It’s getting tougher to raise funding and startups must gear up to adapt to the changed investment scenarios. They should start to concentrate on profitability rather than just traction as investors get picky.
What do investors want?
Investors are looking at startups with a robust revenue model in place and those who are solving a real problem. In the past, startups which had a lot of traction were getting funded, but now the pattern has changed. Besides a good product, good team and a market, which an investor anyway looks at, they are looking at the revenue model now.
Artificial intelligence and machine learning-based startups are going to get a lot of funding. Second, a lot of people are exploring opportunities in the alternative lending segment. So peer-to-peer lending and SME lending will see some surge and new startups will emerge. Third is financial technology. Earlier, most fin-tech startups were B2B, but now we’ll see more B2C lending startups getting funded. This is an area I will be looking at in the coming year.
Another thing I have noticed is that a lot of real estate startups are coming, which earlier offered only generic technology but now offer specific technology solutions. Real estate e-commerce could not completely stand in terms of the reality of the market; execution was a huge challenge there. Because of that a lot of hugely funded startups also couldn’t perform well. So there are a lot of new models coming up, and we have been evaluating some of them. A lot of startups with robust revenue-based models will come up in this space.
How helpful is bootstrapping?
Bootstrapping helps as the startups learn how to invest resources prudently and evolve the solutions they provide. Bootstrapping first is advisable because it gives them maturity so that they provide more sophisticated solutions. So bootstrapping is suggested before reaching out to investors, because it helps them get a better valuation.
When should a startup look for funding?
A startup can start looking for funding the day it has some clarity on the product it is providing and identifies the exact pain point. Startups should start looking for funding at the concept stage itself. If they look for funding before that, they might start working on a concept that is not worth funding. Entrepreneurs may then realise their concept is not workable after six-seven months.
So, it’s important to reach out to a few investors at the prototype stage. Entrepreneurs can raise a small amount as well, say about $100,000, so that there is accountability. Once there is an external investor, discipline automatically comes in the startup. But they should reach out to investors only once they are clear with the concept and the product through bootstrapping.
Common mistakes entrepreneurs make
Entrepreneurs need to pick concepts when the market is ready. If they bring a concept when the market is not ready, then it won’t work. It is important to introduce the concept at the right time. There have been many failures in the past just because startups came very early or because the ideas were introduced when the market was already cluttered. The unicorns you see now picked up the concept faster than others at the right time to bring them to the Indian market.
Another mistake startups do is that they don’t do proper research during the conceptualization stage, and a strong proposition and business model is missing. Once the funding happens, it is very difficult to change this. So the proposition needs to be there before raising capital.
Growth rate vs unit economics
At the seed stage, unit economics matter. Traction and growth automatically come when you have a business model and have secured funding. At the same time, customer feedback is very important. The product needs to be continuously evolved by incorporating the suggestions made by the customers.
Indian vs US entrepreneurial system
India’s entrepreneurial system is on the same growth path as that of the US seven to eight years ago. A lot of momentum has been generated because of new funds. However, we are a little behind because the push from the government came a little late. But with the government’s efforts and policies, startup development and investment has become faster. In the past few years, a lot of people have turned angels. That has unlocked a lot of potential. The ecosystem’s evolution has just begin and is in the right direction.
A five-year tax holiday would have been good for a startup. If the startup survives for five years and raises a few rounds, it reaches a good valuation. The holiday is needed to help a startup in initial years. After that it is already a successful startup.
The two-year window is, of course, better than three years for capital gains tax. Startups which do well get better valuation in the first year itself. We exited budget hotel aggregator OYO in less than a year, and it was beneficial to us.
There is a dedicated fund for backward classes, and it is good because there is a lot of entrepreneurial talent there. There is already funding available for various communities in the market, so this community approach is nothing new. This allocation of funds is more of a developmental approach rather than being reservation. The government doesn’t have any schemes for the other categories, so it isn’t really reservation. It is not biting out money from other venture capitalists or angel investors. A concern that I have is whether the full allocated amount will be used or not.
It’s good that the government has linked Aadhaar with financial services, as a lot of technologies are being built around it. I have seen a few startups which are emerging around this platform. It is an interesting space.
Apoorv Ranjan Sharma is co-founder of Venture Catalysts, a seed investment and innovation platform with nearly 50 angel investors on board.
As told to correspondent Disha Sharma.