Before pitching your start-up idea to a Venture Capitalist (VC), it’s important to understand how they function. We can even let you in on a few brutal truths about VCs that you should know about..
Unicorns don’t impress a VC
Even with the Unicorn explosion currently ensuing, venture capitalists are not too ecstatic when a start-up turns into a unicorn. Mainly because they are more interested in companies that can ‘endure’. According to VCs, a start-up may turn into a billion-dollar company but that does not imply that the endurance level of the company is high.
A VC always checks the competition for a potential investee
Whenever a start-up approaches, VCs will first see if it belongs to a less-crowded segment. If the company has too many competitors, it is seen as a challenge and a VC is less keen on investing in such start-ups.
For most traditional VCs in India, profitability takes centrestage and is the deciding factor in most, if not all their investments.
Start-ups with unique offerings are preferred
A VC prefers companies with unique offerings in their products/services. If the company is differentiated with one-of-a-kind products/services, it will be prioritised.
VCs are also on the lookout for positive outcomes for the user of a product/service. Start-ups that offer value or solve a problem for the target user can find favour with VCs.
VC strategy is independent of their portfolio
Irrespective of what kind of portfolio a VC has to show, their strategy is most probably determined by other internal factors like the experience of the sponsors, management teams and directors. In reality, you can’t conclude about their investing strategy just by looking at their portfolio.
Profitability takes centre stage
For most traditional VCs in India, profitability takes centre stage and is the deciding factor in most, if not all their investments. Modern investors are now beginning to look beyond profitability to see what the start-up has to offer. But most of the traditional VCs in India still view potential investees from the profit/loss scenario.
Start-up founders’ time is not valued
Most VCs do not value the time of a start-up founder seeking investment. Since there is still no efficient process among VCs to ensure that start-ups seeking investments receive quick response, they are generally made to wait.
Proposal rejections take time
The next brutal truth about a VC is that they reject a lot of investment proposals, but even these rejections take time. Having to wait around for an investment rejection is very frustrating, but it’s the brutal truth.
Oftentimes investment terms are not fair
In the event of an investment, generally the terms laid down by a VC are not very fair to the start-up founder. A lot of investees are taken by surprise by the terms, especially after the exclusivity signing and during the negotiation of definitive documents. Investment terms are not always transparent and upfront.
Seed Funding is not preferred
VCs do not usually like to invest in the seed stage. This is because the company is still in the ideation stage and investing in such a start-up is like taking a wild chance. There is nothing to show that it’s a wise move. Getting seed funding from a VC is hardest because it is viewed as very high risk. In the event that a VC invests in the seed stage, they see themselves as partners and not as investors in the start-up.
What’s in it for me?
VCs have become very brutal in this year alone. For instance, Tiger Global is aggressively writing checks. While this is definitely good news, this kind of aggression may hinder other investors. When aggressive VCs like Tiger Global invest in your start-up, the investment level is often very high and cannot be matched by other VCs. In the event of an exit by Tiger Global, other VCs may not be ready to back you, leaving you stranded. This is one scenario that you need to be careful about in the current VC funding frenzy.
But the fact of the matter is that more technology start-ups will become unicorns. NASSCOM and TiE are also taking on the aggression towards the Indian start-up ecosystem’s growth. The brutal truth now is that this is the right time for start-ups to get investments. It’s brutal, but it’s good and true. By 2025, India will have 100 unicorns and your start-up better make a place on that list.