A start-up may sustain for an initial period with its own funds being bootstrapped by the founder(s). But for scaling up, every entrepreneur requires more funds and thus, seeks external funding. This article covers the key aspects to keep in mind for early-stage funding – pre-series A/angel /seed funding. At such an early stage, it may seem simple to approach an investor with a brilliant idea and raise the requisite amount of money. But it’s easier said than done.
Try putting yourself in the shoes of a Venture Capitalist and you will soon realise where the difficulty lies. At this initial stage, start-ups do not have much of a track record which makes the job of VCs difficult to evaluate them.There are many parameters an investor looks for in a start-up. Your idea is just one of them all. Let’s look at the 3 key elements and skills which an investor focuses on while judging any start-up in its early phase.
The first thing which Venture Capitalists look into is the uniqueness of the solution provided by the start-up. The solution being offered in the form of a product or service has to be centered on resolving relevant consumer pain point. Such pain point should be shared by a large number of consumers in the market making the solution/idea scalable. The solution must also offer a distinguished value proposition to the customer. For example- Uber envisaged the idea of aggregating the taxi services which was unique of its kind. This is a pain point that many individuals face. They made the process of searching and finding a cab extremely easy and convenient for the consumers across the globe.
Venture capitalists are interested in start-ups which have an idea that is scalable in the industry. Unless there is a big opportunity available for an entrepreneur for solving a problem, the business idea or a solution may have very few funders. Startup with a scalable idea in a large market has the potential of providing the right returns to the investors. Uber knew that their idea was scalable as they were entering the multi-billion dollar market of urban transportation by offering on-demand cab services.
One of the most important things the investors would like to dig deeper into is the founding team. The Venture Capitalist may allocate funds to a prodigious founding team even with an average idea. It is usually presumed that a great team can generate significant returns from a mediocre idea, supported by strong execution.VCs look for the founding teams with a strong leadership and people with different complementary skills. VCs also give priority to the team’s ability to execute their plans.
A start-up having a strong idea in a large market with a strong team to nurture has a great potential to succeed in attracting investors.