Many startups do not anticipate the capital investments and they waste money on every round.
A large market size, robust growth model, and an innovative product are what most investors require before investing in a startup.
However, there are many entrepreneurs who approach angel investors even without a basic knowledge of the customer segment that their startups plan to target.
In an interaction with Moneycontrol, Ishan Singh, angel investor in nine startups including women hygiene venture PeeBuddy and local discovery portal Little Black Book (LBB) talks about the key metrics that an entrepreneur should keep in mind before reaching out to an angel investor.
Singh, also founder CEO of RevStart, a startup co-working, and acceleration venture, now also coaches ventures in the basics of building a business.
Excerpts (in sic) from an informal chat:
Having a proper cap table, legal compliance & collaterals
"Many startups in India lack paperwork, a list of contractual clients, basic marketing collateral, a sales pipeline and even legal compliance.
Many lack the basic template and have no idea about it while they are pitching to the investors. They go around raising funds from friends and family without any documentation.
"I can give you examples of many startups who would have done well with just one person investing Rs 15 lakh but at the end of it, the entire capital stack is a mess. Investors often don't want to come in because of a messed up cap table."
The importance of being a CFO-cum-CEO
"Keeping a clean capital stack from day one and understanding where your financial metrics would be is extremely important. At the end of the day, any person who is the CEO of a company and is looking to raise money has to be a part finance head also. He is not just expected to be the executive head but also a financially savvy businessperson. Marrying traits of someone who is financially savvy with someone who is capable of executing is a rare quality to find."
Validating the product & being able to afford your salary
"Many startups do not anticipate the capital investments end up wasting money on every round. Many people come up with an idea which has no relevance in business. They make a product which nobody requires.
They don't have any market validation of their idea with regards to the demand for the product and don't know if people will pay for it.
They are not sure of the quantum of money they would need. They will have seed or angel round and then there will be a bridge round.
Eventually, they never manage to get to the point where they will be investible by a VC fund.
I don't think that the Indian ecosystem today is geared towards large amounts of funding for startups which are going to take an extremely long gestation period to monetize.
My first two questions for an early startup looking to raise funds are:
At what point of time will your business generates Rs 5 crore of free cash flow? At what point in time your business will afford to give you a market salary?
Startups need to understand their market. They have to be in touch with reality as to the market potential of their startup and the problem they are solving when they come to ask investors for the money.
Majority of the startups have not identified a target market."firstname.lastname@example.org