What Makes a Start-up Stand Out as a Venture Capital Opportunity? Lessons for 2021–2022

What makes a start-up attractive to venture capitalists? That is — quite literally — a billion-dollar question. In 2020, start-ups in India raised a total of $10 billion in VC funding, a historic high barring 2019 when this number reached $11.1 billion. It means that despite a rocky economic climate, interest in start-ups remained high, and they continue to be a key pillar for our economic growth. Indeed, India has been among the top five start-ups ecosystems globally for several years, and average deal volumes have only grown.

It begs a crucial question for start-up founders in 2021–2022: how does one realign the business for optimal funding. More specifically, are there any key performance indicators (KPIs) that VCs check for before investing; the answer is slightly complex.

The Elephant in the Room: The Odds Aren’t in Your Favour

Before we get into the KPIs one should try to reach, it is essential to assess your possibilities when seeking funding in the first place. According to research, if a VC firm receives 3000 applications, only around 200 are considered funding candidates. Of this, just 20 eventually go on to receive investments — this means that there’s just a 0.7% chance of a startup genuinely attracting VC attention for the long haul.

However, the 20 that do end up raising funds typically attract substantial amounts in investment. VCs perceive a few core ideas to be worth the investment, and they are eager to reap full returns from this handful of deals. It brings us to the positive side of the picture.

The Good News? The Economic Outlook is Dynamic

Keep in mind that the numbers I mentioned are global, and India’s startup environment is younger and more bullish overall. When asked if COVID-19 had impacted VC plans in 2020, just 7% said they would halt their investments in the upcoming year. An overwhelming 87% said they are actively looking at industries that are “positively impacted by the present crisis,” such as digital collaboration or e-commerce. It is heartening to see that 1 in 4 investors said that they had not changed the valuation of the startups under consideration at all.

In other words, start-up founders can expect a busy economic road ahead with more opportunities than challenges. They must keep the top KPIs and benchmarks against which start-ups assess to maintain their growth plans on track.

Doing Your Homework: Business Model, Storytelling, and Fund Requirements

In my experience (and this is confirmed by research), three primary criteria matter when assessing a start-up for funding. First, and this goes both ways — just as a start-up review is around ROI projections, the start-up also gauges if the VC is fit to be a long-term partner.

Business model

The business model is arguably the first element VCs will consider after your product/service idea. First, you must have a revenue generation model in place with viable observation unit economics. Next, revenues should support further growth and monetization so that the business model feeds itself. Also, VCs focus heavily on the long-term sustainability of an idea. If they don’t believe the shelf life is large enough, they won’t invest. Finally, it is vital to factor in customer experience and market sentiment, with scalability and modest growth plans.

Storytelling

While I mention this second for the sake of convenience, storytelling and the business model must go hand in hand. VCs have limited mindshare to devote to a single company or start-up idea, which is why the elevator pitch concept still holds. The pitch shouldn’t just only describe the product — it must:

● Work through the idea maze, where you take the VC from idea inception to project execution without getting lost.

● Be defensible so that you can respond to a VC playing the devil’s advocate or challenging the product’s viability.

● Stand on its own, without mimicking or reacting to a market competitor.

Fund requirements

Start-ups must be able to accurately gauge their funding requirements without underplaying or overshooting the actual figure. If the storytelling is convincing, VCs are often open to investing more than is necessary for profitability purposes. But this could put undue pressure on the start-up, particularly in its early years. Conversely, the funding might fall short of your requirements if you cannot correctly map allocations across staffing costs, facility costs, expansion and infrastructure. In discussion with the CEO of SmartKarrot, a view articulated was, “Start-up leaders need to show where they need help and where are they weak, it should be connected to the funding story, i.e. fund for scale, i.e. strength and fund as well to cover weakness “.

It Comes Down to the People

Finally, in addition to the three elements I just discussed, there is the inevitable X factor.

The X factor refers to whether your people have the right experience, are inspired, engaged, and motivated to carry out the mammoth task of taking the germ of an idea to monetization. The people behind ideation or company and, more importantly, their character is fundamental. You could have the best view in the world, but it might never get off the ground with the wrong team in place. An organization’s leadership can play a massive role here, bringing the following qualities:

● High EQ — Understands the more significant, intangible impact of decisions.

● Articulate — Can leverage language to express and convince, not just inform

● Inclusive — Can build a diverse team from all walks of life

● Experienced — Knows the common pitfalls of the startup journey and how to avoid them

● Risk appetite — Should be eager to take calculated risks

A start-up is a company that is yet to be born. Instead, a group of people work towards a shared idea, inspired by a leader and fuelled by sufficient resources. The start-up's people makeup (more than ten employees, diversity, non-toxic work environment, and individual expertise) often serve to convince VCs and alleviate any doubts around those three primary elements.

In my previous article, I had discussed the merits of having a leadership style and how it influences a business’ trajectory. For start-ups, this could be a game-changing factor that impacts all other variables like customer-centricity, employee well-being, and market readiness.

Join the conversation by commenting below. You can also email me at Arvind@AM-PMAssociates.com.