors invest with the expectation of making a return on their investment, so they look for startups with the potential for a high-value exit. This could include an acquisition by a larger company or an initial public offering (IPO). Venture capitalists will typically consider a startup's potential exit options when investing, as this can impact their potential return on investment. They will also work with the startup's management team to develop a plan for achieving a successful exit strategy.

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Ronnie “Clear! And finally, how does one combine a narrative with numbers? “

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I said “Ronnie, this to me is the unsung hero of an investment pitch. It involves a certain amount of art in crafting a narrative that is substantiated by numbers.

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I saw you were taking copious notes. I suggest you digest this, and we can meet again. I must tell you that it is an incredibly brave move on your part. My advice is that you prepare yourself for this both mentally and emotionally. Dream with your eyes open! “